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Employee Benefits Security Administration

Report of the Working Group Studying the Trend in the Defined Benefit Market to Hybrid Plans

November 10, 1999

The Working Group Report, submitted to the ERISA Advisory Council on November 10, 1999, was approved by the full board and subsequently forwarded to the Secretary of Labor. The Advisory Committee on Employee Welfare and Pension Plans, as it is formally known, was established by Section 512(a)(1) of the Employee Retirement Income Security Act of 1974 to advise the Secretary with respect to carrying out his/her duties under ERISA.

FINDINGS:

1) In general, public policy should foster the maintenance and growth of broad-based defined benefit pension plans that provide a reliable, lifetime steam of retirement income.

a) A major appeal of defined benefit plans is their flexibility: benefits and funding can be molded to fit the specific priorities of plan sponsors and their employees.

b) To preserve that appeal, the development of plan design approaches that reflect the evolving retirement income needs of workers, retirees and plan sponsors should be encouraged, to the extent those new approaches contribute to secure, broad-based pension coverage.

2) Conceptually, cash balance plans and other account-base defined benefit plan formats are no more that retirement-plan design tools, which in themselves are neither “good” nor “bad”.a) Account-based plans tend to eliminate the back loading inherent in traditional final average pay pension plans and, accordingly, to provide higher accruals for employees who are younger and/or have shorter service, relative to what they would earn under traditional plans.

b) Unless adequate protective measures are included, the employees that are likely to be at a disadvantage under a cash balance plan (in comparison to a traditional plan) are those who, at the time the cash balance plan is introduced, are nearest retirement and who therefore have the greatest interest in and need for retirement benefits.

c) It is, or should be, possible for plan sponsors to design account-based plans in ways that temper or eliminate the potential negative impact on older employees and their families.

3) Cash balance plans have captured the attention of the public and of federal policy makers because the very great majority of them have been created by converting a traditional defined benefit plan to the account-based format, rather than introduced as new, stand-alone pension programs.

a) Conversions by their nature cause the pension benefits that most employees will earn in the future to be different from what they would otherwise have had.

b) When a pension plan is converted to a plan design that gives lower benefit accruals to older, longer-service employees, without appropriate transition protections there is a takeaway – a loss of expected future benefits – which is felt much more sharply than if the employer were simply adding a new benefit that tended to offer more to younger employees.c) The loss that older employees experience in some cash balance conversions is especially profound in companies that had previously invested the most in promoting their traditional pension plan to employees as a valuable component of the employees’ compensation, encouraging employees to build careers in reliance on what they viewed as a retirement income promise.d) The severity of the reaction to cash balance conversions is also, doubtless, related to the fact that their impact is most directly felt by baby boomers, who are just now starting to approach retirement eligibility and who comprise a vocal and politically important segment of our population.

4) Ironically, the popular reaction to what is perceived as the abandonment of traditional pension plans may lead employees, and policy makers, to recognize the value of those plans more than they have in recent years.

a) Since one of the reasons most commonly given for cash balance conversions is that employees do not perceive or value the investment that employers make in traditional plans, perhaps the backlash to the conversions may also dampen employers’ interest in pursuing them, while at the same time causing employers to approach them with greater sensitivity to employee concerns.b) Large employers are not likely to introduce and support a benefit plan design unless they perceive that, alone or in combination with the employer’s other retirement programs, it provides attractive compensation for workers whom the companies want to recruit or retain.5) Two other near-universal features of cash balance conversions are noteworthy, in contrast to traditional plans: the elimination of early retirement subsidies and the introduction, or accentuation, of lump sum payments.

a) Explicit early retirement subsidies were added to plans to encourage older employees to leave service; now, employers say they are eliminating those retirement incentives because they want to retain experienced employees, yet those are the employees who – absent substantial transition protections – feel the greatest affront when a traditional plan is converted to a cash balance plan.b) The savings realized by phasing out early retirement subsidies can be used either to lower overall plan or to spread the cost of benefits differently among the covered employees.

c) When defined benefit plans focus participants’ attention on account balances” or the lump-sum values of their annuities and give them access to those amounts when they change jobs, in order to compete with defined contribution plans for employees’ acceptance, they run the risk (similar to defined contribution plans) of enticing employees to spend their pension money before retirement.6) The likelihood that a particular type of retirement plan is responsive to employee needs and priorities as well as those of the employer is strongest when employees, through their collective bargaining representatives or other mechanisms, participate in the design of their benefit plans.

a) Given the intricacy of the issues presented by cash balance conversions, it is a significant challenge for many labor unions to evaluate and respond effectively to employers’ conversion proposals.b) Nevertheless, there is substantial evidence that employees acting collectively in an organized fashion, through their labor unions or through other types of networks, can be effective in securing favorable terms for employees affected by a cash balance conversion or in shielding them from a conversion unless it is clear that it will be to the advantage of the majority of them.

c) Bringing employees into the decision-making process, by offering an individual choice or through other approaches, can avert potential hard feelings, workplace disruption and impaired productivity in the wake of a cash balance conversion.

7) A consistent theme of the presentations before the Working Group was the fact that, typically, not enough information is made available to employees affected by cash balance conversions to enable them to understand how the change will affect their personal situations.

Recommendations:

1) There is a need for clearer, more candid disclosure when a fundamental change is made in a pension program.

a) Enhanced disclosure requirements should emphasize information that employees can understand and that is likely to be useful to them; distribution too much technical information can defeat the purpose as effectively as distributing too little.

b) Employees affected by a cash balance conversion should be able to obtain information about the specific impact on them that will enable them to make a reasonable comparison between the old and new plan formulas, on a practical basis and within a reasonable time frame either before or after the change.

c) New disclosure requirements should include safe harbors and model language to ease the burden on plan sponsors, and to protect them and their plans from future liability based on an employee’s misunderstanding, as long as the representations that are given comply with legal and regulatory standards.2) When traditional pension plans, especially those with surplus assets, are converted to account-based plans, plan sponsors are strongly encouraged to include plan design features that, to the greatest extent possible, protect the reasonable expectations of the long-service participants in the prior plan and their likely reliance on those reasonable expectations.

