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Pensions: going going: Increasingly, employers are giving workers responsibility for their own retirement plans
(Newsday (Melville, NY) (KRT) Via Thomson Dialog NewsEdge) Aug. 20--Tony Mastrogiovanni might have earned more in another job, but he chose to join AT&T more than three decades ago because of the great benefits, particularly the pension plan. He wanted the comfort of steady income in his golden years.
Now that he's, left IBM, he's getting a much smaller check than he had expected.
That's because when AT&T decided in 1997 to convert from a traditional "defined-benefit" pension plan to what's known as a "cash-balance" plan, his estimated annual retirement payout at age 55 was slashed from $44,000 to $26,000.
Though his own retirement payout took a hit, Mastrogiovanni noted that a cash-balance plan has value for younger workers -- especially if the option is no pension at all. Employees need a retirement plan that, unlike a 401(k), they aren't responsible for managing, he said.
"A pension is a safety blanket for retirees," said Mastrogiovanni, 55, of Douglaston. "Cash-balance plans are fine for younger folks because [unlike traditional pensions] they can take it with them [when they change jobs]. And they have a lot of time to let it grow."
Bias charges and blessings
Cash-balance pensions gained popularity in the late 1990s as companies looked to provide benefits suitable for a more mobile workforce as well as to simplify administration of benefits. But after a rash of lawsuits charging the newfangled pensions discriminated against longtime workers, employers stopped converting to them.
Now, a recent appellate court ruling and congressional legislation have provided official blessings to cash-balance plans. But don't expect these pensions to come back into vogue, experts say. They likely have lost their appeal because companies no longer fear jettisoning pensions completely in favor of 401(k) plans.
"Large companies with healthy pension plans have found they can freeze the plans and offer 401(k)s," said Mauricio Soto, senior research associate at Boston College's Center for Retirement Research. "It may be too late to make cash-balance plans as popular as they would have been."
Cash-balance pensions initially were seen by many as a compromise, one that would allow employers to continue offering a guaranteed retirement payment, or "defined benefit," through a plan that can be cheaper and easier to maintain than a traditional pension.
Just over a quarter of the Fortune 100, the nation's largest companies, offer cash-balance pensions, according to Watson Wyatt Worldwide, a consulting firm. A Boston College study found there are more than 1,000 cash-balance plans with at least 100 participants each in the United States, covering roughly 9.6 million people. About one-quarter of people with pensions are in cash-balance plans.
Portability plus
In cash-balance pensions, workers accrue pension benefits -- usually a percentage of annual salary -- each year of their tenure with a firm. Workers can check how much they've accrued and take vested benefits along if they transfer to another employer. Such features make the plans attractive to today's workers, who tend to switch jobs every few years, experts said.
"Companies like cash-balance plans since they allow employees to more easily understand their benefit and generally provide more portability," said Ari Jacobs, U.S. retirement practice leader at Hewitt Associates, a consulting firm.
Traditional pensions, on the other hand, favor longtime workers since the benefits they receive at retirement usually are based on final average salary and years of service. This style of pension caters more to previous generations, workers who often spent their careers with one employer.
Conversions from traditional to cash-balance plans quickly encountered charges by older employees that the plans were discriminatory because they reduced expected benefits for workers approaching retirement. Furious that the rules were being changed in mid-career or even later, employee groups from several companies, most notably IBM, sued to challenge the legality of the plans.
Conversions essentially stopped in 2003 after a federal district court judge ruled in favor of the workers; the ruling found that IBM's cash-balance plan was discriminatory and illegal. Subsequently, IBM agreed to pay $320 million to settle part of the class-action lawsuit and, if the ruling were upheld on appeal, to pay up to an additional $1.4 billion.
Fearing a similar fate, other companies waited for the appeals court to issue a decision and for new pension reform legislation from Congress.
Some legal clarity
Early this month, the judicial and legislative uncertainty was lifted to a large extent. In its long-awaited pension reform bill, Congress established various rules by which companies can set up or convert to cash-balance plans without fear of age-discrimination litigation. President George W. Bush signed the bill into law on Thursday.
And on Aug. 7, a U.S. Court of Appeals judge in Chicago overturned the initial decision against IBM, ruling instead that the company did not commit age discrimination when it converted to a cash-balance plan.
Though the developments appeared to bode positively for such pensions, experts say the impact may be minimal. That's because dozens of companies, including some with well-funded pension plans such as IBM and Verizon, have decided to freeze their defined-benefit plans. Instead, they will offer workers only 401(k)s.
