Saturday, October 07, 2006

"Chill" Pill?

Last week, another court rejected claims that a cash balance plan was age discriminatory (see “Cash Balance Plan Not in Breach of Age Discrimination Laws”), though you could perhaps be excused for not noticing that result. In fact, my guess is that a random sampling of the adviser universe would reveal two things about cash balance plans: first, a great ignorance about what they are and how they work (see links below); and second, a general sense that they represent an illegal plan design.

Over the past several years, the conversion – and litigation experience – of a single plan – IBM - has dominated the media’s coverage of these programs. Along the way, Congress has cut off funding for the Department of Labor to issue clarifying regulations on these programs (led by Congressman Bernie Saunders, I-Vermont, in whose state IBM is the largest employer), and the IRS quit issuing determination letters on these plans (basically an approval by the IRS that the plan document passes muster).

They continued to be adopted by employers, of course (see “One Bad Apple”), but it surely couldn’t have been easy given all the bad press regarding those programs. And most of that coverage centered around a single case: Cooper, et al. v. IBM Personal Pension Plan, a case brought in the U.S. District Court of Southern Illinois (see “Murphy’s Law: IBM Loses Cash Balance Ruling”) in 2003.

It’s not the only lawsuit that has been brought regarding cash balance plans – but, until recently, it was one of the very few in which plaintiffs’ counsel had actually been able to convince a court that the plans were illegal (and then only in the context of a conversion from an existing traditional defined benefit plan). And, despite a surprising number of cases in different jurisdictions that came to a completely different conclusion – at least one, Tootle v. ARINC Inc., came to a directly different result – the only one that “the media” seemed to care about was the IBM verdict – and they flogged it relentlessly, IMHO. Consequently, while some employers continued to embrace the cash balance concept, they doubtless did so with trepidation. Countless more - we’ll never know the full effect – employers and advisers likely drew their sense of things from the headlines and simply chose to avoid a potential headache. This “chilling effect” is, of course, exactly the result that cash balance opponents had in mind.

In recent weeks, the landscape has changed dramatically. The Pension Protection Act specifically clears up the age discrimination issue, at least on a prospective basis and, coincidentally, within days of that result, the IBM decision was reversed on appeal. Not that either of these results have been headline news in most cases (the headlines in the IBM case have largely been focused on the plaintiffs’ “determination” to carry their case to a higher court).

And not that cash balance plans are a panacea for what ails our current retirement savings system – but they offer a benefit accumulation that seems more portable than traditional pension plans and more consistent with the working patterns of today’s workforce, is supported by the Pension Benefit Guaranty Corporation (PBGC), and is typically employer-funded. The design is, generally speaking, more balance-sheet friendly than traditional pension plans, and its benefit to participants more readily grasped and communicated.

Automatic solutions alone aren’t likely to be enough to stave off the retirement savings crisis, and we’ll surely draw less support from traditional defined benefit plans in the future than we have heretofore (even for the minority that had that support to begin with). We need new solutions, and we need to consider old solutions in a new light.What’s changed about cash balance plans? Not much. What’s changed about their viability as a plan design alternative? Quite a bit, I hope.

- Nevin Adams

For more on cash balance plans see:

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