3) The legal and regulatory basis for operating cash balance and other hybrid pension plans, and for converting traditional plans to account-based plans, should be clarified, with rules that fit the character of the plans, so that all parties know the “rules of the game.”a) The Advisory Council takes no position on the legal issues presented in the current litigation over cash balance conversions.

b) Technical provisions in current law that were specifically designed for annuity-based defined benefit plans should be examined carefully and, to the extent it is demonstrated that they inhibit plan provisions that would provide equitable, broad-based retirement income through account-based defined benefit plans, revised as they apply to such plans.

4) The Labor Department should:

a) develop and publish explanatory materials for employees and of plan sponsors about account-based defined benefit plans, identifying in particular the question concerning the impact on employees that need to be considered in connection with a conversation;

b) train its staff in the practical, legal and actuarial aspects of cash balance conversions, so that they equipped to field questions from employees, employers and the general public, and

c) publicize the Department’ availability to assist the public in coming to grips with this new phenomenon.5) Given the increased availability of lump sum payments that hybrid plans offer, the concerns addressed by this Advisory Council’s 1998 Leakage Report are taking on greater urgency, and should be considered by policy makers.6) While this report does not take a position on legislative or regulatory steps with respect to cash balance conversions beyond those discussed above, any such steps that may be considered should be targeted to conversion-type transactions, and not extended to other types of changes in defined benefit plans in a way that could further discourage the maintenance and enhancement of broad-based defined benefit plans as a basic source of secure, lifetime retirement income for American workers.

BACKGROUND

1) General Trends in Defined Benefit Plans

a) The decline over the past 10 -15 years in the absolute number of private-sector defined benefit plans are in the number of working people covered by those types of plans is well documented, as are the corresponding increase in coverage under individual account plan that rely on employees’ contributions - 401(k), 403(b) and 457 plans - and the pervasiveness of these trends in the small-employer market.i) Concurrent with, and doubtless related to, the drop off in defined benefit plan coverage has been increased emphasis on individual self-reliance in planning for retirement, along with diminished expectations that employers will continue to provide continued support, in the form either of retirement income or health coverage, for employees after they cease contributing to the employers’ profitability.ii) These issues have been explored by the Advisory Council several times in recent years, and the Council has made a number of recommendations to examine further the forces behind the trend, as well as to slow or reverse it.

iii) Although some Members of Congress have attempted to address these issues and, pursuant to its statutory mandate to promote defined benefit plans, the Pension Benefit Guaranty Corporation(PBGC) has been exploring it in depth, in recent years government official concerned with the need to promote retirement income planning have tended to focus on defined contribution plans as convenient, easily understood vehicles for retirement savings.

b) The Advisory Council believes that defined benefit plans are good for workers and the economy because – and to the extent that – they:i) Guarantee a steady, reliable lifetime stream of retirement income, regardless of investment market fluctuations or the retiree’s (and spouse’s) longevity;ii) Cover a broad range of employees automatically, whether or not they have the means, or take the initiative, to save for retirement on their own;

iii) Provide retirement benefits that can be targeted to replace the participants’ working income and updated after retirement – or late in a worker’s career – to keep pace (past-service benefits);iv) Give employers and bargaining parties reasonable flexibility in designing and funding programs that meet their specific needs and priorities, and

v) Provide a long term, stable and professionally managed pool of investment capital.

c) Because developments during the year led the Working Group to focus on coming to grips with the growing controversy over cash balance conversions, it was able to spend little time looking at the broader questions of defined benefit trends, what to do about them and why.

i) The issues raised by the erosion of private-sector defined benefit plan coverage and the costs and validity of the means that have been suggested to counteract it, such as refreshing the incentives for plan sponsors and simplifying the regulatory regime that governs defined benefit plans, continue to deserve serious, unbiased examination, particularly given the concerns facing Social Security.

2) Cash Balance and Other Hybrid Plans: The Basics

a) Cash Balance Plans – General Designi) They are classified for regulatory purposes as defined benefit plans that promise and pay a guaranteed benefit regardless of market experience or the actual level of plan funding at the time of payout.

ii) Benefits under cash balance plans are presumptively payable as an annuity, with surviving-spouse protection in the case of married retirees if an annuity is the payment form selected.

iii) The funding policy, including the actuarial funding method and “budget” for amortizing anticipating plan liabilities, is set by the employer, within ERISA minimum-funding boundaries, to match the employer’s financial objectives and philosophy.iv) Plan sponsors have the ability to make benefit increases, grant past-service credit and target extra credit or subsidies to identified groups (e.g., for early retirement windows, survivor and disability benefits and transition mechanisms to protect employees’ retirement income expectations).v) The PBGC guarantees payment of basic benefits in the event the plan terminates when the employer is in severe economic distress, such as bankruptcy, even if the plan is not fully funded at that point.

b) Account Balance-Type Accruals

i) Benefits are defined, in the first instance, as a growing single-sum dollar amount (a “notional account”, or cash balance), not a monthly benefit; that accumulated sum is converted into translated into an annuity at retirement unless the participant and spouse choose otherwise.ii) In a cash balance plan, each year’s accrual is a dollar amount, such as 5% of that year’s pay, allocated to a hypothetical account, plus future “earnings” on the amounts credited to the account at a stated rate. Typically, the benefit promised by the plan is the sum of each year’s earning credits plus interest credits on past accumulations.iii) Increasingly, pay credits are “age-weighted”, that is, a higher percentage of pay is credited, based on the employee’s age and/or length of service.iv) The rate at which interest credits are determined must be defined in the plan and guaranteed by the plan sponsor as part of the promised benefit; it is commonly based on an outside, independent index that is often linked to prevailing rates on specific U.S. Treasury debt instruments, but fixed interest rates are not uncommon.

v) Pension equity (PEP) or life cycle plans define benefits as a percentage of final average pay, which grows with each year of service, e.g., if the accrued benefit is a single sum equal to 10% of final average pay for each year of service, a 20-year veteran would be entitled to an “account” equal to two times final average pay, or the equivalent annuity. In terms of benefit focus, this is comparable to a traditional severance plan.vi) Another design, typically more costly and, accordingly, far less common, is a minimum balance plan, which promises a standard pension supported by a minimum benefit expressed in account form.

c) Comparison and Contrast with Traditional Pension Plans

i) Lump sum “account” rather than annuity focus(1) Promises stable growth in economic value, but does not promise a stable, predictable monthly benefit (stream of income); instead, the monthly annuity benefit depends on the available cash balance and the annuity purchase rate in effect under the plan at the time of retirement

