Proposed Cash Balance Pension Rule Attacked From Both Sides
A proposed Treasury Department regulation on cash balance pension plans is at the center of an intense controversy.
Business groups say the proposed regulation is too restrictive and mechanical, making it difficult for employers to design plans to meet its specifications.
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Two members of Congress also took shots at the regulation, saying it does not go far enough to protect workers rights.
They are sponsoring legislation they say would better protect older workers when companies switch from traditional retirement plans to cash balance plans.
A cash balance plan is a type of tax-qualified retirement plan that combines features of a 401(k) plan with those of traditional defined benefit plans.
In a cash balance plan, each employee has an account balance similar to a 401(k) plan. When employees change jobs, the cash balance plan can move with them.
However, employers bear all the investment risk, as is the case with defined benefit plans.
Many companies have converted traditional plans to cash balance plans, but many employees charge that doing so discriminates against older workers.
Older workers say that the conversion is accomplished in a way that reduces their retirement benefits by as much as 50%.
Treasury recently proposed rules designed to protect older workers. The rules require that any cash balance plan give older workers pay credits that are equal to or greater than the pay credits for younger workers.
In addition, the regulations require that any conversion be age-neutral, meaning employers cannot use factors in a conversion that provide a bigger benefit for younger workers than for older workers.
The regulations use a mathematical test to determine whether a plan is age discriminatory.
John M. Vine, an attorney representing the ERISA Industry Committee, Washington, an employers group, says the proposed regulations are “fundamentally flawed.”
The regulations, he says, employ a “rigid mathematical approach” that is inconsistent with Congressional intent and prevailing plan design.
“Under the approach taken by the regulations, the Social Security System would be considered age-discriminatory,” Vine says.