ASH ALANCE ENSION LAN ONVERSIONS - OU Lawjay.law.ou.edu/faculty/jforman/Forman-OCUfinal.pdfPlans:...

* Copyright 2000. Jonathan Barry Forman. Professor of Law, Univer sity ofOklahoma; B.A. 1973, Nor thwes tern Univer sity; M.A. (Psychology) 1975, Univers ity ofIowa; J.D. 1978, Universi ty of Michigan; M.A. (Economics) 1983 , George WashingtonUniversity. Delegate to the 1998 National Summit on Retirement Savings. The authorswish to thank Kyle N. Brown, Jeremy F. Citro, Ron Gebhardtsbauer, Alvin D. Lurie,Patrick J. Purcell, Bruce D. Pingree, Richard C. Shea, Mark J. Ugoretz, and Edward A.Zelinsky for their helpful comments and insights.

** Attorney for The Williams Companies , Inc., Tulsa, Oklahoma; Bachelor ofAccountancy 1997, University of Oklahoma; J.D. 2000, University of Oklahoma.

379

CASH BALANCE PENSION PLAN CONVERSIONS

JONATHAN BARRY FORMAN*

AMY NIXON**

One of the hottest issues in the pension world today involvescompanies replacing their traditional pension plans with cashbalance plans. A cash balance plan is a pension plan that lookslike a bank account or a 401(k) plan. The problem is thatreplacing a traditional pension plan with a cash balance plan willreduce the expected pension benefits of older workers. As a result,older workers can see their future pensions cut—in some casesdeeply. Not surprisingly, many of these older workers have feltcheated, and they have filed a number of lawsuits to stop these so-called cash balance conversions. This Article considers the various legal issues that areraised by cash balance conversions. In particular, this Articleconsiders whether these conversions violate the EmployeeRetirement Income Security Act (ERISA) or the Age Discriminationin Employment Act (ADEA). The Article concludes that the typicalcash balance conversion will not violate these laws. As long as theconversion protects the already-accrued benefits of older workers,ERISA will be satisfied. And, as long as post-conversion benefitallocations are nondiscriminatory, ADEA should be satisfied.

C:\WINNT\Profiles\Administrator\Personal\Forman-OCUfinal.wpd

380 Oklahoma City University Law Review [Vol. 25

1. See, e.g., Lee A. Sheppard, The Down-Aging of Pension Plans, 82 TAX NOTES 171

(1999); Jonathan Barry Forman, Sheppard Way Off Base on Cash Balance Plans, 82 TAX

NOTES 723 (1999) (letter to the editor); Colleen T. Congel, Cash Balance Plans DrawPraise, Criticism, 26 Pens. & Ben. Rep. (BNA) 656 (Mar. 1, 1999); Hope Viner Samborn,Now You See It, Now You Don’t, 85 A.B.A. J . 34 (Nov. 1999); Ellen E. Schult z, Ins andOuts of “Cash-Balance” Plan, WALL ST. J., Dec. 4, 1998, at C1; Ellen E. Schult z, PensionPaternity: How A Single Sentence by the IRS Paved the Way to Cash Balance Plans, WALL

ST. J., Dec. 28, 1999, at A1; Alvin D. Lurie, Defined-Benefit Plan Still The Best Pension,WALL ST. J., Jan. 17, 2000, at A19 (letter to the editor); Jon Forman, Cash Balance

Pension Plans, J. REC., Sept. 8, 1999, at 5, 16 [hereinafter Cash Balance Plans]; MaryBeth Franklin, Balancing Act, KIPLINGER’S PERS. FIN. MAG., Dec. 1999, at 122; ChristineDugas, Pension Partisans Fight for Retirement Security; Advocates Urge Companies toRaise Benefit Payments, USA TODAY, June 12, 2000, at 1B.

2. See infra Part II.A.1; Jonathan Barry Forman, Universal Pensions, 2 CHAPMAN L.REV. 95, 99 (1999).

3. See I.R.C. § 401(k) (1994 & Supp. 1998). Under a 401(k) plan, a worker canchoose between receiving cash currently or deferring taxation by placing the money in anemployer-sponsored reti rement account. Consequently, they are somet imes ca lled cash ordeferred arrangements (CODAs). See, e.g., JOHN H. LANGBEIN & BRUCE A. WOLK,PENSIONS AND EMPLOYEE BENEFIT LAW 50-54 (3d ed. 2000).

4. See generally Carol Quick, An Overview of Cash Balance Plans, EBRI NOTES, July1999, at 1; Patrick J. Purcell, Pension Issues: Cash-Balance Plans, CRS REP. FOR

CONGRESS (Sept. 2, 1999); Sharyn Campbell, Hybrid Retirement Plans: The RetirementIncome System Continues to Evolve, EBRI SPECIAL REPORT NO. 32/ISSUE BRIEF NO. 171,

Mar. 1996; Robert R. Mitchell, Cash Balance Pension Plans, J. PENS. BEN., Summer 1999,at 25; David A. Pratt, Focus on . . . Cash Balance Plans, J. PENS. BEN., Spring 2000, at 34;EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI), FUNDAMENTALS OF EMPLOYEE BENEF IT

PROGRAMS, ch. 10 (5th ed. 1997); Dennis R. Coleman, The Cash Balance Pension Plan,

THE PENSION FORUM, Oct. 1998, at 21; Paul V. Strella, Specialized Qualified Plans —Cash Balance, Target, Age-Weighted and Hybrids, 352-2nd Tax Mgmt. (BNA) (1994)

available in LEXIS, BNA Library, TMUS File (Apr. 27, 2000); Maureen B. Ratigan, CashBalance Plans: One Option in a Competitive World, J. PENS. BEN., Autumn 1999, at 4;

Larry Sher, A Workable Alternative to Defined Benefit Plans, CONTINGENCIES, Sept.-Oct.1999, at 20; Norman H. Godwin & Kim G. Key, An Overview of Cash Balance Pension

Plans, 26 J. PENS. PLAN. & COMPLIANCE 58 (2000); Alvin D. Lurie, Cash Balance Plans

I. INTRODUCTION

One of the hottest issues in the pension world today involves companiesreplacing their traditional pension plans with so-called cash balance plans.1

A cash balance plan is a defined benefit plan2 that looks like a bank accountor a 401(k) plan.3 A cash balance plan accumulates, with interest, ahypothetical account balance for each worker.4 The individual account

2000] Cash Balance Pension Plan Conversions 381

Examined, 7 J. TAX’N EMPLOYEE BEN. 227 (2000); Stanley D. Baum, Cash Balance PlansAddressed, 92 J. TAX’N 165 (2000).

5. See, e.g., Mitchell, supra note 4, at 28.6. See Quick, supra note 4; Purcell, supra note 4; Alvin D. Lurie, Cash Balance

Plans: Enigma Variations, 85 TAX NOTES 503 (1999); Towers Perrin, Cash Balance Plans:Time Out for Facts (visited Sept. 8, 2000) <http://www.towers.com/towers/publications/mon9910.pdf> [hereinafter Time Out for Facts]; Alex T. Arcady & Francine Mellors, Cash

Balance Conversions, AICPA J. ACCT. ONLINE (Feb. 2000) (visited Aug. 26, 2000)<http://www.aicpa.org/pubs/jofa/joaiss.htm>; Rosina B. Barker & Kevin P. O’Brien, Fromthe Editors—PensionCabal .com—Ruminations on the Cash Balance Crisis, BENEFITS L.J.,Winter 1999, at 1, 5.

7. See, e.g., Congel, supra note 1; Sheppard, supra note 1.8. Treasury Benefits Tax Counsel J. Mark Iwry recently summarized the problem as

follows:

Most of the recent controversy relating to the use of cash balance pension planshas focused on conversions of traditional defined benefit plan structures intocash balance plans. When an employer amends a defined benefit plan that hasa traditional final average pay defined benefit formula to provide for a cashbalance plan formula, there i s a very real change in accrual patterns that canadversely affect certain workers. Older workers who were nearing the peakyears of their economic accrual under the traditional plan formula will bedeprived of the opportunity to realize those large accruals. These workersmight quite understandably view the plan change as tantamount to a pay cut.

Hearing on Hybrid Pension Plans Before the Senate Comm. on Health, Educ., Labor andPens., 106th Cong., 1st Sess., (1999) (prepared testimony of J. Mark Iwry, Benefits TaxCounsel, Department of the Treasury, Washington, D.C.) (visited Aug. 26, 2000)

balances are determined by the plan’s benefit formula and consist of twocomponents: an annual cash balance credit and an interest credit.

For example, a simple cash balance plan might allocate 5% of salary toeach worker’s account each year and credit the account with 7% interest onthe balance in the account. Under such a plan, a worker who earned $30,000in a given year would get an annual cash balance credit of $1500 (5% x$30,000), plus an interest credit equal to 7% of the balance in herhypothetical account as of the beginning of the year. Like bank accounts and401(k) plans, workers find that cash balance plans are easy to understand.5

So what’s the problem? Simply put, replacing a traditional pension planwith a cash balance plan will reduce the expected pension benefits of olderworkers.6 Many older workers will see their future pensions cut—in somecases deeply.7 No doubt, these older workers will feel cheated,8 and some



<ht tp:/ /www.senate.gov/~labor/Hearings1999/septhear/092199wt/092199wt.htm>[hereinafter Hearing on Hybrid Pensions].

9. See, e.g., Hearing on Pension Reform Before the Senate Comm. on Finance, 106thCong., 2d Sess. (1999) (prepared testimony of Robert F. Hill, Esq., Trial Attorney, Denver,Co.) (visited Sept. 11, 2000) <http://www.senate.gov/~financew16-30.htm> [hereinafter

Hearing on Pension Reform]; see also Hearing on the Cash Balance Conundrum Beforethe Senate Special Committee on Aging, 106th Cong., 2d Sess., (2000) (prepared testimonyof James A. Bruggeman, Employee of Central and South West Corporation, Tulsa,Oklahoma; prepared test imony of Joseph Perkins, Immediate Past President, AARP,Washington, D.C.; prepared testimony of Karen W. Ferguson, Director, The PensionsR i g h t s C e n t e r , W a s h i n g t o n , D . C . ) ( v i s i t ed A u g. 2 6 , 2 0 0 0 )

<http://www.senate.gov/~aging/hr51.htm> [hereinafter Hearing on Cash Balance]. Videoaccess to the hearing is available at <http://www.senate.gov/~aging/events.htm>.

10. Employee Retirement Income Security Act (ERISA) of 1974, Pub. L. No. 93-406,88 Stat. 829 (codified as amended in scattered sections of 26 and 29 U.S.C.) [hereinafterERISA]. Tit les I, III, and IV of ERISA are codified as amended at 29 U.S.C. §§ 1001-1461(1994 & Supp. 1998). Provisions of Ti tles I, III, and IV of ERISA are often cited to ERISAsections. Tit le II of ERISA amended scattered sections of the Internal Revenue Code. SeeI.R.C. §§ 1-9833 (1994 & Supp. 1998).

11. See Age Discrimination in Employment Act (ADEA) of 1967, Pub. L. No. 90-202,81 Stat. 602 (codified at 29 U.S.C. §§ 621-634) (1994 & Supp. 1998).

12. See, e.g., William K. Carr, Amended Tax Court Petition: Seidlitz v. Commissioner,

TAX NOTES TODAY, Aug. 27, 1999, available in WL, Doc. 1999-27983, 1999 TNT 166-9;William H. Tobin, Cash Balance Pension Plans: Seidlitz v. Onan, J. PENS. BEN., Spring2000, at 7.

13. See discussion of the legislative response, infra Part V.A.14. See, e.g., IRS Tax Correspondence, 86 TAX NOTES 56 (2000).15. See, e.g., Schultz, supra note 1; Congel, supra note 1.

attorneys for older workers argue9 that cash balance plan conversions violatethe Employee Retirement Income Security Act (ERISA)10 and the AgeDiscrimination in Employment Act (ADEA).11

Not surpr isingly, a number of older workers have filed lawsuits to stopthese conversions,12 and they have complained to Congress,13 the ExecutiveBranch, 14 and the media.15 So far, however, Congress and the ExecutiveBranch have been decidedly laissez faire about these cash balance planconversions. With the economy booming, government officials don’t seem towant to impose costly limits on the ability of corporat ions to restructure their


16. See Cash Balance Plans, supra note 1. Congress has held a few hearings on cashbalance plan conversions, and i t is considering legislation that would require employers togive their workers more information about proposed pension plan changes. The Execu tiveBranch is also supportive of disclosure legislation, and the Department of Labor, theInternal Revenue Service, and the Equa l Employment Opportunity Commission are alsostudying cash balance plans. See, e.g., Colleen T. Congel, Cash Balance Plans: Disclosure

Bill Introduced in House, Senate; Lawmakers, Agency Officials Praise Proposal, 26 Pens.& Ben. Rep. (BNA) 2395 (Oct. 11, 1999); Colleen T. Congel, Cash Balance Plans: Sen.

Grassl ey Urges Treasury at Hearing to Conclude it s Cash Ba lance Review, 27 Pens. &Ben. Rep. (BNA) 1420 (June 13, 2000) [hereinafter Congel, Senator Grassley].

17. See, e.g., Goldman v. First Nat’l Bank, 985 F.2d 1113 (1st Cir. 1993) (affirmingthe dismissal of an age discrimination suit that implicated a cash balance plan conversion);but see Lyons v. Georgia Pac. Corp. Salaried Employees Retirement Plan, No. 99-10640,2000 U.S. App. LEXIS 19180 (11th Cir. Aug. 11, 2000) (holding that, after a cash balanceconversion, the Georgia Pacific plan violated ERISA when it failed to properly computeLyons’ lump-sum distribution).

18. See Congel, supra note 1, at 656.19. See id.20. See, e.g., Daniel Eisenberg, The Big Pension Swap Accounts That Yield Benefits

Sooner are Replacing Traditional Plans, but Older Workers are Crying Foul, TIME, Apr.19, 1999, at 36.

21. See infra Part IV.

pension plans.16 And, so far, the courts have been less than receptive to thepension law and age discrimination complaints of older workers.17

All in all, the objections of older workers have done little to slow thesteady stream of cash balance plan conversions. More than 400 mid-sizedand large companies have already shifted to cash balance plans, including atleast twenty-two of the Fortune 100 companies.18 So far, more than sevenmillion workers are already covered by cash balance plans.19

But is it legal? Should companies be allowed to replace their traditionalpension plans with cash balance plans? In general, the United States haswhat is called a “voluntary” pension system.20 That is, the federalgovernment does not require employers to provide pension benefits to theirworkers. If an employer chooses to provide pension benefits, however, theEmployee Retirement Income Security Act (ERISA) governs how thosebenefits are to be provided. ERISA generally ensures that workers willactually receive the pension benefits that their employers have promisedthem.

Does that mean that a company has to stick with a traditional pensionplan that it designed fifty years ago? Under current law, the answer isgenerally no.21 Employers are free to terminate their pension plans or amend



22. See I.R.C. § 411(d)(6) (1994). See also Hearing on Hybrid Pensions, supra note8 (prepared testimony of Stuart L. Brown, Chief Counsel for the IRS, Washington, D.C.).

There are other deterrents to terminating a defined benefit plan, however. Forexample, an employer that terminates an overfunded defined benefit plan and recovers theexcess assets can be liable for a nondeductible 50% excise tax on the amount of thereversion. See I.R.C. § 4980 (1994 & Supp. 1998). Also, if a plan is terminated, then allparticipants will vest in their accrued benefits, even if they have not yet met the plan’snormal vesting requirements (e.g., five years of service). See id. § 411(d)(3) (1994).