(2) The availability of a lump sum payment is not unique to account-based defined benefit plans, but it is far more pervasive (indeed, almost universal) than in more traditional pension plans

(3) This signature characteristic – the availability of a lump sum – is often hailed for providing “portability” and probably enhances the plan’s appeal to employees, but at the same time it undermines the retirement income security aspect of the defined benefit format, by making pension assets available for immediate use whenever an employee changes jobs.d) Career-average rather than final-pay focus

i) Unlike a traditional career-average defined benefit design, cash balance plan benefits are automatically indexed, as the annual interest credits apply to the full “account” balance, including those associated with prior years’ earnings, and thereby update all prior pay creditsii) Further analysis of how cash balance plans compare with more traditional career-average defined benefit designs would be useful in evaluating the cash balance plans as a type of pension design.

e) Cash balance plan accruals are more “front-loaded” than other defined benefit designsi) The pattern of accruals under a standard cash balance plan is relatively even, with a slight upward slope toward the end of the person’s career; under a final average pay plan, accruals start out relatively flat, with a sharp upward curve as the employee approaches early retirement eligibility.ii) The accrual curves differ depending on whether the display shows the growth, plateauing and drop off in terms of actuarial value or in terms of expected monthly annuity benefits.

iii) In recent years it has become more common for cash balance plans to be “age-graded,” i.e., the pay credits are a higher percentage of pay at older ages. Nevertheless, the basic design still favors those likely to have interest credited to their notional accounts for the longest periods. These are younger employees, or those who are likeliest to stay longest at the employer and therefore least likely to receive a lump sum payment after a relatively short accrual period.iv) Notwithstanding the potential for truncating the accrual process through an early lump-sum withdrawal, the even accrual pattern under a cash balance plan results in relatively more generous accruals for short-service employees than they would realize under a traditional plan that is designed to reward long service (as well as age). This is one reason why cash balance plans are said to fit the goals of employees who expect to move from job to job rather than staying with one employer for most of their career.

f) Many traditional pension plans have some element of subsidy built into the pensions payable at early retirement, and it is common to find express early retirement subsidies for those with especially long service; this is rare for cash balance and other hybrid plans.

g) In general, cash balance plans tend to provide proportionally more benefits to lower paid employees than traditional pension plans, because younger, shorter service employees tend to be lower paid, as a group, than those with more seniority at a company.

3) Cash Balance Conversions

The great majority of cash balance plans (95%, in one survey) are created by amendment to – conversion of – traditional pension plans, which typically are overfunded at the time of the conversion.a) Unless specific steps are taken to counteract it, conversion from a final-average pay to a cash balance plan deprives older, long-service employees of the abrupt jump in pension value that they were on the brink of realizing, after working for years with relatively low pension accruals.

i) In addition to flattening the effective accrual curve late in participants’ careers, the conversion typically results in the elimination of the early retirement subsidy in connection with the cash balance formula.ii) As a transition device – called “wearaway” – plans often promise employees they will receive the greater of their frozen benefit under the previous formula or their total benefit under the cash balance formula.(1) For employees at or near early retirement age, the value of the “old-plan” benefit may be so much larger than the accruals under the cash balance formula that they effectively accrue little or nothing for a prolonged period, until the old-plan benefit is worn away.(2) In some cases the opening balances under the cash balance formula may be set lower than the present value of the old-plan accrued benefit measured on the basis of statutory (§417(e)) assumptions, taking into account the value of the associated early retirement subsidy. This exacerbates the wearaway effect.

b) There is a widespread suspicion that employers are hiding the reasons for, and impact of, cash balance conversions.

i) Reportedly, some employers have presented the change as an enhancement to the pension program generally, while down playing or omitting mention of the negative effect on some employees.

ii) Because annuity benefits and account-balance benefits are dissimilar and the differences stem from actuarial concepts that are unfamiliar to most people, employees may have difficulty understanding the changes in their personal situations after the conversion even when the employer has been candid.

c) It appears that a majority of employers make an attempt to temper the impact of a conversion on the employee groups that are likely to be most severely affected – those nearest to early or normal retirement age, through a variety of transition mechanisms. These include:i) “Grandfathering” some employees under the prior formula;ii) Providing higher future pay credits for older/long-service employees, permanently or for a transition period,

iii) Setting opening balances higher than just the present value of the old accrued benefit, at least for some employees, to give them a head start on earning a reasonable cash balance benefit, and

iv) Giving current employees a choice between the old and new formulas.

d) When employers draw lines between those employee groups who are covered by transition protections and those who are not, for reasons of cost or otherwise, those who just miss coverage may react to the perceived takeaway more sharply than if accommodation had not been provided for any group.

e) Reasons for Cash Balance Conversions

i) The primary reason that employers give for converting their traditional pension plans to an account-based format is that they expect the new design will be more attractive to, and appreciated by, the employees that they want to recruit and retain.

(1) Employers do not expect incoming generations of employees, particularly those with high-tech skills, to spend their careers with one employer – either because the employees will want to change jobs, or because employers’ staffing needs are not likely to remain constant.(2) Although the logical and theoretical attraction of cash balance plans to younger, more mobile employees with in-demand skills was frequently cited to the Working Group, it is not clear whether there is evidence that this type of pension does, in fact, lure these types of employees to companies that offer them, i.e., it is not clear how effective the promise of any type of defined benefit pension is in recruiting these employees.

(3) While the mechanics of a cash balance conversion are intensely complex and difficult to explain, once it is in place a single-sum account benefit is viewed as easy to communicate, understandable and more likely to be appreciated by employees than a future annuity benefit of unknown amount.

ii) Employers reportedly also hope the account-based design will help focus employees on pensions as retirement savings vehicles, and on the need for them to supplement employer-provided funds with their own savings.

iii) To eliminate incentives for skilled older employees to leave the workforce, employers want to eliminate or phase out the early retirement subsidies that are built into their traditional pension plans.