"Because of the uncertainty surrounding cash-balance plans, a lot of employers have opted out of the defined-benefit system altogether," said James Klein, head of the American Benefits Council, a lobbying group for employers.
IBM, for one, is not going back to a cash-balance pension, a spokesman said. It will continue with plans to freeze existing pensions and provide an enhanced 401(k) in 2008.
"It's a decision we believe was very progressive," said Clint Roswell, a company spokesman.
401(k)s preferred
Some workers and retirees say they're not troubled by the fading popularity of cash-balance plans. They prefer 401(k) plans because they can invest assets as they choose.
Bob Sellar, a former IBM manager with homes in Manhattan and Northport, said cash-balance plans are poor substitutes for traditional pensions. Instead, he thinks companies should offer 401(k)s and match a portion of the employee's contribution.
"401(k)s suit the current workforce," said Sellar, 64, who retired just before the company converted its pension plan to cash-balance. "They are simple, they give you control and they are portable."
Employees can prepare for retirement with 401(k)s if they know when they start working that there will be no pension to fall back on, said Lynbrook resident Joan Dombrowski, who worked as an administrator at IBM for more than 20 years before leaving in 2002.
"Someone starting at 25 has a good 25 years to build a 401(k) ... as long as they understand up front that this is their long-range savings plan," said Dombrowski, 53, who has a traditional pension from her first stint at IBM and a cash-balance plan from a more recent tenure there.
Experts say 401(k)s can trump cash-balance pensions because they allow participants to invest in equities, which offer potentially higher returns than pension plans. Many cash-balance plans offer only a paltry interest rate, often so low it doesn't even beat inflation, said pension expert Norman Stein, a law professor at the University of Alabama.
"Young people should have the ability to prudently invest in the stock market," Stein said, "and many cash-balance plans haven't offered people that option."
Q&A
What is a cash balance pension?
In a cash-balance pension plan, an employer contributes to an employee's retirement each year of the worker's tenure. The contribution is often a percentage of salary, usually 4 to 5 percent, and the account is portable should the worker change jobs. Many experts say this is better for today's mobile workforce than a traditional pension, in which the benefits are based on final average salary and years of service.
Why do employers like cash-balance pensions?
Employers like cash-balance pensions because they can simplify plan administration and are cheaper to maintain than a traditional pension. They may also be more attractive to today's workforce.
Why do employees like cash-balance pensions?
In addition to being able to take the vested benefits along if they transfer to another employer, workers also can check on how much their retirement benefit has accrued.
If a company shifts to a cash-balance pension, what's the impact on younger workers? On older workers?
A Government Accountability Office study last year found that workers of all ages generally lose retirement benefits in conversions to cash-balance pension plans. The median monthly loss for a 30-year-old employee would be $59, for a 40-year-old, $188, and for a 50-year-old, $238. Cash-balance pension supporters, however, say that such plans have many advantages, particularly for younger workers who switch jobs.
- TAMI LUHBY
A pension glossary
DEFINED BENEFIT PLANS
Traditional pension: Benefits commonly are based on final average salary and years of service. They typically are paid as an annuity. Employers are responsible for contributing funds and managing the assets in the plan.
Cash-balance pension: An employer contributes to an employee's retirement account for each year of the worker's tenure. The contribution is often a percentage of salary, usually 4 to 5 percent. The employer is responsible for managing the assets, but a worker who switches jobs can transfer funds to an account with the new employer. At retirement, employees must be given an annuity option but often take a lump-sum payment.
DEFINED CONTRIBUTION PLANS
401(k)s: Workers can contribute annually up to $15,000 of their wages ($20,000 if age 50 or over) to a company-sponsored, tax-deferred retirement account. Employers may match at least part of the contribution. Workers are responsible for investing and managing the assets. Benefits typically are taken as a lump sum at retirement, sometimes rolled into an IRA.
Cash and carry
Almost 1 million workers are currently in cash balance pension plans. Workers earn benefits each year with a company and can carry those benefits with them if they change employers.
Total Total Total assets
Year plans participants (in millions)
1999 599 4,090,000 $247,743
2000 799 6,317,000 $412,369
2001 873 6,746,000 $347,355
2002 927 7,869,000 $365,495
2003 1,037 9,516,000 $528,150
2004 991 9,590,000 $567,912
SOURCE: BOSTON COLLEGE CENTER FOR RETIREMENT RESEARCH
Copyright 2006 Newsday Inc.
Copyright (c) 2006, Newsday, Melville, N.Y.
Distributed by McClatchy-Tribune Business News.
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