23. See Edward A. Zelinsky, The Cash Balance Controversy, 19 VA. TAX REV. 683

(2000); Richard C. Shea et al., Age Discrimination in Cash Balance Plans: Another View,19 VA. TAX REV. 763 (2000); Rosina B. Barker & Kevin P. O’Brien, Do Cash Balance

Plans Violate the ADEA?, BENEFITS L.J., Summer 2000, at 75.

them—with only one major caveat: employers can never reduce the benefitsthat a worker has already earned.22 Employers can cut future benefitaccruals, but they cannot cut the amount of pension benefits that workershave already accrued. In short, ERISA does seem to permit employers toamend their traditiona l pension plans and thereby convert them into cashbalance plans for future years.

Another possible limit on cash balance plan conversions can be found inthe Age Discrimination in Employment Act (ADEA). That Act generallymakes it unlawful to pay older workers less than younger workers for thesame work. But it is difficult to see how older workers can use ADEA tooverturn the typical cash balance plan conversion. No court has suggestedthat ADEA protects an older worker’s right to backloaded benefit accrualsin the future.

All in all, older workers may feel cheated when their employers replacetraditional pension plans with cash balance plans, but current law seems topermit these cash balance conversions. As long as an older worker’s accruedbenefit is protected, ERISA should be satisfied. As long as future benefitallocations are nondiscriminatory, ADEA should be satisfied. And, as longas Fortune 500 companies want to make these changes, Congress and theExecutive Branch are unlikely to interfere in any substantive way.

The purpose of this Article is to consider the various legal issues that areraised by these cash balance conversions.23 At the outset, Par t II of thisArticle provides an overview of cash balance plans, and Part III explainshow cash balance conversions work. Next, Part IV of this Article discussesthe legality of cash balance conversions. In particular, Part IV considerswhether these conversions violate ERISA or ADEA. Finally, Part Vdiscusses proposed legislative and regulatory responses.


24. See Employee Retirement Income Security Act (ERISA) of 1974, Pub. L. No. 93-

406, 88 Stat. 829 (codified as amended in scattered sections of 26 and 29 U.S.C.). See, e.g.,JOINT COMMITTEE ON TAXATION, 106TH CONG., 1ST SESS., OVERVIEW OF PRESENT-LAW

TAX RULES RELATING TO EMPLOYER-SPONSORED RETIREMENT PLANS (Comm. PrintJCX-16-99, Mar. 22, 1999) <http://www.house.gov/jct/x-16-99.htm>; Forman, UniversalPensions, supra note 2, at 99-101.

25. See I.R.C. § 402 (1994 & Supp. 1998).26. See id. §§ 404, 4972.27. See id. § 501(a) (1994).28. See id. § 402(a).29. See id. § 72 (1994 & Supp. 1998).30. See Pamela C. Scott, Qualified Defined Benefit Plans: The Essentials, in

UNDERSTANDING ERISA 1998, at 33, 36 (PLI Tax Law & Practice Course Handbook Series

No. J-421,1998), available in WL, 421 PLI/Tax 33, 36.

II. BACKGROUND ON CASH BALANCE PLANS

This Part provides an overview of pension plans, in general, and cashbalance plans, in particular.

A. An Overview of Private Retirement Plans

Most private retirement plans are governed by the Employee RetirementIncome Security Act (ERISA).24 These private retirement plans typicallyqualify for favorable tax treatment under the Internal Revenue Code.Basically, an employer’s contributions to a tax-qualified pension plan onbehalf of an employee are not taxable to the employee.25 Nevertheless, theemployer is allowed a current deduction for these contributions (withinlimits).26 Moreover, the pension fund’s earnings on these contributions aretax-exempt.27 Workers pay tax only when they receive distributions of theirpension benefits,28 and, at that point, the usual rules for taxing annuitiesapply.29

Employer-sponsored retirement plans generally fall into two broadcategories based on the nature of the benefits provided: defined benefit plansand defined contribution plans. These are discussed in turn.

1. Defined Benefit Plans

In a defined benefit plan, an employer promises employees a specificbenefit at retirement. To provide this benefit, the employer makes paymentsinto a trust fund and makes withdrawals from the trust fund. 30 Employer



31. Because the employer bears the risk, the employer also keeps any investment gainsand may use the gains to reduce contributions. On the other hand, a defined benefit plancan easily become underfunded because of a decline in value of the pension fund’sinvestment portfolio or even because of changes in the employer’s work force (such asincreasing life expectancies).

32. See ERISA §§ 4001-4402, 29 U.S.C. §§ 1301-1461 (1994 & Supp. 1998);EMPLOYEE BENEFIT RESEARCH INSTITUTE, supra note 4, ch. 3; JAY CONISON, EMPLOYEE

BENEFIT PLANS IN A NUTSHELL 424-54 (2d ed. 1998).33. Forman, Universal Pensions, supra note 2, at 99.34. See EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI), supra note 4, at ch. 5.

contributions are based on actuarial valuations, and the employer bears allof the investment risks and responsibilities.31 Benefits are guaranteed by thePension Benefit Guaranty Corporation.32

Defined benefit plans typically provide each worker with a specificannual retirement benefit that is tied to the worker’s averagecompensation and number of years of service. For example, a[typical “final average pay”] plan might provide that a worker’sannual retirement benefit (B) is equal to 2% times years of service(yos) times final average compensation (fac) (B = 2% x yos x fac).Under this formula, a typical worker with 30 years of service wouldreceive [an annual] retirement benefit equal to 60% of herpreretirement earnings (B = 60% x fac = 2% x 30 yos x fac). Finalaverage compensation is typically computed by averaging theworker’s salary over the three [or five] years immediately prior toretirement.33

“Career average pay” plans pay benefits based on compensation averagedover a much greater number of years of service, say, thirty rather than five.34

2. Defined Contr ibution Plans

Under a typical defined contribution plan, the employer simplycontribu tes a specified percentage of the worker’s compensation to anindividual investment account for the worker. For example, contributionsmight be set at 5% of annual compensation. Under such a plan, a workerwho earned $30,000 in a given year would have $1500 (5% x $30,000)contributed to an individual investment account for her. Her benefit atretirement would be based on all such contributions plus investment earningsthereon. There are a variety of different types of defined contribution plans,


35. See I.R.C. § 401(k) (1994 & Supp. 1998).36. See IRS News Release No. IR-1999-80, reprinted at Pens. Plan Guide (CCH) ¶

17,034I.37. See generally Campbell, supra note 4; Kelly Olsen & Jack VanDerhei, Defined

Contribution Plan Dominance Grows Across Sectors & Employer Sizes, While MegaDefined Benefit Plans Remain Strong: Where We Are and Where We Are Going, EBRI

SPECIAL REPORT NO. 33—ISSUE BRIEF NO. 190, Oct. 1997, at 27-29; Peter J. Alles, What’son the Menu Today? Hybrid Retirement Plans, EMPLOYEE BENEFITS PRAC., 1st Quarter2000, at 1.

38. See infra Part II.B.

including money purchase pension plans, target benefit plans, profit-sharingplans, stock bonus plans, and employee stock ownership plans (ESOPs).

Profit-sharing and stock bonus plans may include a 401(k) feature whichallows workers to choose between receiving cash currently or deferringtaxation by placing the money in a retirement account.35 Consequently, theyare sometimes called cash or deferred arrangements (CODAs). Themaximum annual amount of elective deferrals that can be made by anindividual in 2000 is $10,500.36

3. Hybrid Plans

Alternatively, many companies rely on so-called “hybrid” retirementplans that mix the features of both defined benefit and defined contributionplans.37 Pertinent here, a cash balance plan is a defined benefit plan thatlooks like a defined contribution plan.38 Like other defined benefit plans,employer contributions are based on actuarial valuations, and the employerbears all of the investment risks and responsibilities. Like definedcontribution plans, however, cash balance plans provide workers withindividual accounts (albeit hypothetical).

Similarly, a so-called “target benefit plan” is a defined contribution planthat looks like a defined benefit plan. A target benefit plan uses a definedbenefit formula to establish a “target” benefit for each participant. Theemployer contributions for each part icipant are actuarially determined toachieve this goal, but this “target” benefit is not guaranteed. Instead, aworker’s ultimate retirement benefit is based on the actual balance in theworker’s individual account.



39. See U.S. GENERAL ACCOUNTING OFFICE, Private Pensions — Most Employers ThatOffer Pensions Use Defined Contribution Plans, available in WL GAO-RPTS, GAO/GGD-97-1, at 4 (Oct. 3, 1996); Paul Yakoboski, Overview of the U.S. Employment-Based

Retirement Income System, in THE FUTURE OF PRIVATE RETIREMENT PLANS 19 (Dallas L.Salisbury ed. 2000).

40. See generally RICHARD A. IPPOLITO, PENSION PLANS AND EMPLOYEE PERFORMANCE

10-17, 41-60 (1997); Jonathan Barry Forman, Public Pens ions: Choosing Between DefinedBenefit and Defined Contribution Plans, 1999 DET. C.L. REV. 187, 195-201 (1999).

41. See Harkin Would Protect Accrued Benefits in Defined Benefit Plans, TAX NOTES

TODAY, July 16, 1999, available in WL, Doc. 1999-23674, 1999 TNT 136-45 [hereinafterHarkin].

42. See, e.g., IPPOLITO, supra note 40; RICHARD A. IPPOLITO, PENSION RESEARCH

COUN CIL, PENSIONS, ECONOMICS AND PUBLIC POLICY 133-50 (1986); JOSEPH F. QUINN ET

AL., PASSING THE TORCH: THE INFLUENCE OF ECONOMIC INCENTIVES ON WORK AND

RETIREMENT (1990); LAWRENCE THOMPSON, OLDER AND WISER: THE ECONOMICS OF

PUBLIC PENSIONS 71-83 (1998); ALAN L. GUSTMAN & THOMAS L. STEINMEIER, PENSION

INCENTIVES AND JOB MOBILITY (1995); Michael D. Hurd, Research on the Elderly:

Still another approach is for an employer to offer a combination ofdefined benefit and defined contribution plans. For example, manycompanies with traditional defined benefit plans have added 401(k) plans.39

4. Traditional Defined Benefit Plans Are Backloaded

Pension benefits typically accrue differently under defined benefit anddefined contribution plans. In particular, under a traditional (i.e., finalaverage pay) defined benefit plan, benefit accruals increase significantly thecloser a worker gets to retirement. On the other hand, under a definedcontribution plan, benefits accrue at a constant rate (e.g., 10% of annualcompensation).

Indeed, one of the most obvious features of traditional final average paypensions is that they are “backloaded.” That is, they tend todisproportionately favor older workers who have stayed with the companyfor twenty-five or thirty years. The primary reason for this backloading isthat the value of benefit accruals typically increases as a percentage of payas workers approach retirement age.40 In fact, well over half of the value ofa worker’s pension can accrue in the last five or ten years of service.41

5. The Implication of Backloading

The differing rates of benefit accrual under traditional defined benefitplans and defined contribution plans result in different incentives that canaffect employee decisions about work and retirement.42 In particular,


Economic Status, Retirement, and Consumption and Saving, 28 J. ECON. LITERATURE 565

(1990); Alan L. Gustman et al., The Role of Pensions in the Labor Market: A Survey of theLiterature, 47 INDUS. & LAB. REL. REV. 417 (1994).

43. See Michael Falivena, Pensio n Portability: No Easy Solution , PENS. &

INVESTMENTS, Feb. 5, 1990, at 15, as reprinted in LANGBEIN & WOLK, supra note 3, at 172[hereinafter Falvivera, in LANGBEIN & WOLK]. See also Olsen & VanDerhei, supra note37, at 11-12.

traditional defined benefit plans (i.e., final average pay plans) typicallypenalize workers who change jobs frequently, create large financialincentives for workers to stay on the job at least until they are eligible forearly retirement, and push workers out of the work force once they havereached the plan’s normal retirement age.

For example, Table 1 shows the magnitude of this financial penalty onthe mobile worker.43 Table 1 compares the retirement benefits of fourworkers. These workers all have identical thirty-year pay histories (6%annual pay increases starting at $20,000 and ending at $108,370) and alltheir employers have identical final average pay plans (1.5% times years ofservice times final pay). The only difference among these workers is that thefirst worker spent his entire career with one employer, while the otherworkers divided their careers over two or more employers. Nevertheless, thelong-tenure worker would receive an annual benefit of $49,000 at retirement,while the worker who holds five jobs would receive just $27,000 per year.



44. Falivena, in LANGBEIN & WOLK, supra note 43, at 172.45. See, e.g., Lunn v. Montgomery Ward & Co., Retirement Sec. Plan, 166 F.3d 880

(7th Cir.1999); Retiree Benefits: Increased Benefit s for Older Retiree Not Warranted Under

Floor-Offset Pension, 26 Pens. & Ben. Rep. (BNA) 537 (Feb. 15, 1999).

Table 1. Non-portability of Final Average Pay Plans44

Worker Employerno.

Yearlyaccrual

rate

Years ofservicepay

FinalPay

Total pension

1 1 1.5% 30 $108,370 $49,000

2 12

1.5 1.5

1515

45,219108,370

10,174 24,383 35,000

3 123

1.5 1.5 1.5

101010

33,78160,513

108,370

5,069 9,077

16,256 30,000

4 12345

1.5 1.5 1.5 1.5 1.5

66666

26,76537,96753,85676,396

108,370

2,409 3,417 4,847 6,876 9,753

27,000

In short, the mobile worker covered by a final average pay plan willsuffer large benefit losses each time she changes jobs. Moreover, evengreater financial penalties can result if a worker changes jobs withoutvesting. All in all, final average pay plans penalize workers who change jobsfrequently.

At the same time, however, final average pay plans create large financialincentives for workers to stay with a firm at least until they are eligible forearly retirement. This is the so-called “golden handcuffs” phenomenon.

Also, final average pay plans typically push older workers out of thework force at normal retirement age. That’s because once a worker is eligibleto receive full retirement benefits, delaying retirement can actually be quitecostly.45 Those who delay retirement lose current benefits, but the increasein benefits that can result from an additional year of work rarely


46. According to the so-called “implicit contract” theory, employers underpay theiryounger workers in exchange for overpayment l ater in their careers. The backloading ofpension accruals encourages younger workers to stay with the company at least until earlyretirement age. At the same time, however, it gives employers a reason to discourage “late”retirement. See Bernard Casey, Incent ives and Disincentives to Early and Late Retirement:Working Paper AWP 3 .3, 1, 18-20 (visited Sept. 11, 2000) <http://www.oecd.org./subject/ageing> (following link AWP 3.3 Eng); David A. Wise, Living Longer, Saving Less,

Retiring Sooner , in RETIREMENT AND PUBLIC POLICY: PROCEEDINGS OF THE SECOND

CONFERENCE OF THE NATIONAL ACADEMY OF SOCIAL INSURANCE, 209-21 (Alicia H.Munnell ed., 1991).

47. See Joseph F. Quinn, Retirement Patterns and Bridge Jobs in the 1990s, EBRIISSUE BRIEF NO. 206, Feb. 1999, at 8 (1999).

48. See, e.g., I.R.C. § 402(c) (1994). 49. See, e.g., Cash Balancing Act, PLAN SPONSOR, Feb. 1999 (visited Aug. 27, 2000)

<http:/ /www.assetpub.com/psfeb99/feature_right.html>; Mervin M. Wilf, New Generationof “Hybrid” Defined Benefit Plans, in ALI-ABA COURSE OF STUDY: ANNUAL FALL

PENSION LAW AND PRACTICE UPDATE (presentation at Tulane Tax Institute, Sept. 21,1994), available in WL Q232 ALI-ABA 1S.