(1) Yet, the elimination of early retirement subsidies is widely perceived as evidence of hostility to older employees.

iv) Some employers are revising their pension and compensation programs in order to compete for employees with newer companies that offer newer forms of compensation, such as stock options and richer defined contribution benefits.

v) By introducing a cash balance plan, employers undergoing successive mergers and acquisitions hope to create a convenient platform for consolidating retirement programs by moving all of the employees to a common, wholly new, design.

vi) The impact of cash balance conversions on employers’ pension cost is a matter of dispute.(1) Although critics say that cost saving is the real impetus for conversions, whether conversions usually yield actual cutbacks in overall employer spending on retirement programs following a conversion is a matter of dispute; all of the employer representatives and consultants who appeared before the Working Group, as well as Working Group members with experience consulting with employers on cash balance conversions, stated that, for the great majority of their clients, the goal was to keep cash costs roughly the same rather than to cut them back.

(2) In cases where the actual cost of the pension plan was reduced, it was reported that those savings were often re-deployed to other benefits, such as the 401(k) matching contribution and/or stock options.

(3) Under accounting standards, reported pension expense may drop in the early years after a cash balance conversion, which can have an impact on earnings as measured by Financial Accounting Standards.

vii) There was little discussion before the Working Group of why employers choose to convert to cash balance plans rather than terminating their traditional pension plans and establishing, or enriching, their defined contribution plans.

(1) Nevertheless, there can be little doubt that one reason is that, if the pension plan were terminated rather than restructured, employers would have to pay a minimum 20% excise tax on any surplus pension assets that they recover from the plan after paying off all benefits, even if they transfer the full amount to another retirement plan.

(2) Employers have substantially more funding flexibility if they provide account-type benefits through a defined benefit rather than a defined contribution plan.

(3) Defined contribution benefits must be fully funded at all times, whereas cash balance notional accounts can be funded over time, in accordance with ERISA’s minimum funding requirements.(4) Employers generally aim for higher investment returns on plan assets than they promise to credit on cash balance accounts, particularly since IRS rules currently discourage plans from promising interest credits at rates comparable to likely plan investment yields.

(5) Most of the employers that have converted their pension plans to account-type designs already have 401(k) plans, which typically offer participants substantial control over the level of their retirement savings and the manner in which those savings are invested, so adding to those plans might be viewed as redundant.

(6) While it is often stated that 401(k) plans only benefit those employees who can, and choose to, contribute to them, other designs are possible and employers can choose to make an across-the-board base contribution that is not linked to the deferrals made by individual employees. Nonetheless, the most common approach among large employers is to offer matching rather than automatic employer contributions to employees’ 401(k) accounts, in large part to stimulate employees to take responsibility for their own retirement income security.(7) Although the “wearaway” phenomenon would not occur in a termination followed by a shift to a defined contribution plan, the inherent bias in favor of younger, shorter service employees is likely to be even stronger in a defined contribution plan than in an account-based pension plan.WORKING GROUP STUDYING ISSUES SURROUNDING THE TREND

IN THE DEFINED BENEFIT PLAN MARKET

WITH A FOCUS ON EMPLOYER-SPONSORED HYBRID PLANS

SUMMARY OF MEETING NOTES

April 7, 1999

Kenneth S. Cohen

Kenneth S. Cohen, Senior Vice President and Associate General Counsel, Massachusetts Mutual Life Insurance Company and a former Advisory Council Vice Chair, discussed the previous Council’s work that led to the current Council study issue.Mr. Cohen provided historical background of employer-sponsored defined benefit programs, noting that defined benefit plans reached a peak of 175,000 in 1983. In 1993, they had decreased to 83,000. The trend for smaller plans was more dramatic. There were 1.5 million participants covered in 1983, and by 1996, coverage had dwindled to 800,000. In addition, there has been little movement in the establishment of new defined benefit plans. Mr. Cohen cited regulatory trends and Congress’ inability to provide simplification of defined benefit plans as reasons for the decline. He commented on the work of the previous Council which recommended reforms to address the current state of defined benefit plans. These included the need for the DOL’s support of changes, repealing full funding limitations, restoring of benefit limits to 1992 levels, permitting pre-tax contributions, reducing the IRS’ delay in issuing guidance, simplifying requirements for small employer plans and allowing in-service distributions.Mr. Cohen then described some of the features of cash balance plans and their resemblance to both defined benefit and defined contribution plans. He commented that their rise may be a means of stabilizing the defined benefit plan decline. Previously, the alternatives for plan sponsors were to terminate the plan or freeze benefits with possible defined contribution plan replacement.

Mr. Cohen provided some of the reasons why conversions to cash balance plans are being made. Companies are becoming more concerned about the competitive environment and the use of cash balance plans are more in line with current work force demographics. Increasingly workers are less likely to remain with one employer for their whole career. There has been recent conversion made by large employers. Mr. Cohen commented that media attention appears to focus on employer cost savings as the sole reason for changes. He suggested that most employers would cite other reasons including employees lack of understanding or appreciation of the traditional defined benefit plans. The portability issue for shorter service employees is significant. As a result, Mr. Cohen provided information on the increase in popularity of cash balance plans. One survey by KPMG suggested that 8% of those contacted have cash balance plans. This is about double the rate of the previous survey.

Mr. Cohen commented on the impact on older, longer service employees who would be affected by a change in traditional plans (that are primarily final average salary type plans) to cash balance plans (that are career average type formula plans) . The concern centers on adequate disclosure of the information to employees. In that regard, he noted recent bills attempting to address this issue. In March, 1999 Representatives Portman and Cardin proposed legislation regarding disclosure requirements on the rate of benefit accruals. Senator Moynihan proposed bill would go farther and would result in providing participants with approximately 20 calculations in a “statement of benefit change”. These will result in higher costs to employers. Mr. Cohen suspected that a compromise between these bills may be more appropriate.In questions and answers after Mr. Cohen’s testimony, Mr. Mackell referred to a recent article in the Wall Street Journal that focused on the cost savings to employers. Mr. Cohen suggested that this may be an oversimplification to a more complex problem. Again he discussed the situation of the 1980’s where there was an increase in plan terminations and freezing of benefits. He suggested the affect on older employers is largely a transitional issue that can be addressed with better disclosure that currently is not adequate. This is where the focus should lie, not in changing the benefit protection requirements.Ms. Uberti suggested that there might be a tie in to the Council’s other issue of plan surplus assets. Mr. Cohen noted that most plans are overfunded and that there might be an opportunity there. Ms. Mazo commented that employers did not need to apologize for attempting to lower their cost to become more competitive.Mr. Fanning commented upon the lump sum payouts of cash balance plans especially those made before attaining retirement age. Mr. Cohen responded that these lump sum features add to the portability advantage of these plans. Not all are being rolled over to another qualified entity. There appears to evidence that the older the participant, the more likely the distributions would be to rolled over.

