After Court Ruling, Employers Urged To Stay Calm On Cash Balance Plans

After Court Ruling, Employers Urged To Stay Calm On Cash Balance Plans

Employee benefit and pension specialists are urging employers to remain calm following a July 31 decision by a federal district court judge who found that IBMs conversion from a “traditional” defined benefit pension plan to a cash balance plan was unlawful age discrimination under the Employee Retirement Income Security Act. (See NU, Aug. 11, 2003.)

The case, Cooper v. The IBM Personal Pension Plan, has been certified as a class action covering about 130,000 employees and retirees. Next up is the issue of damages, and the thorny question of how to compensate the plaintiffs, given the substantial stock market losses recently suffered by many cash balance plans.

According to Judge G. Patrick Murphy of the Federal District Court for the Southern District of Illinois, such a conversion is age-biased because older employees collect lower benefits than their younger co-workers under a cash balance plan, as the interest, dividends and other earnings have less time to accumulate.

Under a traditional defined benefit plan, the employer guarantees a specified benefit at retirement. In a cash balance plan, each employee has a hypothetical account to which contributions and interest payments are credited, with the employer assuming the investment risk that contributions and earnings will be sufficient to pay a specific dollar amount upon retirement. (It differs from a defined contribution plan, where the employee assumes the investment risk.)

Actuaries and benefit consultants agree that employers should not take any immediate action respecting their pension plans until the appeal process in the IBM case has run its course.

“It was one judge going off on his own,” says Fred Rumack, national director of tax and legal services for Buck Consultants Inc. in New York. “There was forum shopping for a court that has a reputation for being pro-plaintiff.”

Bill Arnone, partner in the human capital practice at New York-based Ernst & Young, says the decision should surprise no one. “When you have a federal judge and ERISA, anything can happen.”

But the IBM case did serve an important purpose, according to Arnone. “This case lets employers know that there is a new era in which federal courts are likely to get involved in pension plans.”

Arnone continues, “When ERISA was passed in 1974, there was only one type of pension plan [defined benefit]. Congress hasnt refreshed the law since then, so the courts are stepping in.”

Adrien LaBombarde, a principal and actuary for Milliman USA in Houston, Texas, suggests that the judge ruled the way he did because he wants to send the issue of whether cash balance plans are age-biased “to the Supremes.” If the IBM case does go to the U.S. Supreme Court, LaBombarde seems confident it will be decided differently.

“For now, it is a victory for the plaintiff employees and retirees, but if you are a plaintiff, its not the kind of victory you want,” he notes. “There are no sound arguments [in the judges written opinion], no citation of precedents, little discussion and not much evidence of a basis for the decision. Plaintiffs hearts must yearn to see even a footnote of legal authority, but there is none.”

Also, parts of the decision are based on definitional and grammatical niceties involving the terms “accrual” and “accrued benefits,” in LaBombardes view.