50. See Anna M. Rappaport, The Aging Society and Retirement Benefit Strategy,PROFIT SHARING, July-Aug. 1997, at 8; National Economic Council Interagency WorkingGroup on Security, Women and Retirement Security, October 27, 1998, (visited Aug. 27,2000) <http://www.pub.whitehouse.gov/WH/Publicat ions/html/Publi cation.html>(following links to “G. Identify Documents Using Persistent Document Identifiers (PDI)”t o “ 2 . V i e w D o cu m e n t b y P D I e n t e r i n g D o c u m e n t I D ”<pdi://oma.eop.gov.us/1998/10/28/5.text.1> and pressing “Show”); Teresa Heinz et al.,Women’s Institute for a Secure Retirement (WISER), Women and Pensions: An Overview(visi ted Aug. 27, 2000) <http:/ /www.wiser.he inz.org/pensions_overview.html>.

compensates for the benefits lost. And those who work until they drop mayleave nothing behind for their survivors.46

On the other hand, because defined contribution plans are not typicallybackloaded, vested workers do not suffer benefit losses from changing jobsor retiring too early, nor do they face financial penalties for working past theplan’s normal retirement age.47 Instead, mobile employees can typically rollover their individual account accruals and accumulate large account balancesto be used for retirement.48 Indeed, this portability is one of the mostimportant advantages of defined contribution plans,49 especia lly for womenwho typically have shorter job tenures because of greater child and dependentcare responsibilities.50

In that regard, consider two workers, Alex and Bob, working side-by-side and each earning $50,000 a year. Assume further that Alex is thirty-fiveyears old, Bob is fifty-five, and both are covered by a final average pay



51. See Congel, supra note 1, at 658.52. See George F. O’Donnell & Patricia Seahill, Pension Redesign For Deregulated

Utili ties, PUB. UTIL. FORT., Mar. 1, 1998, at 44, 47.

defined benefit plan that provides a retirement benefit equal to 2% times finalaverage pay for up to thirty years of service. Because Bob is closer toretirement age than Alex, their employer would have to contribute more tothe pension plan this year on behalf of Bob than Alex. It’s as if the employercontributed $8000 this year for Bob’s pension (which must be fully fundedin ten years) but only $2000 for Alex’s pension (which can grow thatcontribution for thirty years). That’s backloading, and the net effect is thatthirty-five-year-old Alex costs the employer just $52,000 to employ, but Bobcosts $58,000.

On the other hand, under a defined contribution plan, the employerwould contribute the same specified percentage of pay to both workers’accounts. For example, if contributions were set at 10% of annual pay, bothAlex and Bob would see $5000 credited to their individual accounts.Needless to say, younger workers (like Alex) see little reason to go to workfor a rust-belt company with a backloaded final average pay pension whenthey can go to work for a high-tech company—like Microsoft—that willimmediately stuff money into their 401(k) accounts.

6. Cash Balance Plans Are Not Backloaded

That’s where cash balance plans come in. Like traditional pension plans,cash balance plans are defined benefit plans, but they look like definedcontribution plans.51 Consequently, corporations stuck with traditionalpension plans can mimic defined contribution plans—and get rid ofbackloading—by amending their traditional pension plans and therebyconverting them into cash balance plans.52

For example, recall that under the final average pay plan describedabove, fifty-five-year-old Bob would see an $8000 pension benefit accrualthis year, and thirty-five-year-old Alex would see a $2000 accrual. If theiremployer converts this final average pay plan into a cash balance plan, bothBob and Alex would see $5000 annual credits added to their hypotheticalaccounts.

Having worked for the company for many years, Bob may feel cheatedout of $3000. On the other hand, Alex is thrilled to see a $3000 increase inhis benefit accrual, and the employer is happy because it now finds it easierto recruit talented, young workers.


53. See, e.g., Daniel Dulitzky, Incentives for Early Retirement in Private Pension andHealth Insurance Plans (Urban Inst. Retirement Project Series Paper No. 3, 1999) (visitedAug. 27, 2000) <http://www.urban.org/retirement/briefs/3/brief_3.html>; Leslie E. Papke,Are 401(k) Plans Replacing Other Employer-provided Pens ions? Evidence from PanelData, 34 J. HUMAN RESOURCES 346 (1999); Council of Economic Advisors, Annual Report

of the Council of Economic Advisors, in ECONOMIC REPORT OF THE PRESIDENT 7, 131, 157-63 (1999); Kevin Dent & David Sloss, The Global Outlook For Defined Contribution

Versus Defined Benefit Pension Plans, BENEFITS Q., 1st Quarter 1996, at 23; GaryKleinman et al., An Analys is of the Move Toward Defined Contribution Pension Plans: Are

the Rewards Commensurate with the Risks, J. PENS. PLAN. & COMPLIANCE, Fall 1999, at61; U.S. GENERAL ACCOUNTING OFFICE, supra note 39, at 4.

54. See EMPLOYEE BENEFIT RESEARCH INSTITUTE, EBRI DATABOOK ON EMPLOYEE

BENEFITS 81 (Employee Benefit Research Institute ed., 4th ed. 1997).55. See id.56. See id.57. See U.S. GENERAL ACCOUNTING OFFICE, supra note 39, at 4. 58. See Barker & O’Brien, supra note 6, at 5 ; see also Pension Benefit Guaranty

Corporation, Facts: Defined Benefit Plans (visi ted July 7, 2000) <http ://www.pbgc.gov/dbbenfit.htm>.

In short, replacing a traditional final average pay pension plan with acash balance plan will reduce expected benefits for older workers andincrease benefits for younger workers, at least for those younger workerswho stay with the employer long enough to vest. Indeed, that seems to bewhy so many companies have made the change. But how else should theycompete for workers with Microsoft and the other high-tech companies thatare not burdened with traditional pension plans?

7. The Shift Away From Traditional Defined Benefit Plans

Not surprisingly, in recent years, there has been a marked shift awayfrom traditional defined benefit plans and towards defined contribution plansand cash balance plans.53 As of 1993, about 43% of private-sector workerswere covered by at least one pension plan.54 Defined contribution planscomprised 88% of these plans, up from 67% in 1975.55 Moreover, 42% ofthe active participants in those private-sector plans had a definedcontribution plan as their primary plan, up from just 13% in 1975.56

Similarly, in 1993, 88% of private employers with only one retirement plansponsored only a defined contribution plan, up from 68% in 1984.57 Thenumber of defined benefit plans reporting to the Pension Benefit GuarantyCorporation has also declined—from 111,000 in 1987 to just 43,000 in1998.58 Also of note, 401(k) plans are the fastest growing part of the defined



59. See Yakoboski, supra note 39, at 29.60. See Hearing on Hybrid Pensions, supra note 8 (prepared testimony of Jack

VanDerhei, Temple University and Fellow Employee Benefit Research Institute,Washington, D.C.) (visit ed Sept. 11, 2000) <http://www.ebri.org/testimony/T121.htm>.

61. See id.62. See id.63. See Edward A. Zelinsky, ERISA and the Emergence of the Defined Contribution

Society, in NYU 57TH INST. ON FED. TAX’N — EMPLOYEE BENEFITS & EXECUTIVE

COMPENSATION, §§ 6.01-.05 (Alvin D. Lurie ed., 1999) [hereinafter Zelinsky, DefinedContribution Society]. Yakoboski, supra note 39, at 32, views the shift to individualaccount-type plans as “a plus for workers.” He believes that the enhanced portabilityinherent in defined contribution plans and cash ba lance plans provides a better match for

today’s mobile work force. See id.64. See generally references cited supra note 4; Zelinsky, supra note 23, at 687-715.

contribution world. In 1995, for example, there were 201,000 401(k) plans,up from 17,000 in 1984, and the total number of active participantsincreased from eight million to twenty-eight million over that time period.59

At the same time, the nature of defined benefit plans has been movingaway from the traditional final average pay and career average pay models.According to a recent survey of large U.S. employers that offer definedbenefit plans, the percentage utilizing a final average pay formula hasdecreased from 85% to 72% over the past five years.60 Similarly, thepercentage of large employers using a career average pay formula hasdeclined from 15% in 1995 to 9% today.61 At the same time, utilization ofcash balance plans has increased from 6% to 16% of the large definedbenefit plans surveyed.62 All in all, the era of the traditional defined benefitplan is largely behind us.63

B. Cash Balance Plan Basics

For all their novelty, cash balance plans are technically defined benefitplans. However, cash balance plans differ in some key ways from moretraditional defined benefit plans (like final average pay plans).

1. An Overview of Cash Balance Plans

A cash balance plan is a defined benefit plan that looks like a definedcontribution plan.64 The plan accumulates, with interest, a hypotheticalaccount balance for each part icipant. The individual account balances aredetermined by the plan’s benefit formula and consist of two components: an


65. See, e.g., Mitchell, supra note 4, at 28.66. In addition to contributions based on salary, cash balance plans may use a flat

dollar amount for the credit and may integrate the pl ans with Social Security. The interestcredit may be at a specified rate or it may be indexed to an economic monitor such as the

CPI. See EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI), supra note 4.

annual cash balance credit and an interest credit.65 For example, a simplecash balance plan might allocate 5% of salary to each participant’s cashbalance account each year, and credit the account with 7% interest on thebalance in the account.66

Cash balance account statements are issued to participants each year andmay provide benefit projections at retirement age. Cash balance statementslook like defined contribution plan statements and are generally easier forparticipants to understand than a traditional defined benefit plan formula.Cash balance plans may pay out account balances in the form of a lump-sumdistribution or as an annuity, but some sponsors encourage the selection ofan annuity by specifying a favorable actuarial basis to convert accounts toannuities. Table 2 provides an example of a simple cash benefit plan.



67. Lawrence T. Brennan & Dennis R. Coleman, Cash Balance Pension Plans, in THE

HANDBOOK OF EMPLOYEE BENEFITS, (Jerry S. Rosenbloom ed., 3d ed. 1992), reprinted in

Campbell, supra note 4, at 8.

TABLE 2. CASH BALANCE PLAN EXAMPLE67

This example illustrates how an employee’s cash balance account grows overfive years. A new employee in this example earns $30,000 per year. Each year theemployee will earn cash balance pay credits equal to 5% of $30,000, or $1500, andan interest credit of 7%.

For purposes of this example, assume that each year’s pay credit earns one-halfof the annual interest credit rate in that year (i.e., 3.5%), since pay creditsnormally will be credited throughout the year.

The balance after the first year would be $1,552.50 ($1,500 + 3.5% of $1,500).To determine the interest credit for the second year, add 7% of the balance at thebeginning of the year ($108.67) to 3.5% of the pay credit for the year ($52.50) toarr ive at $161.17. Continuing in this manner, at the end of five years, the accountvalue will be $8,928.01, or almost 30% of annual pay (see table below).

Account Value Annual Pay Credit Interest Credit/a/ Account ValueYear (Beginning of Year) Pay (5 percent) (7 percent) (End of Year)

1 $ 0.00

$ 30,000 $ 1,500 $ 52.50 $ 1.552.50

2 1,552.50 30,000 1,500 161.17 3,213.67

3 3,213.67 30,000 1,500 277.46 4,991.13

4 4,991.13 30,000 1,500 401.87 6,893.00

5 6,893.00 30,000 1,500 535.01 8,928.01

/a/ Pay credits assumed to receive one-half of the annual interest credit.


68. See Quick, supra note 4.69. See Pamela D. Perdue, Selecting a Suitable Qualified Plan and Plan Design For

Your Clients— Moving Beyond the Tried and True, in ALI-ABA COURSE OF STUDY:QUALIFIED PLANS, PCS, AND WELFARE BENEFITS 171, 197 (presentation at Scottsdale,Arizona, Feb. 16, 1995), available in WL C980 ALI-ABA 171, 197.

70. See Marjorie Hoffman, Cash Balance Pension Plans [I.R.S. Not ice 96-8], Pension,

Profit-Sharing, Welfare, and Other Compensation Plans, ALI-ABA Course of Study, CA62A.L.I.-A.B.A. 755, 757 (Mar. 20, 1996); I.R.S. Notice 96-8, 1996-1 C.B. 359.

71. See EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI), supra note 4.72. See id. Because cash balance plans are defined benefit plans, however, benefits are

guaranteed by the Pension Benefit Guaranty Corporation. See ERISA §§ 4001-4009, 29U.S.C. §§ 1301-1309 (1994 & Supp. 1998); EMPLOYEE BENEFIT RESEARCH INSTITUTE

(EBRI), supra note 4, ch. 3; CONISON, supra note 32, 424-54.73. See Hearing on Pension Reform, supra note 9 (prepared testimony of Patrick J.

Purcell, Specialist in Social Litigation, Congressional Research Service, Washington,D.C.). Also, Financial Accounting Standard No. 87 allows companies to report their excesspension assets as income on their financial statements. See EMPLOYERS’ ACCOUNTING FOR

PENSIONS, Statement of Financial Accounting Standards No. 87 (Fin. Accounting Standards

2. Cash Balance Plans Look Like Defined Contr ibution Plans

The key to cash balance plans is the hypothetical account balances theyprovide for employees.68 However, the accounts are merely bookkeepingdevices for cash balance plans.69 The payment and interest credits of a cashbalance plan are designed to be similar to those used in defined contributionplans.70 Employers choose these characteristics because they appeal toyounger, more mobile employees. However, cash balance plans differ insome key ways from defined contribution plans.

Cash balance plans differ from defined contribution plans because theplan formula defines the future benefit an employee will receive rather thanthe amount of the employer’s contribution.71 Among other things, that meansthat a cash balance plan may be underfunded and employees can losebenefits when a plan terminates.72 In contrast, defined contribution plans,once funded, are always fully funded. Because defined contribution plans,once funded, continue to be fully funded, an employee’s account balance ismore secure.

Also, under a cash balance plan, the employer assumes the investmentrisk. The employer must make up the difference if plan assets underperform.On the other hand, if investment returns are high, the employer is allowed tokeep any investment returns that the plan earns over and above the amountspromised to employees.73



Bd. 1982); Elizabeth A. White, Lawmakers Seek Accounting Rule Changes; Also Cite Age

Discrimination in Conversions, 27 Pens. & Ben. Rep. (BNA) 606 (Feb. 29, 2000); EthanG. Stone, Note, Must We Teach Abstinence? Pensions' Relationship Investments and theLessons of Fiduciary Duty, 94 COLUM. L. REV. 2222, 2230 n.37 (1994). Basical ly,Financial Accounting Standard No. 87 requires companies to recognize the costs of their

defined benefit p lan on an accrual basis. See Buck Study Shows Slight Increase in Rate ofReturn Reported on FAS 87, 27 Pens. & Ben. Rep. (BNA) 211 (Jan. 25, 2000).

74. See Purcell, supra note 4, at 1-2.75. See id. at 2.76. See id.77. See Littler Mendelson, Cash Balance Pension Plans Present Flexibility and

Interes ting Challenges, CAL. EMPLOYMENT L. MONITOR, July 21, 1999, at 8.78. See Norman Stein, Some Serious Questions About Cash Balance Plans: Retirement

in the Balance, CONTINGENCIES, Sept.—Oct. 1999, at 28.79. See id.80. See Eugene H. Veenhuis, Cash Balance Plans: The Newest Benefit Plans, in

UNDERSTANDING ERISA 1986, at 9, 14 (PLI Tax Law & Practice Course Handbook Series,No. J4-3585, 1986) (listing an employer’s ability to use assets of overfunded plans andchance to reduce employee benefits with less notice as “advantages” of cash balance plans).

81. See supra Part II.A.4.82. See Towers Perrin, Hot Topics, Perspective on Cash Balance Plans: Making the

Transition, (visited Nov. 7, 1999) <http ://www. towers.com/towers/hot tops/htcbp.htm> (on

file with Oklahoma City Univers ity Law Review) [hereinafter Making the Transition].