Mr. Tani commented on those workers who change jobs frequently. When they get to the end of their career, there combined pensions are smaller than what they would have been if they were in a cash balance plan for the entire time and rolled over each distribution. In addition, he commented that there is little focus as to what employers are doing to their other plans which include increasing the matching of company contributions. He suggested one needs to look at the total retirement program.

Mr. Gulotta commented that early conversions may have made some errors. However, companies learn from other companies’ mistakes. The later conversions have been handled more smoothly. He questioned whether the proposed bills that would result in numerous calculations would add participants’ understanding. Mr. Cohen stated that plan participants have a right to some level of understanding. It should be done without excessively burdening employers. He reiterated his earlier comment that a compromise on the disclosure issue would need to be reached.April 7, 1999

Stuart Sirkin and David Gustafson

Stuart Sirkin, Director of the Office of Policy Development and David Gustafson, Chief Actuary, both from the Pension Benefit Guaranty Corporation (PBGC) discussed the current state of defined benefit plans. Mr. Gustafson provided historical statistics on the steady decline of defined benefit plans. In 1979, 79% of workers were covered by such plans. In 1996 it dropped to 50% and is below 50% currently. In 1985, there were 112,000 plans. Now there are 42,000. This is particularly significant for plans with less than 1,000 participants. (The number of participants has risen however, this is a result of a natural growth pattern whereby a retired worker is replaced by an active worker. The plan would now have two participants instead of one.) Active participants are declining from 42 million to 25 million in 1998. The percentage of the labor force covered was 39% in 1975, now it is 24%. There have been some pockets of strength, such as union plans, but overall trend is downward.

Mr. Sirkin elaborated on the PBGC’s dual goal of strengthening existing plans and expanding the universe to encourage plan growth. The PBGC contacted employers in an attempt to see what could be done to accomplish these goals. He commented that he suspected that if they were starting fresh, few would design the current system. Feedback included simplifying technical issues as well changing the way corporate executives view these plans. It was felt that senior management may perceive typical define benefit plans as vehicle for the rank and file and not primarily for them. If changes could be made, then executives would care more about these plans. Mr. Sirkin provided a history of the compensation limits. His point was that after adjusting for inflation, executives are still getting benefits from these programs. Secondly, he suggested that flexibility needs to be increased. If barriers are removed, then participation in these plans should increase.Mr. Sirkin suggested that hybrid plans are a means to add value to the defined benefit programs. He suggested that until an employee reaches 45, he or she does not think very much about retirement plans. Traditional plans are not fully appreciated or understood by participants. Cash balance plans are more easily understood and their portability feature is attractive to most participants and employers. The removal of age 55 cliff barriers would enhance defined benefit plans. He also related a suggestion to allow participants to collect a pension and continue to work.

In addition, ERISA Advisory Council members made comments including Ms. Mazo who noted companies are using defined benefit plans as a work force management tool. Mr. Sirkin commented that companies were more interested in the removal of barriers so that there is movement among plans.

Mr. McTeague asked about the use of funds distributed as to where they are going (i. e. rollover or not). Mr. Sirkin did not have any hard statistics but suspected that the older, longer service employees would be more likely to roll over any distributions.

Mr. Tani questioned interest rates on lump sums. Mr. Sirkin commented that revisions have been made over the years. Ms. Mazo related extreme cases (Harper Row) where the use of high rates produced significantly smaller benefits.

Mr. Gulotta commented that under defined benefit plans, investment risk is borne by the employer. He asked about the other side of the coin, i.e. what is the reward for the company for taking such risk. Mr. McTeague commented that companies get the reward by having not to fund future contributions. Mr. Gulotta was asking about the excess plan assets and the use for underfunded retiree health benefit plan. He suggested that participants would be better off if these excess assets could be used to help cover the projected shortages in the retiree health area. Mr. Sirkin disagreed that this would be a proper use of pension funds.

Ms. Mazo expressed concerns about increasing dollar limits particularly in Taft Hartley plans. She suggested they be scaled back to 1982 levels. Mr. Gustafson echoed her concern.

Mr. Gulotta suggested that the group solicit information from witnesses from both sides of the issue. These include those from industry as well as labor, those who have implemented cash balance plans and those who considered the change but rejected the implementation. Media representatives could be called. Mr. Grossman suggested that AARP be contacted. Mr. Stapley commented that the focus appears to be slanted on exceptions to programs and not on what was done right. The group decided that as long as a balance of perspectives was heard by the end of the study period, it is less important as to the order of witness presentations. Mr. Tani suggested that technical witnesses who could address IRS code problems be included. Mr. Grossman advised that he is writing an article on age discrimination on cash balance plans that he would share with the group. Mr. Brown suggested that consideration be given to size of employers called and that hard data be provided to support their findings.

May 6, 1999

Ron Gebhardtsbauer and Richard Shea

Ron Gebhardtsbauer, Senior Policy Fellow, American Academy of Actuaries (AAA) and Richard Shea, Partner, Covington & Burling spoke with Mr. Gebhardtsbauer beginning his remarks by stating that AAA’s position on matters relating to items such as cash balance plans is largely neutral. Their responsibility is to provide both pros and cons so that employers and others may make an informed interpretation. He described the features of the typical cash balance plan. The plans have an initial account balance to which an employer contribution is made annually. This contribution is generally a percentage of pay. To this a pay credit, as described in the plan document, is added to the account. The pay credit generally does not equal the actual investment return of the funds and the rates are usually tied to the yield on 30 year Treasury instruments. Generally, there are no employee contributions. As such, unlike a 401 (k) plan, everyone is likely to participate in the plan since no employee contributions need be made to join plan. Investment risk remains with the employer as assets are invested independently of the pay credit. If results are good, the costs are lowered.In following discourse, Ms. Mazo commented about plans that tie the pay credit to something other than 30 year treasuries, such as S&P 500 index. These could result in losses with market swings. Mr. Shea commented that this is a design issue and it is possible to set it up that way. Mr. Tani commented that equities can produce a whip saw effect and Mr. Gebhardtsbauer acknowledged that it is unclear as to what the right thing to do. Mr. Shea briefly described a Nations Bank plan that has a guaranteed floor provision, something that would be illegal in a 401 (k) plan.