On the other hand, defined contr ibution plans allocate the financial risksto employees.74 The employer’s only funding obligation is to make the initialcontribution.75 As a result , the employer makes no guarantees concerning thelevel of benefits an employee will receive.76

Defined contribution plans can also be cumbersome in some respects.Because contributions are kept in separate accounts and not pooled, capitalis often locked into low-risk investments.77 This result occurs becauseemployees often invest too conservatively.78 In contrast, cash balance plansoffer pooling of assets and management by professionals rather thanindividual employees.79 This feature, plus the individual account statementsthat employees receive, are two reasons for the growth of cash balance plans.However, the rise of cash balance plans can also be attributed to otherfactors.80

3. Benefit Accrual Under Cash Balance Plans

As already explained, traditional defined benefit plans are backloaded.81

Like defined contribution plans, however, cash balance plans provide formore uniform accruals over an employee’s working career.82 They provide


83. See id. See also Jerry Brockett & Kien Liew, Are You Bet ter Off Retiring Under ACash Balance Plan Or A Traditional Pension Plan? Case Study 1 & Case Study 2 (visitedJuly 7, 2000) <http://www.pens ionbenefits.com/articles/>.

84. Making the Transition, supra note 82.85. See Hearing on Hybrid Pensions, supra note 8 (prepared testimony of Ron

Gebhardtsbauer, Senior Pension Fellow, American Academy of Actuaries, Washington,D.C.) (visited Sept. 19, 2000) <http://www.actuary.org/1999.htm> (following link to

Hybrid Pension Plan Coverage: Retirement Into the 21st Century).

for larger benefit accruals than final-average-pay plans for younger workersand smaller benefit accruals for older workers. Table 3 provides acomparison between a cash balance plan and a traditional plan. 83 Eventhough the two plans in Table 3 produce almost identical values at age sixty-five, the cash balance plan offers a more level pattern of accrual throughoutthe employee’s career.

Table 3. Cash Balance Plan v. Final-average-pay Plan: Comparison ofAccumulated Single Sum Values84

Age Final-Average-Pay-Plan Cash Balance Plan

30 $ 200 $ 900

40 $ 7,200 $ 19,000

50 $ 42,300 $ 74,700

60 $ 184,800 $ 212,000

65 $ 323,200 $ 329,000

Chart I provides a graphic comparison between a cash balance plan anda traditional defined benefit plan.85 Chart I compares the contributions madeon behalf of an individual for the following two hypothetical pension plans:(1) a simple cash balance plan with a flat 6% pay credit and an annualinterest credit of 5%, and (2) a traditional defined benefit plan with a benefitat age sixty-five of 1% multiplied by the years worked and multiplied by thefinal pay. Chart I shows that the cash balance plan has fairly levelcontribution accruals at all ages. On the other hand, the traditional definedbenefit plan is backloaded, and there are financial penalties for staying pastretirement age. All in all, Chart I illustrates that cash balance plancontributions are much larger than the accruals of the traditional defined



86. See id.; see also Steve J. Kopp & Lawrence Sher, A Benefit Value Comparison of

a Cash-Balance Plan with a Traditional Final Average Pay Defined Benefit Plan, THE

PENSION FORUM, Oct. 1998, at 1.87. Hearing on Hybrid Pensions, supra note 8 (testimony of Ron Gebhardtsbauer) and

supra note 85.88. See infra Part V.A.

benefit plan for young employees, but are much smaller for olderemployees.86

87

III. CASH BALANCE PLAN CONVERSIONS

On their face, cash balance plans seem particularly benign. The plansfavor uniform accruals for employees. However, cash balance plans havegenerated a fair amount of controversy and are currently the subject of anumber of legislative proposals aimed at curtailing the perceived inequitiesunder the plans.88 The controversial aspects of cash balance plans are not aresult of the plan formulas. The plans receive attention because of negativeconsequences often resulting to older employees when a traditional definedbenefit plan is converted into a cash balance plan.


89. See Veenhuis, supra note 80, at 13.90. See id.91. See supra Part II.A.4-5.92. For example, it typically costs employers more to provide pension and health

benefits for older workers than for younger workers, and salary costs and other benefits canalso be higher. See., e.g., Gary Minda, Opportunistic Downsizing of Aging Workers: The

1990s Version of Age and Pension Discrimination in Employment, 48 HASTINGS L.J. 511,523-25 (1997).

93. See Mitchell, supra note 4, at 29.94. See id.95. See Congel, supra note 1, at 658.96. See Morning Edition: Pros and Cons of Cash Balance Plans for Retirement

Savings (N.P.R. radio broadcast, Feb. 1, 1999) (for audio version, Cash Balance RetirementAccount, select “archives” for Feb. 1, 1999 at <http://www.npr.org/programs/morning>),

reprinted in Harkin Would Protect Accrued Benefits in Defined Benefit Plans, TAX NOTES

TODAY, July 16, 1999, available in WL, Doc. 1999-34674, 1999 TNT 136-45 [hereinafter

Morning Edition].

A. Plan Conversion Basics

Many companies favor cash balance plans because these plans are easyto administer, an employer’s required contribution is more readilyascertainable, and the plans benefit mobile workers.89 Other more cynicalreasons may also explain why companies convert to cash balance plans. Aconversion to a cash balance plan may be a way for an employer to reducefuture benefit accruals without employees noticing.90

As discussed ear lier, traditional defined benefit plans are “backloaded.”91

As a result, older employees can be very expensive to employ.92 When anemployer decides to convert a traditional defined benefit plan to a cashbalance plan, the accrued benefits under the old plan cannot be reduced.93

However, the interaction of several factors results in older employersreceiving less benefits.

1. How a Conversion Works

In a conversion, the employer determines an employee’s accruedbenefit.94 However, this accrued benefit is usually not the opening balanceof the nominal cash balance account.95 This results from regulations allowingemployers to use two different interest rates in calculating the accruedbenefits under the old plan and the opening balance of the new plan.96 Theemployer often chooses the combination of interest rate assumptions mostfavorable to it. Additionally, an employer can set the opening account



97. See Hearing on Pension Reform, supra note 9 (testimony of Patrick J. Purcell) andsupra note 73.

98. Making the Transition, supra note 82. See also Hearing on Pension Reform, supra

note 9 (testimony of Patrick J. Purcell) and supra note 73, at 7.99. See Cash Balance Plans: ERIC: Proposed Ban is Groundless, Pens. Plan Guide

(CCH) 2, No. 1278, at 2 (Aug. 2, 1999).100. See id.101. See, e.g., Rosina B. Barker & Kevin P. O’Brien, From the Editors: Cash Balance

Plans: Are Wear-Away Transi tions Legal Under the ADEA?, BENEFITS L.J., Spring 2000,at 1.

102. See I.R.C. § 411(d) (6) (1994); ERISA § 204(g)(1), 29 U.S.C. § 1054(g)(1) (1994).

See infra Part IV.A.103. See Hearing on Hybrid Pensions, supra note 8 (testimony of J. Mark Iwry).

balance at almost any level as long as an employee who leaves can receivea lump sum equal to the present value of her accrued benefit under the oldplan.97

2. Benefit Accrual in Cash Balance Conversions

Replacing a traditional pension with a cash balance plan can have anadverse impact on middle-aged workers. The mid-career worker “gets theworst of both plans—the lower early accruals provided by the final pay plan,along with the lower late accruals provided by the cash balance plan.”98 Formost defined benefit plans, an employee accrues most of her benefits in thelast few years of employment.99 As a result, employees accrue very little inthe first years of employment.

Cash balance plans have more uniform accruals.100 When an employerconverts from a traditional defined benefit plan to a cash balance plan, theemployee never receives the benefit of those disproportionately large latecareer accruals. While the loss of expected accruals is troublesome foremployees, they may also be hurt by not accruing more benefits for severalyears. This phenomenon is known as the “wearaway.”101

3. The Wearaway

When an employer amends a pension plan, it cannot reduce alreadyaccrued benefits.102 As a result, an employee who had accrued a benefit of$1000 a month at age sixty-five before the amendment is entitled to at least$1000 a month at age sixty-five after the amendment.103 To ensure thatemployees’ accrued benefits are not reduced, employers use two methods.Under one method, the “sum of” formula, the benefits accrued after the


104. See id.105. See id.106. I.R.S. Notice 96-8, supra note 70, provides the following example:

As explained below, in order to comply with sections 411(a) and 417(e) incalculating the amount of a single sum distribution under a cash balance plan,the balance of the employee’s hypothetical account must be projected to normalreti rement age and then the employee must be paid at least the present value,determined in accordance with section 417(e), of that projected hypotheticalaccount balance. If a cash balance plan provides interest credits using aninterest rate that is higher than the section 417(e) applicable interest rate,payment of a single sum distribution equal to the hypothetical account balanceas a complete distribution of the employee’s accrued benefit may result eitherin a violation of section 417(e) or a forfeiture in viol ation of section 411(a).This is because , in such a case, the present value of the employee’s accruedbenefit, determined using the section 417(e) applicable interest rate, willgenerally exceed the hypothet ical account balance. The following exampleillustrat es this potentia l problem.

Example. A cash balance plan provides for interest credits at a fixed rateof 8% per annum tha t are not conditioned on continued employment, and forannuity conversions using the sect ion 417(e) appl icable interest rate andmortality table. A fully vested employee with a hypothetical account balanceof $45,000 terminates employment at age 45 and elects an immediate singlesum distribution. At the time of the employee’s termination, the section 417(e)applicable interest rate is 6.5%.

The projected balance of the employee’s hypothetical account as of normalretirement age is $209,743. If $209,743 is discounted to age 45 at 6.5% (thesection 417(e) applicable interest rate), the present value equals $59,524.

Accordingly, if the plan paid the hypothetical account balance of $45,000,instead of $59,524, the employee would receive $14,524 less than the amountto which the employee is entitled.

Even if a cash balance plan provides interest credits using an interest ratethat exceeds the section 417(e) applicable inte rest rat e, the plan can sati sfysections 417(e) and 411(a). Such a plan would provide that the amount of anysingle sum distribution is equal to the present value of the employee’s accruedbenefit determined in a manner that satisfies sections 411(a) and 417(e) evenif the amount of the single sum exceeds the employee’s hypothetical accountbalance. Thus, in the example above, the plan would satisfy sections 411(a)

amendment are added to the benefits accrued before the amendment.104 Theother option is the “greater of” formula. Under this option, the employerdetermines the benefits that would be due under the new plan and comparesthat number to the accrued benefits under the old plan.105 The employermeets these requirements as long as the employee receives the greaterbenefit.106



and 417(e) if the employee received a single sum dist ribution of $59,524 (thepresent value of the employee’s accrued benefit) rather than $45,000 (theemployee’s hypothetical account balance).

I.R.S. Notice 96-8, 1996-1 C.B. 359.107. See id.108. See id.109. See Harkin, supra note 41.110. See id.111. See, e.g., Senate Hearing on Cash Balance, supra note 9 (prepared testimony of

Laurel Sweatt, Manager of Benefits, Central and South West Corporation, representing theAssociation of Private Pension and Welfare Plans, Dallas, Texas), at 8.

If the employer sets the opening account balance at less than the presentvalue of the old pension plan, the employee will not receive any new pensionbenefits until the benefit under the new plan equals the benefit the employeehas earned under the old plan.107 The employer is also allowed to freeze itscontributions until the employee has earned under the cash balance plan theamount she was entitled to under the old defined benefit plan.108 As a result,employers may not have to pay for benefit accruals for as long as five yearsafter a conversion.109 This result has been dubbed the “wearaway” (or“benefit plateau”), and it is one of the most contentious features of cashbalance plans. Some critics contend that the wearaway results in an end-runaround the rule that accrued benefits cannot be reduced.110

One of the principal causes of wearaways in most cash balanceconversions is the elimination of early retirement subsidies from the pensionplan.111 After a conversion, the opening balance in a worker’s cash balanceaccount is typically based upon the worker’s normal retirement age benefitunder the old plan and does not include the value of any early retirementsubsidy that the worker may have already earned under the old plan.Consequently, a wearaway will occur because a worker who has alreadyearned an early retirement subsidy prior to the conversion will have anaccrued benefit under the old plan that is higher than the opening balance ofher cash balance account. If she were to leave the company at the time of theconversion, she would be entitled to the full value of her accrued benefits,including the value of any early retirement subsidy that she had accrued. Ifshe were to stay with the company, however, it could take years before the


112. See, e.g., Members of ABA Tax Section Say Cash Balance Plans Are NotDiscriminatory, TAX NOTES TODAY, ¶¶ 69-72 (July 6, 2000) (LEXIS, FEDTAX Library,TNT File, 2000 TNT 130-53) (providing a numerical example of the basic wearawayproblem) [hereinafter Members of ABA Tax Section].

113. See, e.g., Hearing on Cash Balance, supra note 9 (testimony of Laurel Sweatt) andsupra note 111, at 7; Time Out for Facts, supra note 6; The ERISA Industry Committee,U n d e r s t a n d i n g C a s h B a l a n c e P l a n s (v i s i t ed Apr . 8 , 2 0 0 0 )<http://eric.org/cashbalancebrief.htm>.

114.This is a particularly difficult issue to understand. Basically, the problem is oneof different interest rates. Section 417(e) of the Tax Code requires that adefined benefit plan that offers a lump-sum option convert the annuity into a

lump sum using an interest rate that produces a lump sum that has a minimumvalue. When you apply this law in reverse, as must be done in a cash balanceplan — where the benefit is defined as a lump sum — this rule forbids the planfrom converting that lump sum into an annuity that is too high. In other words,

what sets a minimum lump-sum value sets a maximum annuity amount.Chart C [omitted] illustrates this effect. It assumes that a plan converts the

participant’s accrued benefit under the traditional plan into an initial cashbalance using an 8% interest rate based on current market conditions. The law,however, requires the use of a 6% interest rate for converting an annuity to alump sum. As a result, the plan promises that the employee will get the greaterof the cash balance account or the value of the accrued benefit at the time oftransition. Chart C shows how the two values grow as a 40-year-old employeeapproaches retirement. The value of the frozen lump sum starts out higher. Itgrows rather slowly — at the 6% rate — until it is overtaken by the cashbalance account, which grows with both interest and new contribution credits.

Time Out for Facts, supra note 6, at 7.115. See id.116. See id.

balance of her cash balance account exceeded the value of her accruedbenefit at the time of conversion.112

The extent of the wearaway can also depend on interest rates.113 Ifinterest rates are increasing, the present value of the old benefits is less thanunder the cash balance plan. 114 As a result, an employee would suffer morefrom the wearaway. With planning, a savvy employer can generate a largewearaway. Such an employer would use a high interest ra te to determine theopening balance. As a result, an employee who had accrued $1000 under theold defined benefit plan may only be entitled to $800 as his opening cashbalance account balance. 115 In that case, that employee will not earn anymore benefits until the $200 wears away. 116



117. See, e.g., U.S. DEPARTMENT OF LABOR, PENSION AND WELFARE BENEFITS

ADMINISTRATION, Cash Balance Plans: Ques tions and Answers, (visited Sept. 8, 2000)<http://www.dol.gov/dol/pwba> [hereinafter PENSION AND WELFARE BENEFITS].

118. See Making the Transition, supra note 82. See also Kyle N. Brown et al, TheUnfolding of a Predictable Surprise: A Comprehensive Analysis of the Shift from

Traditional Pensions to Hybrid Plans (vis i ted Sept . 8, 2000)<http://www.watsonwyatt.com/homepage/us/res/cash_balance.htm>; Elizabeth A. White,Study Cites Plan Conversion Motives , Says Many Employers Did Not Save Money, 27Pens. & Ben. Rep. (BNA) 610 (Feb . 29, 2000) ; Robert L. Clark & Sylvester J. Schieber,Taking the Subsidy Out of Early Retirement: The Story Behind the Conversion to HybridPensions (May 1-2, 2000) (unpublished manuscr ipt prepared for the Pension ResearchCouncil Conference on Financial Innovations for Retirement Income Philadelphia,Pennsylvania, on file with Oklahoma City Univers ity Law Review); Robert L. Clark, & FredW. Munzenmaier, Impact of Replacing a Defined Benefit Pension with a DefinedContribut ion Plan or a Cash Balance Plan (Feb. 23-24, 2000) (unpublished manuscriptprepared for Retirement 2000: A Multi-disciplinary Symposium, Washington, DC(February 23-24, 2000), conference sponsored by the Society of Actuaries, on file withOklahoma City University Law Review); Hearing on Cash Balance, supra note 9 (preparedtestimony of Sylvester L. Schieber , Director of Resea rch and Information Center, Wat sonWyatt Worldwide, Bethesda, Maryland).