Mr. Gebhardtsbauer then compared how accrual benefits are different under a cash balance and traditional defined benefit plans. The accumulation of benefits goes up rather smoothly in a cash balance plan until retirement age and then it can fluctuate dramatically. Under a traditional DB plan, the opposite effect occurs. Mr. Shea provided graphics that illustrated the whip saw effect. He stated that it is desirable to know how much will be paid out in a lump sum at time of termination. In general the lump sum is calculated as the present value of the accrued benefit with a joint survivor option at normal retirement age and discounted back using GATT rates and specific interest rate and mortality assumptions. In the example using a 45 year old with a $50,000 balance currently, this would project to $193,000 at age 65 (using 7% assumption). This amount would translate to a $62,000 balance when discounted back using a 5½% rate. He then describe the typical defined benefit plan with early retirement incentives. The largest spike occurs at early retirement age and negative accruals can actually occur thereafter. This results in a plan design that encourages people to stay to a point and then leave. These can be mitigated with age or service weighted plan design features.

Mr. Gebhardtsbauer discussed factors involved in the switching to cash balance plans. It is sometimes a work force management issue. It can be used to retain younger workers. With the tighter labor market being experienced by many companies, this may be desirable. Prior to ERISA, retirement plans were sometimes viewed as “old age” insurance since you had to spend your entire career in order to reap a benefit. ERISA changed that with vesting requirement that allowed for benefits prior to normal retirement age. Mr. Shea related his prior experience when he was at the Treasury Department and concluded that in some ways the system appears focus to on the smaller percentage (approximately 10%) that remain with one employer instead of concentrating on the 90% who do not. He then commented on the recent negative media reports on the cash balance plans. They seem to overemphasize the negative effects on certain specific individuals, typically those older, while ignoring the fact that the vast majority of employees are benefitted. There is an overemphasis of the “underhanded motive” of employers. He thought that since with a tighter job market, why would employer intentionally alienate their workers? Mr. Shea described some of the other characteristics of cash balance plans including the portability feature. He provided reasons why shifts are occurring. He noted the limitation of the traditional DB plans. Mr. Shea then described some of the disadvantages of a DC plan. Participants are restricted and don’t have a good idea as to what their benefit will buy in the future. In addition, the participant bears all the investment risk. The delivery of benefit system is flawed since generally no annuities can be purchased directly (or at without incurring additional costs). There are no supplemental benefits, for disability or survivor benefits as there is with DB plans. There is no past service credit given in a merger/acquisition. Finally, the employer has a lack of funding flexibility since it will be required to contribute in accordance with the plan document.Mr. Shea described some of the limitations of a traditional defined benefit plan. They tend to be viewed as providing benefits for longer service employees. They do not particularly work well for younger or short service employees. In addition, those who change job frequently and women who leave and rejoin the work force for family matters are harmed by traditional DB plans. He then gave an example of the annual benefit accrual for employees with the same wages who were at different ages and year of service. The most dramatic increase is for an employee is in the year that they reach age 55 and 30 years of service. It was estimated, in the example, at $62,000 for that year. For someone age 45, the annual accrual would be only $900 and for one age 55 and 15 years of service it would drop to $21,000. This emphasized the back loading of expense and encourages workers to take advantage of the spikes and then leave.

Mr. Shea discussed a Society of Actuaries study that collected data on turnovers of 259,000 participants from 41 large employers during the period from 1989-1995. This data was analyzed and a comparison was made to a hypothetical cash balance plan that would yield that same benefit value. The result was that 68% of the participants would have been better off under the cash balance plan. Further, for those who were would have had a higher benefit under the cash balance plan, they were 4 times better than with a traditional plan. For women in this group, the results were even more dramatic since 77% would have better off. Further, there is no penalty for changing jobs. Mr. McTeague asked if they are better off, where is the increase coming from? The answer is that it is derived from a redistribution of benefits within the group. Mr. Fanning commented that most employers hire employee and try to keep them. Would they be better off under a traditional DB structure. Mr. Shea suggested that it depends. If there is a tendency to hire them until they retire, then maybe so. However, he suggested that for the first 20 years or so, the benefit would not be appreciated. Ms. Uberti related her experience in the banking industry. It is considered a plus if you have worked for other institutions. This can result in an influx of creativity as workers bring what they learned elsewhere to there job. In addition, the level of appreciation varies from industry and job class. In general, blue collar workers place a higher value on DB benefits whereas service industry employees do not. Mr. Mackell cited “creative destruction” where something is learned from every experience no matter how bad it may appear. Mr. Shea reiterated the need to get away from traditional DB plans with their back loading of expense.Mr. Grossman asked for comments on the age discrimination issue that has been emphasized in the media. Mr. Shea answered that rate of accrual needs to be the same regardless of age, e.g. 5% per year. Critics may cite that an older worker may have one less year to grow a benefit but he felt that this was covered under the safe harbor provisions. Generally they are age neutral but can run into some problem in a transition situation where the wear down effect may be longer for older workers.

Mr. Gebhardtsbauer described the situation with the United Methodist Church. They were starting form scratch and their plan is not covered under ERISA. Their plan design included a floor benefit which closely resembled a cash balance plan. In summary, Mr. Shea cautioned not to overreact to selective anecdotal examples which may portray things as very bad. The focus is that cash balance plans are better for more employees than traditional plans.

June 9, 1999

James Durfee

James Durfee, Senior Actuary at Towers Perrin, commented that Towers Perrin does not take sides in these issues but rather attempts to analyze the effect of any change. He further commented that one difference between traditional defined benefit plans (TDBP) and cash balance plans (CBP) is the pattern of accrual. In a TDBP, the accrual is back loaded to where much of the accrual is made during the latter stages of an employees career. In a CBP, there is a more uniform accrual throughout the working life of an employee. A chart was shown that contrasted both of these types of plans. In the example, an employee who worked for the same company under a TDBP would have approximately 40% of his/her pension accrued by age 50. If the same employee were to have been covered under a CBP, the accrual would have been 45%. If a conversion to a CBP were to be made at this time, this would require an transition benefit of about 15% to make the employee whole. This is to offset the shortfall at the time of conversion since the employee would not be getting the benefit of the later year’s higher accrual under a TDBP.Mr. Durfee provided some information as to how employers are addressing the transition question upon conversion. He stated that 43% provide that certain employees are allowed to continue the old plan in some form. Another 17% added additional credits to accounts while 5% increase the opening balance. The balance of 35% would not add any addition benefits because they were unable or unwilling to do so for cost reasons. Mr. Durfee commented that whatever is done, it is likely that someone might be hurt since there will always be someone who was born one month too late. Those who stand to lose are most likely those in the 45-55 age range depending upon the plan design.

Mr. Tani commented that the loser are typically those who are highly leveraged with early retirement benefits. Mr. Gulotta commented that even with the best intention, most employers will not be able to lower costs and have no losers. Mr. Gulotta commented that replacement rates at normal retirement rate under a CBP would be lower and would have to be evaluated in the context of other benefits. It probably does not have to be as rich because many employees also 401 (k) plans.

Focus was then turned to employee communication aspect of conversion. In order for the conversion to be successful, employees must have an understanding of the change. The question was raised as to whether an actual calculation or illustrative example could be used. Employee may be invited to do their own calculation using their own assumptions. There may be a way to address the question as to whether it would be better off if the plan did not change. Mr. Gulotta raised the question as to what would happen to the average retirement age if every defined benefit plan was a CBP and how would this impact on government programs such as Social Security and Medicare. It was concluded that individuals would tend to work longer since there would not be the same financial incentive if the early retirement subsidies were eliminated.

Ms Mazo summarized the two pending bills namely H. R. 1102 introduced by Representatives Portman and Cardin and S. 659 sponsored by Senator Moynihan and others. Please refer to the testimony and handouts for further details.

June 9, 1999

Ron Gebhardtsbauer

Mr. Gebhardtsbauer, Senior Pension Fellow, American Academy of Actuaries, began his presentation on disclosure issues of Cash Balance Plans (CBPs). He stated that it is important that employees be given the truth on the impact of any conversion. This is to the benefit of both the employee and employer. However, certain factors complicate the full disclosure suggested by others. For example mergers and acquisition made can make a calculation by individual difficult and costly.

Mr. McTeague challenged the assertion that disclosure would stop TDBP. He cited prior testimony that stated that virtually all CBP come about by conversion of TDBP’s and very few are established initially. Therefore, if employers are unwilling to provide such disclosure then they should just not convert their plan. Ms. Mazo suggested that the onerous disclosure requirement relate to any amendments that may effect benefits, not just plan conversion.June 9, 1999

David Certner

Mr. Certner, Senior Coordinator of Federal Affairs Department, Economics Team, American Association of Retired Persons (AARP) commented that many times it is not obvious that a change is a reduction. The calculation of benefits may not match any one individual if samples are used.

Mr. Gebhardtsbauer cited that when the Congress makes changes to Social Security, no individual statements are sent out and yet the private sector will be asked to provide statements to their employees. Individual counseling may provide a means to provide the effects of changes.

Mr. McTeague suggested that employers have a moral obligation to provide their employee with the necessary information. Mr. Mackell suggested that disclosure needs to be simplified so that it can be understood by all. Technical implementation problems were discussed.

Mr. Certner stated that required disclosure may result in employers fully explaining why they are doing what they are doing. Disadvantages were discussed including increased cost, time required to calculate, difficulty in providing understandable data to employees. Mr. Certner suggested that winners and losers are known and therefore they should just be provided to those individuals. There can be limits set of who gets statements.

June 9, 1999

Brian O’KonskiMr. Brian O’Konski, Actuary and Assistant to the Director of Negotiated Benefits, United Food and Commercial Workers International Union detailed four case studies concerning conversion to CBP that affected his represented employees. In these cases, the employers did not adequately explain the effects of a conversion. Additional information had to be requested and once provided, it appeared that the conversion was not an acceptable alternative for these represented employees.July 14, 1999

Vineeta Anand

Vineeta Anand, Washington Bureau Chief for Pension and Investments, provided the group with a history on the hybrid plans from 1985 to present. Her prepared remarks are incorporated into this summary by reference.

Ms. Abelson asked if the establishment of Cash Balance Plans (CBP) is a recruitment tool, why have they all been conversion of existing defined benefit plans (DBP) instead of creating of new CBP’s. Mr. Tani suggested that CBP’s look better to younger workers and look very much like 401 (k) plans. Mr. Mackell raised the issue concerning the rise of CBP’s with its portability features and the increase in self-directed investment. He wondered how individuals are being educated to handle the investment knowledge needed. Ms. Anand suggested that the rise in the stock market has given the impression to many that successful investing may not be that difficult. She commented that some companies, who are concerned with what their employees might do, have placed limits on the percentage of the account balances that may be withdrawn and in some instances have tied it to age at time of distribution.Mr. Mackell related a concern on what happens when there is a downturn in the market. He suggested that will wake up Congress to action but only after the fact. Ms. Anand commented that the nature of lawmakers is to react to problems rather that provide some preventive action. There can be serious and significant results especially when the number of baby boomers start to retire and may not have saved enough.

Mr. Tani commented on the statement that the company makes money off of the employees. He suggested that the employee does not lose because a floor benefit has been instituted. Companies make more efficient use of pension assets. Ms. Anand countered that perhaps companies could spend more time on educating employees on the importance of asset allocation and clearly disclose the impact. Mr. Tani suggested that everyone’s risk tolerance is different so that even if education was provided, there is no guarantee that employees would make different decisions.Mr. Gulotta suggested that traditional DBP’s act more like a bond while 401 (k) plans are more like equities. The risk down the road increases as workers, such as those in the Nations Bank plan, shoulder more of the risk. Mr. McTeague asked if spousal protection is the same under a CBP and whether lump sums are required. He was advised that the spousal protection is the same and it is not typical that CBP’s have no lump sum provisions. Ms. Uberti made reference to the Leakage report previously issued by the ERISA Advisory Council which addressed problem. Mr. Gulotta related his experience with the implementation of a conversion of AT&T management plan where a limit was put in on lump sums. A similar proposal was made to the bargained group who rejected the limitation of lump sums. This has put pressure on the management plan to change even though a limited may be the better plan design. Mr. Grossman suggested that risk will increase significantly if proposals to go to individual account for Social Security were ever enacted.July 14, 1999

Norman Stein

Norman Stein, Professor of Law, University of Alabama, provided an academic prospective on the topic and read from a prepared statement which is incorporated into this summary by reference.