119. See Time Out for Facts, supra note 6.120. See Making the Transition, supra note 82.121. See Time Out for Facts, supra note 6.

4. Transitional Benefits

Because cash balance conversions can have an adverse impact on mid-career employees, many companies offer them transitional benefits to temperthose adverse effects.117 Indeed, one survey of about seventy-five cashbalance plans found that, in two out of three cases, employers providedtransition benefits of one type or another.118 For example, some companiesallow some or all of their employees the right to choose between the new andold plans.119 Still other employers offer stock options or an increasedemployer matching contributions in a 401(k) plan.120 Of course, suchgenerous transitional provisions can alleviate much of the concerns aboutERISA or age discrimination violations that might otherwise arise inconnection with the conversion.121


122. See Harkin, supra note 41; Arousing Suspicions, PENS. & INVESTMENTS, June 12,2000, at 12.

123. See Purcell, supra note 4, at 6.124. See Brown et al., supra note 118, at ii; Cash Balance Plans: Eric Urges Treasury

and Labor Departments Not to Make Legislative, Regulatory Changes, Pens. & Ben. Daily(BNA) (June 19, 2000); Letter from Mark Ugoretz, President, The ERISA IndustryCommittee, to the Honorabl e Lawrence Summers, Secretary of the United S tates Treasury,and to the Honorable Alexis Herman, Secretary to the United States Depar tment of Labor(June 15, 2000) (visited Sept. 8, 2000) <http://www.eric.org/testimony/061500.htm>.

125. See Brown et al., supra note 118, at ii.126. See id. at i-ii.

B. How Cash Balance Conversions Can Affect Employers

1. Cash Balance Conversions Can Save Employers Money

A switch to a cash balance plan can result in significant savings foremployers. Indeed, some believe that a conversion can even make a pensionplan a profit center for a company.122 An employer can save money on aconversion in two possible ways.123 First, because future benefit accruals forolder employees will fall, the employer should be able to reduce its futurecontributions to the plan. Second, an employer can promise a low rate ofreturn to employees and keep any actual returns above that rate.

On the other hand, the empirical evidence shows that the typicalcompany realizes little, if any savings, when it shifts to a cash balanceplan.124 For example, in its study of seventy-eight large companies that hadconverted their traditional pensions to cash balance or other hybrid plans,Watson Wyatt Worldwide found average employer cost savings from suchconversions of just 1.4%.125 At the same time, however, that study found thatcash balance conversions did result in a significant redistribution of benefitsamong workers, and while most workers were better off with the new hybridplan, the average sixty-year-old worker with thirty years of service would getonly 78% of the benefit she would have received under the original plan.126

a. Employers Save as Benefit Accruals for Older Workers Fall

Cash balance plan conversions reduce future benefit accruals for olderworkers, even if the plan does not create a wearaway. Because of thesereduced future accruals for older workers, cash balance plans can save



127. See Purcell, supra note 4, at 6.128. See Mendelson, supra note 77, at 8.129. See id.130. See id.131. See Hearing on Hybrid Pensions, supra note 8.132. See id.133. See id.134. See Harkin, supra note 41.135. See Purcell, supra note 4, at 6.136. See id.137. See id.

employers significant amounts on required contributions. Indeed, an over-funded pension plan can pay for its own “contributions.”127

The wearaway can compound employer savings. As discussed earlier,employers determine the opening balance of the cash balance plan under thenew formula,128 and some employees might start with cash balance accountbalances that are much less than the amount of their already accrued benefitsunder the old plan.129 As a result, the employer will not have to contributeany more for those employees until the benefit entitlement under the new planexceeds the benefits accrued under the old plan.130

These wearaways follow from the IRS guidance allowing employers todetermine use by the “greater of” formula discussed earlier.131 Under the“greater of” method of plan amendment, the employer can freezecontributions to the new plan until the accrued benefit due exceeds theemployee’s already accrued benefit in the old plan.132 The employer is stillmaking hypothetical contributions to the plan, but the employee will not beearning any additional benefits until the extra wears away.133 These factorscan make an underfunded pension plan into a fully funded plan after aconversion.134

b. Employers Can Save If the Actual Rate of Return on Plan AssetsExceeds the Rate of Return Promised to Employees

Employers may also have another opportunity to profit from cashbalance plans.135 An employer is allowed to promise a low rate of interest toemployees on the hypothetical account balances and keep any actual returnson pension fund assets above that interest rate. 136 The employer can use theextra returns as pay and interest credits and not have to make contributionseach year.137 However, an employer would have to make up the difference in


138. In addi tion, see the discussion of Financial Accounting Standards No. 87, supranote 73.

139. See Sheppard, supra note 1, at 171.140. See, e.g., Brian Tumulty, Cash Balance Plans Slight Older Workers, SALT LAKE

TRIB., May 2, 1999, at D1.141. See Mendelson, supra note 77, at 8.142. See Sheppard, supra note 1, at 171.143. See Morning Edition, supra note 96.

the event that the actual rate of return on pension fund assets was less thanthe promised interest rate.138

2. Cash Balance Plan Conversions Can Affect the Composition of theWork Force

A switch to a cash balance plan can also make companies moreattractive to certain workers. Younger employees favor the monthlystatement of benefits included in a cash balance plan.139 The conversion froma traditional defined benefit plan to a cash balance plan also functions toredistribute benefit accruals in favor of younger workers.140 These factorscombine to make cash balance plans very desirable for younger workers, atleast those who vest.

In addition to being more popular with younger workers, conversion toa cash balance plan may also provide an incentive for costly older workersto retire. Older workers may be continuing to work pr imarily because theywant to maximize their benefits under their original backloaded pension plan.After a conversion to a cash balance plan, however, these older workerswould accrue benefits at a much lower rate than under the original plan.Moreover, when the conversion creates a wearaway, some older workersmight not accrue any new benefits for several years.141 As a result, olderworkers would have less incentive to continue working and might choose toquit earlier than if the company had retained its or iginal pension plan. 142

In fact, sometimes the only way for older workers to avoid the adverseimpact of a wearaway is to quit and receive a payment equal to the presentvalue of their accrued benefits under the original plan.143 The loss of olderworkers means less health insurance, life insurance, salary, and other costsfor employers. This factor combined with younger workers’ interest inmonthly statements makes cash balance plan conversion an effective tool forplanning workforce composition.



144. See Hearing on Cash Balance, supra note 9 (prepared testimony of Sylveste r L.Scheiber) and supra note 118, at 1.

145. See, e.g., Colleen T. Congel, Cash Balance Plans: IBM Shareholders Reject

Resolution; Workers Praise Effort, Look to Next Year, 27 Pens. & Ben. Rep. (BNA) 1131(May 2, 2000); Colleen T. Congel, Cash Balance Plans: IBM Begins Cash BalanceConversion; Pension Rights Center Criticizes Move, 26 Pens. & Ben. Rep. (BNA) 1761(July 12, 1999).

146. In particular, an employer that terminates an overfunded defined benefit plan andrecovers the excess assets can be liable for a nondeductible 50% excise tax on the amountof the reversion. See I.R.C. § 4980 (1994 & Supp. 1998).

147. See Stein, supra note 78, at 29.148. See id.149. See Mark J. Ugoretz, Sheppard’s Attack on Cash Balance Plans: A Response, 84

TAX NOTES 465 (1999).150. See Purcell, supra note 4, at 5.

On the other hand, because a cash balance conversion reduces theretirement benefits available to older workers, it may induce them to worklonger than they otherwise would have. Indeed, according to Dr. Sylvester J.Schieber, Director of the Research and Information Center of Watson WyattWorldwide, one key feature of most cash balance conversions is theelimination of early retirement subsidies.144 Schieber believes that employersare eliminating these early retirement subsidies in response to tighteninglabor markets and changing demographics.

3. Why Many Employers Find that a Cash Balance Plan Conversion Is theBest Alternative

Converting a traditional defined benefit plan into a cash balance plan canalso avoid the kind of negative publicity145 and tremendous costs that couldresult from terminating a traditional plan.146 Some critics believe thatcompanies use cash balance plans as a cheaper alternative than simplyterminating plans all together.147 This claim is bolstered by the fact that mostcash balance plans are instituted as conversion plans. Employers do notusually create a pension program with a cash balance plan.148 However,supporters of cash balance plan conversions strongly disagree with the notionthat employers convert to a cash balance plan to avoid the costs of a plantermination. 149

Employers may also favor cash balance plans because the fundingrequirements are more level than for traditional defined benefit plans.150 Thisresult occurs because benefits are not defined in terms of final average


151. See id.152. See id. at 7.153. See Perdue, supra note 69, at 197.154. See id.155. See Addressing Today’s Workforce Needs, APPWP Voices Cash Balance Plans’

Benef i ts To Employees and Employers (vi sited Sept. 11, 2000)<http://www.appwp.org/la42399.html>.

156. See Ugoretz, supra note 149, at 465.157. See id.158. See The ERISA Industry Committee, supra note 113.159. See id.

pay.151 Instead, under a cash balance plan, funding is directly proportionalto current payroll (e.g., 5% of current pay). Consequently, cash balanceplans can avoid the increasing costs associated with backloading that occurunder final average pay plans, especially as an employer’s work forceages.152

4. When an Employer Loses With a Cash Balance Plan Conversion

Cash balance plans do not always result in savings for employers.Because the benefits are no longer backloaded and are designed to benefitmobile employees, plan costs will increase if many younger employees leaveearly.153 Moreover, the complexities of cash balance plans may make themmore expensive for employers to administer.154 In general, the factorsdetermining whether an employer will save money on a conversion from atraditional defined benefit plan to a cash balance plan are the overall designof the plan, whether the employer provides transition benefits, how theworkforce is composed, and the impact on other employee benefitprograms.155

Employers who convert to a cash balance plan often increasecontributions to other employee benefit plans.156 Also, employers whoinitially save on decreased contributions to older employees will pay over thelong term with higher contributions on behalf of their younger employees.157

Indeed, that is one reason why cash balance plan supporters dispute claimsthat employers switch to cash balance plans to save money.158 As somesupporters point out, an employer who wanted to save money could reducethe generosity of the defined benefit plan formula, terminate the planaltogether, or replace it with a less expensive defined contribution plan.159

All in all, the overall characteristics of cash balance plans make theseplans very attractive for employers. Employers have funding flexibility and



160. See Congel, supra note 1, at 658.161. See Ellen Schultz & Elizabeth MacDonald, Retirement Wrinkle: Employers Win Big

With a Pension Shift; Employees Often Lose, WALL ST. J., Dec. 4, 1998, at A1.162. See id.163. See, e.g., sources cited supra note 145.164. See McAuley v. Int’l Bus. Mach. Corp., 165 F.3d 1038 (6th Cir. 1999). See also

Congel, supra note 1, at 658.

can hire workers who favor the monthly statements of benefits and benefitaccruals that are proportional to salary.160 As a result, with cash balanceplans, employers can enjoy the most favorable characterist ics of both definedbenefit plans and defined contribution plans.

C. Employee Perspectives on Cash Balance Plans

All in all, cash balance plan conversions can be very beneficial foremployers, but the effect of a conversion on employees is less clear cut.Some mid-career employees are greatly hurt by the wearaway and loss ofexpected increased accruals.

1. How Employers Obtain Employee Approval for Conversions

Because the wearaway problem can have such a negative effect onworkers, it is worth consider ing why most employees do not protest thechange from a traditional defined benefit plan to a cash balance plan. For themost part, the failure to protest results from the fact that conversions are toocomplicated for most employees to understand and from the fact thatemployees usually receive very little notice of proposed conversions. Also,in many instances, an employer will offer “sweeteners” to assure employeeacceptance of the new plan.161 These sweeteners can include highercontributions or giving some employees the power to elect to stay under theold plan.162 These sweeteners can ease the transition for employees, but notall employers offer them.

There have been some protests. The recent cash balance conversion byIBM, for example, was the subject of extensive protests by employees (andpoliticians). In particular, many older employees complained about havingto suffer from wearaways at a time when the pension had an eight milliondollar surplus and the company had record profits.163 At least one employeesuit was brought because of the conversion.164 As a result of thesewidespread protests, IBM recently agreed to give a larger number of


165. See Edward P. Jones, IBM Eases Rules on Cash Balance Plans, 85 TAX NOTES 73(1999).

166. See Mary E. Oppenheimer, Cash Balance Plans Under Section 401(a)(4), ALI-ABACourse of Study (Mar. 20, 1991), available in WL, C580 ALI-ABA 433, 435.

167. See Quick, supra note 4, at 7. See also Rappaport, supra note 50.168. See The ERISA Industry Committee, supra note 113.169. See id.170. See id.171. See id.172. See Gayle Stutzman Evans, Qualified Retirement Plans: What’s Best for the Family

Business Owner?, ALI-ABA Course of Study (July 16, 1998), available in WL, SD10 ALI-ABA 239, 265.

employees the option of staying with the original plan or moving to thecompany’s new cash balance plan.165

2. Why Some Employees Benefit from Cash Balance Plans

On the other hand, many workers may applaud a cash balance planconversion. In particular, younger workers typically favor cash balance plansbecause of the more favorable benefit formula and because the benefits aremore portable than under traditional defined benefit plans.166 Women, too,may prefer cash balance plans. According to one actuarial study, mostwomen would receive more benefits under a cash balance plan than under atraditional plan.167 Cash balance plans are very favorable for employees wholeave and reenter the work force.168 Additionally, workers no longer have towork until some magic date to receive increased benefits.169 As a result,employees may be more able to leave unsatisfying jobs.170

Additionally, many workers prefer to have their benefits defined in termsof accounts, albeit hypothetical accounts.171 Workers may also appreciatetheir employer’s contributions more under a cash balance plan because theyreceive annual notification of employer credits to their accounts.172 Besidesthese benefits, many employees will actually profit from the conversion to acash balance plan.

IV. THE LEGAL ITY O F CASH BALANCE CONVERSIONS

Replacing a traditional pension with a cash balance plan raises a numberof complicated and unsettled legal issues under the Internal Revenue Code,the Employee Retirement Income Security Act (ERISA) and the Age



173. See, e.g., Howard Shapiro & Robert Rachal, Guest Article: Litigation Issues inC a s h B a l a n c e P l a n s ( v i s i t e d S e p t . 1 1 , 2 0 0 0 )<http://www.benefitslink.com/articles/cashbalance/

shtml>; Hearing on Cash Balance, supra note 9 (statement of the ERISA IndustryCommittee) (visited Sept. 7, 2000) <http://www.eric.org/testimony/060500.htm>; Ira

Cohen, Poor Guidance Caused Cash Balance Controversy, 85 TAX NOTES 1201 (1999).174. “A plan shall be treated as not satisfying the requirements of this section if the

accrued benefit of a participant is decreased by an amendment of the plan, other than anamendment descr ibed in section 412(c)(8), or sect ion 4281 of the Employee RetirementIncome Security Act of 1974.” I.R.C. § 411(d)(6)(A) (1994).

175. See ERISA § 204(g)(1), 29 U.S.C. § 1054(g)(1) (1994). “The accrued benefit of aparticipant under a plan may not be decreased by an amendment of the plan, other than anamendment described in section 1082(c)(8) or 1441 of this title.” Id.

176. These provisions “also protect[ ] associated fundamental rights, for example, the

right to receive an early retirement benefit.” Hearing on Hybrid Pensions, supra note 8(testimony of Stuart Brown) and supra note 22.

177. See Mitchell, supra note 4, at 30.178. Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown) and supra

note 22.

Discrimination in Employment Act (ADEA).173 These legal issues fall intofour principal categories: (1) the protection of accrued benefits; (2) the rateof benefit accrual; (3) age discrimination; and (4) notice requirements.

A. The Protection of Accrued Benefits

The Internal Revenue Code and ERISA give employers very broadlatitude in amending plans. The Internal Revenue Code states that a plan maynot reduce “the accrued benefit of a participant.”174 The same anti-reductionrule also appears in ERISA.175 Under these provisions, a plan amendment ispermissible as long as a participant’s already accrued benefit is notdecreased.176

In the case of a traditional defined benefit plan converted to a cashbalance plan, the employer is, in effect, freezing past benefit accruals andadopting a new formula for future benefit accruals. As long as past benefitaccruals are not reduced, it would seem that an employer is always free toamend its plan to reduce future benefit accruals.177 According to no less anauthority than the Chief Counsel of the IRS, an “employee’s expectat ion thata benefit formula will remain in effect until the employee retires is notprotected.”178 Nor do these provisions “protect an employee’s expectationthat future compensation increases will be taken into account in computing


179. Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown) and supranote 22.

180. See id.181. Id.182. See id.; Hearing on Hybrid Pensions, supra note 8. The employer must ensure that

all benefits accrued as of the date of conversion are protected , including such optional

forms of benefits as an early retirement option. See id. (testimony of Stuart Brown) andsupra note 22. See supra Part III.A.3.

183. See Hearing on Hybrid Pensions (testimony of Stuart Brown) and supra note 22.But see Senator Tom Harkin, Harkin Letter to IRS Commissioner Rossotti, available i nWL, 1999 TNT 135-59. Senator Harkin argues that the plans are using a legal fiction toreduce accrued benefi ts. Senator Harkin believes that companies are getting around theprohibition against reducing accrued benefits by denying benefits under the new plan due

to the already accrued benefits. See id.184. See Purcell, supra note 4, at 8.185. See id.

an employee’s benefits.”179 For that matter, an employer is generally free toterminate an existing plan and provide no future benefit accrualswhatsoever.180

In short, replacing a traditional pension plan with a cash balance planwill not violate this anti-reduction rule as long as the new plan “protects thebenefits that participants had accrued under the original plan at the time ofthe conversion.”181 As mentioned, employers can satisfy the anti-reductionrule by guaranteeing that each employee is assured “the greater of” theaccrued benefits under the original plan or the benefits calculated under thenew cash balance formula.182

Moreover, this analysis is equally applicable to cash balance conversionsthat involve a wearaway.183 Many employers set the starting account balanceof the defined benefit plan at a value less than the accrued benefits. Underthat scenario, an employer does not have to make additional contributionsuntil the value promised under the new plan exceeds the amount alreadyaccrued under the old plan.184 Nevertheless, as long as an employer does notreduce past benefits, it can set the rate of future benefit accrual at any levelthat it wants without r isk of violating the anti-reduction rule.185

In practice, however, some cash balance conversions may run afoul ofthe anti-reduction rule. In particular, if a plan relies solely on the value of aworker’s hypothetical account to protect accrued benefits, changes in themarket interest rates can create problems. For example, a cash balance planmight violate the anti-reduction rule if the interest rate used for interestcredits is less than the plan’s interest rate used for calculating a lump sum



186. See Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown) and

supra note 22. Cf. Lyons v. Georgia Pac. Corp. Salaried Employees Retirement Plan, No.99-10640, 2000 U.S. App. LEXIS 19180 (11th Cir. Aug. 11, 2000) (holding that, after acash balance conversion, the Georgia Pacific plan violated ERISA when it failed to properlycompute Lyons’ lump-sum distribution).

187. See Time Out for Facts, supra note 6. To avoid this r isk, however, the cash balance

plan can use the “greater of” formula discussed earlier. See Hearing on Hybrid Pensions,supra note 8 and text accompanying notes 104-06; supra Part III.A.3.

188. See I.R.C. § 411(b)(1) (1994); ERISA § 204(b)(1), 29 U.S.C. § 1054(b)(1) (1994).189. Recall that backloading occurs when a disproportionate percentage of benefits are

earned at the end of a worker’s career. See supra Part II.A.190. See Hearing on Hybrid Pension, supra note 8 (testimony of Stuart Brown) and

supra note 22. See also I.R.C. § 411(b)(1)(B).191. See Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown) and

supra note 22.192. See id.

distribution.186 A similar problem could result if the original plan allowed forsubsidized early retirement and the value of that potential subsidized earlyretirement was not taken into account in establishing the initial cashbalance.187

B. Rate of Accrual Issues

The Internal Revenue Code and ERISA provide specific rules thatgovern the pattern under which pension benefits must be accrued.188 Ingeneral, these rules were enacted to prevent excessive backloading of benefitaccruals.189 The rules ensure that the benefits under a pension plan accrue atcertain minimum rates. For example, a plan that provided a pension thataccrued $1 a year for twenty-nine years and $100,000 in year thirty wouldviolate these anti-backloading rules.

That’s where cash balance plan conversions that involve a wearaway canhave a problem. Cash balance plans generally seek to satisfy the so-called133a% method of benefit accrual.190 Under that method, the benefit accrualin a later year of service cannot exceed 133a% of the benefit accrual in anyprior year of service. The IRS acknowledges that some cash balance planconversions can satisfy the 133a% test.191 However, the IRS is concernedthat the interplay of multiple benefit formulas, pay patterns, length ofservice, age of participants, and interest rates can result in accrual patternsthat do not satisfy the rule.192

In particular, the IRS seems to be concerned that the period of zerobenefit accruals following a cash balance plan conversion may violate the


193. See Lurie, supra note 6.194. According to the IRS Chief Counsel, Stuart L. Brown:

[O]ne method [for measuring benefit accrual] focuses on the participant’shypothetical account balance for the current year and projects it forward tonormal retirement age using the interest crediting rates specified by the plan.This hypothetical account balance at normal retirement age is then convertedto an annuity benefit, again using actuarial factors specified in the plan. Theannuity benefit as of the end of the prior year is also measured using the samemethod. The difference in the accrued bene fit s (shown as an annuity) for thetwo years is the accrued benefit for the year. The accrual rate is determined bydividing the accrued benefit for the year by the parti cipant’s compensation forthe current year. . . . The accrued benefit and accrual rate for each year arecalculated using this method, then compared. If the accrual rate for any yearexceeds 133 1/3[%] of that for any prior year, the plan will fail to satisfy thismethod.

Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown).195. See id.; William K. Carr, Participants Contend Pension Plan Fails to Satisfy

Accrual Rules, available in WL, Doc. 1999-4130, 1999 CTF 6-12 (original petit ion ofSeidlitz v. Commissioner). See also Participants Contend Pension Plan Fails to SatisfyAccrual Rules, 82 TAX NOTES 1011 (1999) (summarizing original petition); William K.

Carr, Amended Tax Court Petition: Seidlitz v. Commissioner, TAX NOTES TODAY, Aug. 27,1999, available in WL, Doc. 1999-27983, 1999 TNT 166-9 (text of amended petition)

[hereinafter Amended Petition]; Colleen T. Congel, Cash Balance Plans: Firm’sConversion Disqualifies Plan: Court Should Lift Exempt Status, IRS Says, 26 Pens. & Ben.Rep. (BNA) 2165 (Aug. 30, 1999) (IRS Answer to Petit ion); Stuart L. Brown & LawrenceH. Ackerman, IRS Agrees With Plan Part icipants: Amended Plan Was Disqualifi ed, TAX

NOTES TODAY, Aug. 27, 1999 available in WL, Doc. 1999-27984, 1999 TNT 166-10;

133a% test. The test would be violated, for example, if an employeeaccrued no benefit one year and $1000 the following year, as $1000 isinfinitely larger than $0 (and so greater than 133a times $0).

The problem is much more complicated, however, and the appropriateconclusion depends on what is meant by the term “benefit accrual.”193 Duringa wearaway period, a worker will see pay credits and interest credits addedto her account, but if she actually left the company and took a lump sumdistribution, she might not see any increase in the amount of money that shereceived. Sometimes, under these circumstances the 133a% rule might beviolated.194

In that regard, the IRS is currently litigat ing a case in the Tax Court inwhich it has asserted that the 133a% rule was violated in a cash balanceconversion.195 The Tax Court case involves the cash balance plan conversion



Colleen T. Congel, Cash Balance Plans: Rep. Sanders Repeats Call for Review of CashBalance Age Discrimination Issues, 26 Pens. & Ben. Rep. (BNA) 2179 (Sept. 6, 1999)

(discussing IRS position in case) [hereinafter Rep. Sanders Repeats Call]; Colleen T.Congel, Cash Balance Plans: IRS Supports Participants’ Suit Over Calculation of Pension

Benefits, 26 Pens. & Ben. Rep. (BNA) 2164 (Aug. 30, 1999).196. See Amended Petition, supra note 195.197. See id.198. See id.199. See Brown & Ackerman, supra note 195.200. See Bonner Menking, Lawmaker Urges IRS To Attack Cash Balance Pension Plans,

84 TAX NOTES 1353 (1999).201. See Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown) and

supra note 22.202. See Congel, Rep. Sanders Repeats Call, supra note 195.

by the Onan Corporation.196 Participants in the plan filed a petition in TaxCourt seeking a declaratory judgment that Onan’s cash balance planconversion violated the I.R.C. § 411(b)(1) benefit accrual rules and that theplan should be disqualified from tax-exempt status.197 The participants claimthat under the plan, the 133a% accrual rule is violated for years in whichemployees receive no accruals.198 In its answer, the IRS agreed with theparticipants that the Onan plan violated the 133a% rule, and it furtherasserted that the Onan conversion also violated other pension qualificationprovisions.199

Of note, an internal IRS memorandum that discusses when a cashbalance plan violates the qualification provisions was recently leaked to thepress.200 That memorandum from one of the IRS district directors to themain employee benefits division discusses when a cash balance conversionwill violate the Internal Revenue Code, and commentators believe that theletter addresses the Onan conversion. 201 News reports have been careful tonote that the memorandum addressed only one taxpayer’s plan and may notreflect the IRS’s view on cash balance plans in general.202 In that regard, theOnan case concerns a rather atypical cash balance plan conversion. Featuresof the Onan conversion that earned IRS disapproval include a provisionproviding smaller interest credits for participants who are no longeremployees and a provision allowing benefit reduct ion in coordination with a


203. See Ryan J. Donmoyer, IRS Seeks To Disqualify Cash Balance Pension Plan, 84TAX NOTES 1234, 1235 (1999); but see Onan Defends Conversion to Cash Balance Plan,TAX NOTES TODAY (Mar. 23, 2000) (LEXIS, FEDTAX Library, TNT File, 2000 TNT 57-35).

204. See, e.g., Time Out for Facts, supra note 6. See also I.R.S. News Release IR-1999-79, 64 Fed. Reg. 56,578 (1999), reprinted in 26 Pens. & Ben. Rep. (BNA) 2532 (Oct. 25,1999). Especia lly noteworthy comments include the following: Detailed Comments

Regarding Cash Balance Plans Submitted to the Internal Revenue Service in Response toIRS News Release 1999-79 by the Association of Private Pensions and Welfare Plans(APPWP - The Benefits Association) (Jan. 19, 2000) (visited Sept. 11, 2000)<http://www.appwp.org/dcrcbp000120.pdf> [hereinaft er APPWP]; Submission of the

ERISA Industry Committee to the Internal Revenue Service and the Department of theTreasury on Cash Balance Plans (The ERISA Industry Commit tee, Jan. 19, 2000) (visitedSept. 11, 2000) <http://www.eric.org/testimony/cashbalance.htm> [hereinafter ERISAIndustry Committee].

205. See Time Out for Facts, supra note 6.206. See Hearing on Cash Balance, supra note 9 (testimony of Laurel Sweatt) and supra

note 111, at 8.207. See generally Lurie, supra note 6; Purcell, supra note 4; Michael S. Horne, Are

Cash Balance Plans Inherently Unlawful Under the Age Discrimination in Employment

Act? (The ERISA Industry Committee, Nov. 1, 1999) (visited Sept. 11, 2000)<http://www.eric.org/issuebriefs/93099cash.htm>; Hearing on Hybrid Pensions, supra note

8 (testimony of Lawrence Lorber, Partner, Sonnenschein, Nath and Rosenfeld).

profit sharing plan.203 Most cash balance plan conversions do not share thesefeatures.

In any event, the question as to whether wearaways following a cashbalance conversion violate ERISA’s anti-backloading rule is one of theprincipal issues that the IRS is studying, along with the Department of Laborand the EEOC.204 Of note, however, wearaways occur in lots of situations,and the IRS has never really complained.205

Moreover, it should be noted that many wearaways in cash balanceconversions are the result of the elimination of early retirement subsidies.206

In that regard, however, I.R.C. § 411(b)(1)(B)(iii) says that early retirementbenefits are to be disregarded in applying the 133a% test. Once earlyretirement subsidies are taken out of the mix, it seems unlikely that manycash balance plan conversions will fail the 133a% test.

C. Age Discrimination

Cash balance conversions might also run afoul of the age discriminationlaws.207 The Age Discrimination in Employment Act (ADEA) generallyprohibits employers from discriminating against workers over the age of



208. See 29 U.S.C. § 623(a) (1994).209. Similarly, I.R.C. § 411(b)(2) (A) prohibi ts a defined contr ibut ion plan from ceasing

allocations, or reducing the rate at which amounts are allocated, to a participant’s account,“because of the attainment of any age.” I.R.C. § 411(b)(2)(A) (1994).

210. See ERISA § 204(b)(1)(H), 29 U.S.C. § 1054(b)(1)(H) (1994).211. See 29 U.S.C. § 623(i) (1994).212. See, e.g., ERISA § 204(b)(1)(H)(ii), 29 U.S.C. § 1054(b)(1)(H)(ii) (1994).

A plan shal l not be treated as fai ling to meet the requirements of thissubparagraph solely because the plan imposes (without regard to age) alimitation on the amount of benefits that the plan provides or a l imitation onthe number of years of service or years of participation which are taken intoaccount for purposes of determining benefit accrual under the plan.

Id.213. Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown) and supra

note 22.214. Zelinsky, supra note 23, at 686, 733-43.

forty.208 Pertinent here, I.R.C. § 411(b)(1)(H) prohibits a defined benefit planfrom ceasing accruals, or reducing the rate of benefit accruals, “because ofthe attainment of any age.”209 Para llel provisions are found in ERISA210 andin the Age Discrimination in Employment Act.211

While these statutes clearly forbid a cessation of benefit accruals or areduction in the rate of benefit accruals because of age, they do notautomatically prohibit benefit reductions that merely correlate with age.Indeed, these statutes expressly state that a plan will not fail solely becauseit limits the total amount of benefits that the plan provides or the totalnumber of years that can be used to compute benefits.212 Still otherexceptions ensure “that subsidized early retirement benefits, social securitysupplements, and disability benefits do not violate the age discriminationprohibitions, even though the value of such plan provisions to participantsmay decline with age.”213

1. Does the Typical Cash Balance Plan Violate the Age DiscriminationLaws?

In a recent law review article, Professor Edward A. Zelinsky of theBenjamin N. Cardozo School of Law of Yeshiva University concluded that,“as a matter of law, the typical cash balance plan violates the statutoryprohibition on age-based reductions in the rate at which participants accruetheir benefits.”214 Needless to say, supporters of cash balance plans


215. See, e.g., Shea et al., supra note 23; Barker & O’Brien, Do Cash Balance PlansViolate the ADEA?, supra note 23.

216. See, e.g., I.R.C. § 411(b)(1)(H)(1994).217. Id.218. Barker & O’Brien, supra note 23, at 77.219. See Zelinsky, supra note 23, at 733.220. See Barker & O’Brien, supra note 23, at 79.221. See Zelinsky, supra note 23, at 722.

disagree.215 The dispute focuses on competing interpretations of theapplicable age discrimination provisions.216 The question is a highly technicalone that merits, at least, a basic explication.

I.R.C. § 411(b)(1)(H)(i) prohibits a defined benefit plan from reducingthe “rate of an employee’s benefit accrual” because of the “attainment of anyage.”217 However, “the rate of an employee’s benefit accrual” is nowheredefined.218 In that regard, however, I.R.C. § 411(a)(7) defines an employee’s“accrued benefit” under a defined benefit plan as an annuity commencing atnormal retirement age (e.g., an “age-65 annuity”), and Zelinsky believes thatthis definition is applicable under I.R.C. § 411(b)(1)(H).219 On the otherhand, supporters of cash balance plans argue that an employee’s “benefitaccrual” under I.R.C. § 411(b)(1)(H) cannot mean the same thing as anemployee’s “accrued benefit” under I.R.C. § 411(a)(7).220

Consider an employer with two employees each of whom make $40,000in the current year and have $1000 credited to their cash balance accounts.The only difference is that one employee is age thirty-five and the other isage fifty-five. The mathematics are not in dispute. On the one hand, becausethe amounts credited to the two employees are equal, there does not appearto be any age discrimination. On the other hand, everyone agrees that theI.R.C. § 411(a)(7) age-65 annuities are different: as of age sixty-five, the$1000 credited to the account of the thirty-five-year-old will buy an annuityof $1094 per year, while, as of age sixty-five, the $1000 credited to theaccount of the fifty-five-year-old will buy an annuity of just $235 per year.221

Is that age discrimination, or have both employees been treated equally? If all we had to go on was the statutes themselves, Zelinsky’s

interpretation would seem to be the most plausible. However, becauseCongress, in fact, used different terms in § 411(b)(1)(H) and § 411(a)(7), itcreated an ambiguity. Consequently, there is significant reason to lookbeyond the statutes to see if Congress intended to use these different termssynonymously. In that regard, the two provisions are geared towardsregulating completely different pension plan design problems. Consequently,



222. See Members of ABA Tax Section, supra note 112, ¶ 37.223. In that regard, IRS Chief Counsel Stuart Brown noted that “[t]he Service has not

to date asserted that cash balance plan benefit formulas result in per se violations of the agediscr imination requirements of section 411(b)(1)(H).” Hearing on Hybrid Pensions, supranote 8 (testimony of Stuart Brown) and supra note 22.

224. See Hugh Forcier, Understanding the Assault on Cash Balance Plans (Dec. 1999)(visited Sept. 21, 2000) <http://www.faegre .com/article_print .asp?id=349>.

Employers argue that the “benefit accrual” is simply measured by the paycredit. That is, under a level pay credit formula (4% of pay in the example) therate of “benefit accrual” is the same percent each year and, obviously, does notdecrease with age. Employers also note that, in the case of defined contributionplans, the contribution rate determines whether there is an impermissibledecrease based on increasing age.

Id. ¶ 5.225. See id; Purcell, supra note 4, at 12.226. See 56 Fed. Reg. 47,524 (1991).

it seems that the better view is to interpret the terms differently and in a waythat can best effectuate the very different purposes for the two provisions.222

In short, although the matter is not free from doubt, it appears that thenormal operations of a cash balance plan should not run afoul of theprohibition against age discrimination. 223

2. Does the Typical Cash Balance Plan Conversion with a WearawayViolate the Age Discrimination Laws?

By the same token, replacing a traditional pension plan with a cashbalance plan should not automatically result in a violation of the agediscrimination laws.224 Here, one of the key issue becomes whether thecessation of benefits due to the wearaway happens because of age. The issueis complicated by the fact that so many benefit reductions which are tied toage-related factors, such as limits on years of service and limits on totalaccruals, do not violate age discrimination rules.225

Almost the only guidance issued by the government on this issue comesfrom the preamble to some IRS regulations issued in 1991 to address issuesof discrimination in favor of highly compensated employees under I.R.C. §401(a)(4).226 Although the 1991 regulations are silent on the question of agediscrimination, the preamble says that the age discrimination rules are not


227. Id. at 47,528.

The fact that interest adjustments through normal retirement age are accruedin the year of the related hypothetical allocation will not cause a cash balanceplan to fail to satisfy the requirements of section 411(b)(1)(H), relating toage-based reductions in the rate at which benefits accrue under a plan.

Id. See also Ugoretz, supra note 149, at 467; Strella, supra note 4.228. See Hearing on Hybrid Pensions, supra note 8 (testimony of Stuart Brown) and

supra note 22.229. Id.230. Id.231. See especially Shea et al., supra note 23; Barker & O’Brien, supra note 23.232. See Goldman v. First Nat’l Bank, 985 F.2d 1113, 1120 (1st Cir. 1993).233. Id.234. See id. at 1119.

violated just because “interest adjustments through normal retirement age areaccrued in the year of the related hypothetical allocation.”227

The IRS, along with the Department of Labor and the EqualEmployment Opportunity Commission (EEOC), are continuing to study thequestion of when a cash balance conversion might violate the agediscrimination laws.228 According to IRS Chief Counsel Stuart Brown, in thisanalysis, the government is “consider ing the whole range of factors thatmight indicate a cash balance plan conversion has resulted in agediscrimination. For example, we will consider the impact of the wearawayperiod, as it affects employees of various ages.”229 In the meantime, the IRShas “taken action to require that all cash balance plan conversions pendingwith the Service be forwarded to the National Office for technical advice.”230

Again, although the matter is not free from doubt, it appears that thetypical cash balance conversion should not violate the prohibition against agediscrimination.231

3. Age Discrimination Case Law

At this writing, no case has directly ruled that a conversion from atraditional defined plan to a cash balance plan violated ADEA. The FirstCircuit, however, recently considered whether the adoption of a cash balanceplan showed “age animus” on the part of an employer.232 In Goldman v.First National Bank of Boston,233 the plaintiff maintained that he was firedin violation of ADEA. He cited the employer’s adoption of a cash balanceplan to suppor t this claim of age animus.234 The Goldman court reasoned



235. See id. at 1120.236. See id.237. See Abenante v. Fulflex, Inc., 701 F. Supp. 296, 298 (D. Ct. R.I. 1998).238. See id. at 302. The court even went on to state that finding for the plaintiffs would

hurt older workers by making them more expensive to employ. See id.239. See Stein v. McGraw-Hill, Inc., 782 F. Supp. 207, 210 (S.D.N.Y. 1992).240. Hazen v. Biggins Paper Co., 507 U.S. 604, 609 (1993).

that the cash balance plan conversion was not evidence of age animus. Theplaintiff had cited the decreasing accruals with age and the employer’s desireto attract younger employees as strong motivation for the cash balanceplan.235 The court stated that these factors were insufficient to show agediscrimination unless the plaintiff could show that the benefits received underthe old plan were lowered.236 However, the court did cite the employer’sprotections for older employees in the form of a choice between the old andnew plan. As a result, employees could argue that an employer who did notprovide such protections might be liable for age discrimination.

Courts have, however, addressed issues relating to pensions plans andADEA outside of cash balance plans. Several of these case illustrate howcourts might view ADEA claims for cash balance plans. For example, in onecase, the plan stated that the current value of an employee’s accrued benefitwould be deducted in determining his or her separation pay.237 Because olderemployees were closer to retirement, they would receive less. Nevertheless,the court ruled that the plan did not violate ADEA.238 This case suggests thatthe leveling of future benefit accruals that is characteristic of cash balanceplan conversions is not age discriminatory.

The Goldman case and other ADEA cases not dealing with cash balanceplans are also instructive because they show what an employee would haveto prove concerning a cash balance plan. An employee would have toestablish that the cash balance plan reduced benefits on the basis of age. 239

Because cash balance plans have uniform accrual rates (i.e., a pay creditequal to 5% of salary), it will be difficult for an employee to establish aprima facie case of age discrimination. Instead, an employee would have toargue that the uniform accrual rates violate ADEA because they have adisparate impact on older workers. Disparate impact is where a faciallyneutral policy “fall[s] more harshly on one group.”240

All in all, it is extremely difficult to establish a prima facie case of agediscrimination when the plaintiff claims disparate impact of facially neutral


241. See JOSEPH E. KALET, AGE DISCRIMINATION IN EMPLOYMENT LAW 87 (2d ed.1990).

242. See Howard C. Eglit, The Age Discrimination in Employment Act at Thirty: Where

It’s Been, Where It Is Today, Where It’s Going, 31 U. RICH. L. REV. 579, 696-97 (1997)(citing Justice Rehnquist’s dissent in Markham v. Gellar, 451 U.S. 945, 947 (1981) and

Jus tices Kennedy, Thomas, and Rehnquist in Biggins v. Hazen Paper Co., 507 U.S. 604,618 (1993)).

243. See Eglit, supra note 242, at 697.244. Forcier puts it this way: “Since an older worker hired after the conversion is not

impacted by the wear-away, the use of the technique is not inherently related to age.Therefore, the opponents of cash balance plans must rely on a ‘disparate impact’ claim.”

Forcier, supra note 224, ¶ 15.245.

A plan described in paragraph (2) may not be amended so as to provide for asignificant reduction in the rate of future benefit accrual, unless, after theadoption of the plan amendment and not less than 15 days before the effectivedate of the plan amendment, the plan admini stra tor provides a written notice,sett ing for the plan amendment and its effective date, to—

(A) each participant in the plan, . . .. . .(C) each employee organization representing participants in the plan.

ERISA § 204(h)(1)(A), (C), 29 U.S.C. § 1054(h)(1)(A), (C).246. See, e.g., Scott v. Admin. Comm. of the Allstate Agents Pension Plan, 113 F.3d

1193, 1200 (11th Cir. 1997) (The court applied the test of whether an average participantwould understand that the benefit accrual formula would change after a certain date. Thecourt stated “[t]he summary need not explain how the individual benefit of each participantor alternate payee will be affected by the amendment.”)

rules.241 The Supreme Court has shown resistance to the use of disparateimpact analysis under ADEA,242 and at least two circuits have refused toapply disparate impact to ADEA claims.243 As a result, it seems likely thatan employee’s claim that a cash balance conversion violates ADEA will facean uphill battle. 244

D. Notice Requirements

ERISA also requires that participants in a defined benefit plan receivenotice of a plan amendment at least fifteen days before its effective date. 245

The statute does not give any further guidance as to what information mustbe included in the notice, and the courts have been fairly lenient indetermining whether an employer has given sufficient notice of a benefitreduction.246



247. See Purcell, supra note 4, at 7.248. See Colleen T. Congel, Cash Balance Plans: Iwry Encourages Enhanced

Disclosure; Moynihan May Revise Legislation, Aide Says, 26 Pens. & Ben. Rep. (BNA)2305 (Sept. 27, 1999).

249. See, e.g., Barker & O’Brien, supra note 101; Lawrence J. Sher, Likely Future ofHybrid Plans, in EBRI-ERF POLICY FORUM, THE NEXT 25 YEARS OF ERISA (1999) (visitedSept. 11, 2000) <http://www.ebri.org/decggpf/sher.pdf>.

250. See, e.g., Colleen T. Congel, Cash Balance Plans: Congressional Aides DiscussCB Plans, Pension Provisions in Minimum Wage Bill, 26 Pens. & Ben. Rep. (BNA) 2552(Oct. 18, 1999).

Employers vary greatly in the level of information provided to employeesconcerning a conversion.247 In any event, it seems fairly certain that mostemployers converting to cash balance plans can easily meet the current noticerequirements. In that regard, however, several of the legislative proposalsrelating to cash balance plans center on increasing notice requirements, andthe Treasury Department has also indicated that it agrees that the currentnotice requirements are insufficient.248

V. RECENT LEGISLATIVE AND REGULATORY ACTION RELATING TO CASH

BALANCE PLANS

Due to the current attention on cash balance plan conversions, Congressand the Executive Branch have been put under considerable pressure to takeaction. Moreover, there is reason to believe that cash balance planconversions may be an issue in the year 2000 elections.249 This Part outlinessome of the recent legislative proposals and Executive Branch efforts.

A. Recent Legislative Efforts

Recently, a number of bills have been introduced in Congress that wouldhave an impact on cash balance plan conversions. Some of these proposalswould affirmatively discourage conversions, while others merely seek toensure adequate disclosure of the consequences of conversions.250 TheExecutive Branch also supports legislation that would expand the disclosurerequired when an employer replaces a traditional pension with a cash balance


251. See Colleen T. Congel, Disclosure Bil l Introduced in the House, Senate;Lawmakers, Agency Officials Praise Proposal, 26 Pens. & Ben. Rep. (BNA) 2395 (Oct.11, 1999) [hereinafter Congel, Disclosure Bill].

252. See, e.g., Colleen T. Congel, Cash Balance Plans: Treasury Official Tells SenateLabor Panel Resources Exist to Study Cash Balance Plans, 26 Pens. & Ben. Rep. (BNA)

2303 (Sept. 27, 1999) (discussing the Sept. 21, 1999 Hearing on Hybrid Pensions, supranote 8); Rep. Robert Matsui, Cash Balance Plans: Administration, Rep. Matsui Developing

Proposal Address ing Disclosure Issues, 26 Pens. & Ben. Rep. (BNA) 1759 (July 12, 1999)(discussing the June 30, 1999 Hearing on Pension Reform, supra note 8); Congel, SenatorGrassl ey, supra note 16 (discussing the June 5, 1999 Hearing on Cash Balance, supra note9).

253. See, e.g., Purcell, supra note 4.254. See Harkin, supra note 41.255. S. 1600, 106th Cong., 1st Sess. (1999) (previously introduced as the Older Workers

Pension Protection Act of 1999, S. 1300, 106th Cong., 1st Sess. (1999)).256. See id.257. See id.258. See id.

plan.251 In addition, there have been a number of Congressional hearings252

and reports253 issued on the subject of cash balance conversions.

1. Legislation that Would Discourage Conversions

a. Older Workers Pension Protection Act

One of the most ardent critics of cash balance plan conversions has beenSenator Tom Harkin. Senator Harkin maintains that the wearaway inherentin a conversion from a traditional defined benefit plan to a cash balance planviolates the spirit of laws protecting against age discrimination.254 As aresult, Senator Harkin has proposed the Older Workers Pension ProtectionAct of 1999.255 His bill would outlaw wearaways.256

Senator Harkin recognizes the primary objection to his plan. Anemployer might be motivated to terminate pension benefits all together.257 Nolaw requires an employer to provide a pension plan. Additionally, manyemployers choose to convert to cash balance plans because a conversion ischeaper than fully funding a terminated pension plan. However, Harkinmaintains that employers provide pension benefits to attract employees andhis law would not affect this consideration.258 Critics of Harkin’s bill are



259. See ERIC Legislative Bulletin, July 29, 1999 (visited Sept. 11, 2000)<http://www.eric.org/issuebriefs/harkinamd.htm>.

260. See S. 1300, 106th Cong., 1st Sess. (1999).

For purposes of subparagraph (A), a pl an amendment adopted by a largedefined benefit plan shall be tr eated as reducing accrued benefits of aparticipant if, under the terms of the plan after the adoption of the amendment,the accrued benefit of the participant may at any time be less than the sum of --

‘(I) the participant’s accrued benefit for years of service before the effecti vedate of the amendment, de termined under the terms of the plan as in effectimmediately before the effective date, plus‘(II) the participant’s accrued benefit determined under the formulaapplicable to benefit accruals under the current plan as applied to years ofservice after such effective date.

Id. § 2(a)(i).261. See Colleen T. Congel & Mark Felsenthal, Tax Legislation: Outlook for Pension

Reform Uncertain; Clinton Indicates Willingness to Negotiate, 26 Pens. & Ben. Rep.(BNA) 2216 (Sept. 13, 1999); S. 1600, 106th Cong., 1st Sess. (1999).

262. See Cash Balance Plans: Senate Approves Non-binding Resolution on Worker

Protections During Conversions, 27 Pens. & Ben. Rep. (BNA) 1005 (Apr. 18, 2000).

unconvinced and claim that older workers would be hurt more by terminationof pension plans than by conversions to cash balance plans.259

Harkin’s bill would amend the anti-reduction rule in I.R.C. § 411(d)(6)and ERISA § 204(g). The bill would make it impermissible for a planamendment to reduce accrued benefits if the accrued benefit after the planamendment is less than the sum of the old benefits and new benefits addedevery year under the new plan.260 This rule would, in effect, mean that the oldtraditional defined benefit is frozen and future accruals would be added at thecash balance plan accrual rate. As a result, the wearaway would beeliminated. Harkin’s or iginal proposal contained a tax penalty. However, heremoved that portion of the proposed bill when he reintroduced the bill.261

Senator Harkin also managed to get the Senate to pass a non-bindingresolution expressing the “sense of the Senate” that something needs to bedone to protect long service workers from the adverse consequences of cashbalance conversions.262

b. Representative Sanders’ Plan


263. See H.R. 2902, 106th Cong., 1st Sess. (1999); S. 1640, 106th Cong., 1st Sess.(1999).

264. See Colleen T. Congel, Cash Balance Plans: Rep. Sanders Drafti ng Bill to TargetEmployers Converting to Cash Balance Plans, 26 Pens. & Ben. Rep. (BNA) 2107 (Aug.23, 1999).

265. See id.266. See APPWP, supra note 204, at 33.267. S. 659, 106th Cong., 1st Sess. (1999); see also H.R. 1176, 106th Cong., 1st Sess.

(1999).268. See Quick, supra note 4, at 6.269. See id.; ERIC Legislat ive Bulletin, July 28, 1999 (visited Sept. 11, 2000)

<http://www.eric.org/issuebriefs/moynihganamnedm.htm>.270. See Congel, Disclosure Bill, supra note 251, at 2395.

Representat ive Bernard Sanders and Senator Paul Wellstone alsointroduced legislation that would prohibit wearaways.263 Their legislat ionwould go further and impose a 50% excise tax on any surplus in the pensionfund at the time of the conversion. 264 This tax would only apply if theemployer did not offer all vested employees the choice between the oldpension plan and the new cash balance plan.265 If this bill were enacted,employers would have a very strong incentive to provide generoustransitional benefits for their older employees.

2. Legislation that Would Require More Disclosure

Tax legislation passed by Congress in 1999, but vetoed by PresidentClinton, would have required additional disclosure by defined benefit plansthat were amended to reduce future benefit accruals.266 This legislation wasbased upon a number of bills introduced earlier in 1999.

a. Pension Right to Know Act

For example, Senator Daniel Patrick Moynihan introduced the PensionRight to Know Act.267 That legislation would require employers to generateindividual statements comparing benefits under the old plan and the new cashbalance plan.268 Critics of the bill complain that it would require employersto predict how much employees would make in the future and wouldconsequently be expensive and burdensome to administer.269 However, theplan would not affect the overall legality of the conversions. As a result , theage discrimination debate would continue. Senator Moynihan later backedThe Pension Reduction Disclosure Act of 1999.270



271. S. 1708, 106th Cong., 1st Sess. (1999); H.R. 3047, 106th Cong., 1st Sess. (1999).272. See S. 1708, 106th Cong., 1st Sess (1999); H.R. 3047, 106th Cong., 1st Sess.

(1999).273. See Congel, Disclosure Bill, supra note 251, at 2395.274. See Colleen T. Congel & Elizabeth A. White, Agencies Studying Cash Balance

Disclosure; DOL Official Recommends Clarifying Waivers, 26 Pens. & Ben. Rep. (BNA)1572 (June 14, 1999).

275. See, Congel, Disclosure Bill, supra note 251, at 2395.276. See id.277. See S. 1867 § 114, 106th Cong., 1st Sess. (1999).278. See APPWP, supra note 204, at 33.279. H.R. 1102, 106th Cong., 1st Sess. (1999). The bill would require plan sponsors to

provide participants with a summary or copy of the plan amendment itself thirty days beforethe amendment is to be made.

280. See Congel & White, supra note 274.

b. The Pension Reduction Disclosure Act of 1999

The Pension Reduction Disclosure Act of 1999271 was introduced inresponse to the main objections to the Pension Right to Know Act. This billwould require employers to provide notice only to adversely affectedemployees.272 This bill was introduced by Senators Moynihan and Jeffordsin the Senate, and Representatives Matsui and Weller introduced the bill inthe House.273

Labor Department officials examining cash balance plans have alsofocused on disclosure requirements.274 As a result, the Secretary of Laborendorsed the Pension Reduction Disclosure Act.275 The Pension ReductionDisclosure Act was also endorsed by President Clinton,276 and it wasincorporated into proposed legislation giving small business owners a taxbreak.277 That legisla tion was passed by Congress, but vetoed by thePresident (for other reasons).278

c. The Comprehensive Retirement Security and Pension Reform Act

Representatives Ben Cardin and Rob Portman’s ComprehensiveRetirement Security and Pension Reform Act279 also required comparison ofbenefits under the old and new cash balance plan. However, their bill wouldnot require individualized statements.280 As a result, their bill would not beas burdensome on employers, but it would be less informative for employees.

B. Executive Branch Efforts


281. See Congel, Disclosure Bill, supra note 251, at 2395.282. Id.283. See, e.g., Vineeta Anand, Consensus Needed: Long Wait for Clinton Administration

Letter; First, Everyone Must Agree on Cash Balance Position, PENSION & INVESTMENTS,June 12, 2000, at 2.

284. See I.R.C. §§ 401-440 (1994 & Supp. 1998).285. See, e.g., Colleen T. Congel, Cash Balance Plans: IRS Instructs EP Personnel to

Identify, Refer All Conversion Cases for Technical Advice, 26 Pens. & Ben. Rep. (BNA)2251 (Sept. 20, 1999); Colleen T. Congel, Cash Balance Plans: Officials Discuss Status

of Plan Reques ts, Commitment to Review Conversion Issues, 27 Pens. & Ben. Rep. (BNA)1006 (Apr. 18, 2000); see also Elizabeth A. White, Plan Determination Letters from IRSField Include Cash Balance Caveat, Official Says, 27 Pens. & Ben. Rep. (BNA) 656 (Mar.7, 2000).

286. See I.R.S. News Release IR-1999-79, supra note 204. See also Colleen T. Congel,

Cash Balance Plans: IRS Receives More Than 400 Letters on CB Plan Conversions,Debate Continues, 27 Pens. & Ben. Rep. (BNA) 203 (Jan. 25, 2000) ; Bonner Menking,

Cash Balance Plans: The Administrative Approach Begins, 85 TAX NOTES 414 (1999);ERISA Indust ry Commi ttee, supra note 204; APPWP, supra note 204; Cash Balance Plan

Conversions Don’t Violate Discrimination Laws, Attorneys Argue, TAX NOTES TODAY,Feb. 24, 2000, available in LEXIS, FEDTAX Library, TNT File, 2000 TNT 37-63; AARP

Urges Review of Cash Balance Plan Age Discrimination Issues, TAX NOTES TODAY, Mar.23, 2000, available in LEXIS, FEDTAX Library, TNT Fi le, 2000 TNT 57-34; AARP

Focuses on Cash Balance Benefit Accrual Issues , TAX NOTES TODAY, Apr. 27, 2000,

As discussed ear lier, the Clinton Administration endorsed the PensionReduction Disclosure Act.281 According to President Clinton, “[t]hislegislation would ensure that all Americans have the necessary informationto plan for retirement. It would provide workers with meaningful and timelynotice of plan changes and clearly demonstrate the impact of those changesnow and in the future.”282 Executive Branch agencies are also in the processof developing a comprehensive set of legislative principles on cash balancepension plans.283

1. Internal Revenue Service (IRS)

The IRS is responsible for administering the tax qualification rules thatgovern pension plans.284 In particular, the IRS promulgates regulations andissues determination letters that relate to pension plans, in general, and cashbalance plans, in par ticular. Recently, the IRS directed its employees to referall open determination or examination cases involving cash balance planconversions to the national office for technical advice. 285 The IRS recentlyrequested comments on cash balance plans, in general, and conversions, inparticular.286



available in LEXIS, FEDTAX Library, TNT Fi le, 2000 TNT 82-51; Miller & ChevalierSays Demographics Drive Cash Balance Conversions, TAX NOTES TODAY, Mar. 9, 2000,available in LEXIS, FEDTAX Library, TNT File, 2000 TNT 47-52; Consultants See NoProblem with “Wearaway” Caused by Cash Balance Conversions, TAX NOTES TODAY,

Mar. 9, 2000, available in LEXIS, FEDTAX Library, TNT File, 2000 TNT 47-53.287. See ERISA §§ 101-111, 29 U.S.C. §§ 1021-1031 (1994 & Supp. 1998).288. See Colleen T. Congel, Cash Balance Plans: Lawmakers Ask Agenc ies to Review

Age Discrimination Under Plan Conversions, 26 Pens. & Ben. Rep. (BNA) 2056 (Aug. 16,1999).

289. See Congel, Disclosure Bill, supra note 251, at 2395.290. Colleen T. Congel, Cash Balance Plans: DOL to Examine Actuaries’ Actions in

Cash Balance Conversions, 26 Pens. & Ben. Rep. (BNA) 2551 (Nov. 1, 1999). See Colleen

T. Congel, Cash Balance Plans: Labor Department to Examine Employers’ Actions in PlanConversions, 26 Pens. & Ben. Rep. (BNA) 2879 (Dec. 13, 1999); Colleen T. Congel, Cash

Balance Plans: Labor Department Official Gives Update of Plan Conversion Controversy,27 Pens. & Ben. Rep. (BNA) 892 (Apr. 4, 2000).

291. See PENSION AND WELFARE BENEFITS, supra note 117.292. See ERISA § 512, 29 U.S.C. § 1142 (1994).293. See Colleen T. Congel, Advisory Council: Hybrid Plan Group Defers Taking a

Position on Legal Issues, 26 Pens. & Ben. Rep. (BNA) 2555 (Nov. 1, 1999).

2. Department of Labor

a. The Pension and Welfare Benefits Administration (PWBA)

The PWBA administers and enforces the fiduciary, reporting anddisclosure provisions of Title I of the Employee Retirement Income SecurityAct of 1974 (ERISA).287 Along with the IRS and the EEOC, the Departmentof Labor was asked to examine cash balance plans by Representat iveSanders.288 The PWBA has endorsed the disclosure requirements in thePension Reduction Disclosure Act,289 and the PWBA has indicated aninterest in reviewing whether actuaries have been involved in cash balanceplan conversion “schemes designed to mislead or confuse workers.”290 ThePWBA has also recently published guidance about cash balanceconversions.291

b. The ERISA Advisory Council

The ERISA Advisory Council provides advice and recommendations tothe Secretary of Labor regarding the Secretary’s functions under ERISA. 292

Among its recent projects, the ERISA Advisory Council studied hybridpension plans, in general, and cash balance plans, in particular.293 The


294. See, e.g., Congel & White, supra note 274; Stein, supra note 78.295. See Colleen T. Congel & Elizabeth A. White, Advisory Counci l: Council Approves

Cash Balance Report; DOL to Post Cash Balance Plan Answers, 26 Pens. & Ben. Rep.(BNA) 2631 (Nov. 15, 1999); Congel, supra note 293; U. S. Department of Labor AdvisoryCouncil on Employee Welfare and Pension Benefit Plans, Report/Recommendations of theWorking Group on Studying the Trend in the Defined Benefit Market to Hybrid Plans,

November 10, 1999 (visited Sept. 12, 2000) <http://www.dol.gov/dol/pwba/public/adcoun/cbalinfo.htm>.

296. See supra note 295.297. See id.298. See ERISA §§ 4001-4009, 29 U.S.C. §§ 1301-1309 (1994 & Supp. 1998).299. See, e.g., Remarks by David M. Strauss, Executive Director, Pension Benefit

Guaranty Corporation, at the Cash Balance Pension Plans Conference, San Francisco,California, May 7, 1999 (visited Sept. 12, 2000) <http://www.pbgc.gov/newsroom/

speeches_test/CASHBAL3.htm>; David M. Strauss, There’s No Need to Retire TraditionalPensions, CONTINGENCIES, Sept.-Oct. 1999, at 34.

300. See Colleen T. Congel, Cash Balance Plans: PBGC Likely Will Seek Feedback On

Valuing Terminating Cash Balance Plans, 26 Pens. & Ben. Rep. (BNA) 2551 (Nov. 1,1999); see also Title IV Aspects of Cash Balance Plans With Vari able Ind ices, 65 Fed. Reg.41,610 (2000).

Council had a number of hearings on cash balance plans,294 and it recentlycompleted its report for the Secretary of Labor.295 The report endorsesdefined benefit plans, supports increased disclosure, and recognizes that cashbalance conversions sometimes harm workers.296 The group was unable toreach agreement on the legal issues surrounding cash balance planconversions.297

3. Pension Benefit Guaranty Corporation (PBGC)

The PBGC is responsible for administering the insurance program thatguarantees benefits provided under defined benefit plans covered byERISA.298 Consequently, the PBGC is interested in the shift from traditionaldefined benefit plans to defined contribution plans and cash balance plans.299

Among other things, the PBGC is looking at the question of how to valuecash balance plans upon plan termination.300

4. Equal Employment Opportunity Commission (EEOC)

The EEOC is principally responsible for the Administration’s policywith respect to age discrimination. Along with the IRS, and the Department



301. See, e.g., Colleen T. Congel, Cash Balance Plans: EEOC Director Repeats Promiseto Review Cash Balanc e Age Discrimination Complaints, 26 Pens. & Ben. Rep. (BNA)

2252 (Sept. 20, 1999); Colleen T. Congel, Cash Balance Plans: EEOC Head Says Age BiasIssue in Plan Conversions a Top Regulatory Priority, 27 Pens . & Ben. Rep. (BNA) 6 (Jan.4, 2000); Colleen T. Congel, Cash Balance Plans: EEOC Director Offers Preliminary Dataon Cash Balance Age Discrimination Review, 27 Pens. & Ben. Rep. (BNA) 1333 (May 30,2000).

302. See generally Forman, Universal Pensions, supra note 2.303. See Zelinsky, Defined Contribution Society, supra note 63.304. See, e.g., Jonathan Barry Forman, How Federal Pension Laws Influence Individual

Work and Retirement Decisions, __ TAX LAW. __ (forthcoming 2000) (on file with

Oklahoma City Universi ty Law Review); Jonathan Barry Forman, Making Federal PensionPolicy Work, __ N. AM. ACTUARIAL J. __ (for thcoming 2001) (on file with Oklahoma City

Univers ity Law Review).

of Labor, it is studying the age discrimination questions raised by cashbalance plan conversions.301

VI. CONCLUSION

In most cases, it appears that replacing a traditional pension plan witha cash balance plan is perfectly legal. No doubt, there are abuse situations,but it seems unlikely that a routine cash balance conversion will run afoul ofcurrent laws. Indeed, even most conversions that result in a wearaway shouldpass muster.

Nevertheless, retirement income security is an important goal, andCongress might want to take action to ensure that all Americans haveadequate retirement incomes.302 But not much would be accomplished by anoutright ban on cash balance conversions, in general, or wearaways, inparticular. The era of traditional defined benefit plans is largely behind usnow.303 The time has come for us to accept and embrace defined contributionplans and their cash balance plan cousins.304

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