After reading from his prepared remarks, Professor Stein objected to the statement Mr. Tani had earlier made to Ms. Anand that investment risk rested solely on the employer in a defined benefit plan. Professor Stein suggested that this is too simple a view. He noted that PBGC guarantees were limited and that employees could suffer losses in a defined benefit plan. In addition, the PBGC bears considerable risk. Moreover, in a final pay plan, the employee bears an additional risk, the loss of the inherent indexation of benefits during an employee’s service for the employer. Finally, Professor Stein noted that most seriously underfunded plans result not from poor investment performance, but from the creation of unfunded past-service liabilities.Mr. McTeague asked about possible legal challenges to the conversion of a traditional defined benefit plan to a cash balance plan. Professor Stein answered that there are at least two common statutory problems with the conversion. The first problem, which does not apply to all cash balance plans, is the “wear away” problem, where older employees go through a period in which they effectively accrue no additional benefits for a period of time. Professor Stein said that some lawyers view this as clearly illegal age discrimination.The second problem is the 411(b)(1)(h) annuity problem. That section of the Internal Revenue Code, which has counterparts in Title I of ERISA and the ADEA, prohibits defined benefit plans from reducing annual benefit accruals on account of age. If the benefit in a cash-balance plan is considered the annuity at normal retirement age, the effect of most cash-balance plans is to provide successively lower normal retirement benefits for each year of service. This appears to be a violation of the noted statutory provisions. The counter argument is that viewed from the perspective of contributions rather than normal retirement annuity, cash balance plans treat older and younger workers identically. But the (b)(1)(h) rules were written with respect to normal retirement annuities, and the question of whether you can “cross test” for age discrimination is the open question. Professor Stein did say that he though courts might be reluctant to enforce the statute literally because cash balance plans have a 10-year history, there are so many of them, and they have been approved administratively by the IRS.Professor Stein also was questioned on the issue of whether conversions should be treated as a plan termination, which would require vesting of unvested participants but also income and excise taxes. He said that the excise tax was, in part, designed to discourage plan terminations where older workers were hurt. He suggested that employers viewed conversions as a way of circumventing the termination taxes, and in that sense, conversions could be viewed as a type of tax dodge.

Ms. Abelson asked Professor Stein why a conversion is any different than a major change to a pension plans, which occurs very frequently but does not result in the same outcry. Professor Stein said he thought that conversions to cash balance plans might be on that same trajectory, but at some point there became a qualitative difference between regular changes in benefit formulas and cash balance plans. He stated that the conversions were sold as defined contribution look-alikes and that they are, in fact, qualitatively similar to a conversion to a defined contribution plan, which would be treated as a termination and start of a new plan. He did note, however, that those who disagreed with his perspective could find support for their views in the Supreme Court’s decision in Hughes v. Jacobson.Professor Stein also discussed the real-life policy implications of conversions for mid-career employees. He related his experience with IBM employees, who early in their careers accepted an implicit bargain that they would be paid less while they were younger, but if they stayed with IBM for their careers, they would be rewarded with meaningful retirement benefits accruing during the last third of their time with IBM. He said that the employees performed their side of the bargain, devoting much of their human capital to IBM, but that after IBM’s reaped the reward of their employees’ long service, they were breaking their side of the implicit bargain. Mr. Tani noted that if the plan had been terminated, the employees would not have received a transition benefit at all. Professor Stein conceded that a termination was worse that a conversion, but the underlying issue was similar, whether older employees are unfairly hurt.Mr. Mackell asked Professor Stein if there had been any reaction to the “Cash Balance Practitioners Group,” Professor Stein advised that he was not aware of any.Ms. Uberti commented that it is appropriate that the group hears a balance of perspectives and that Kodak’s implementation of the conversion, which Professor Stein alluded to in his prepared testimony, appears to be a model for how to do a fair conversion. Mr. Fanning then asked Professor Stein whether there were sufficient assets in plans to handle grandfathering of benefits. Professor Stein commented that it varies from plan to plan, but the IBM plan appeared to have sufficient assets to cover these amounts. Mr. Gulotta cautioned employers to be careful how older workers are treated since it is noticed by all, including younger workers. There should be a greater sensitivity to the treatment of older workers.Professor Stein also agreed that using the excise tax to discourage conversions was not an ideal policy response, but it was the compromise that Congress had settled on during the reversion era. Professor Stein said it would have been more desirable then -- and now — to provide clearer substantive protections for older workers, rather than use a penalty tax to try to discourage terminations and conversions.July 14, 1999

William Bortz

and Richard McGahey

Next on the program were William Bortz of the Treasury Department and Richard McGahey, Assistant Secretary, Pension & Welfare Benefits Administration. Mr. Bortz began with a brief history of the legal requirement for disclosure which requires notice to participants if benefits are reduced. Currently, if amendments are made, a copy is made available to participants and only shortly before its effective date. In many case, participants may have difficulty in figuring out the effects on their benefit. The proposal announced yesterday would provide significant changes to the information to be provided to participants including illustrative examples of changes, the effect of the amendment, the class of people effected as well as provide the information 45 days before the effective date. The proposal’s goal would be to have the conversion more easily understood by effected participants.Mr. McGahey stated that proposal would require that participants be informed as to the before and after effects of the change as well as the assumptions used to calculate the converted benefit. He stated that it was their intention to strike a balance between providing participants would meaningful information without the unduly burdensome requirements to be placed on employers. This would include providing a statement of benefits under the plan compared to what it would have been if amendment not implemented. Individual benefit statements would be required only upon request.

The group in general was receptive to the balanced nature of the request for information. Mr. McTeague asked as to who would be responsible for the enforcement process. Mr. Bortz stated that employer would be required to comply and Mr. McGahey added that this would be part of the fiduciary responsibility. Ms. Abelson pointed out that for many employers, the explanation of pension benefits given the complexities of mergers in particular, present a challenge to meet the minimum disclosure at all levels.

Mr. McGahey welcomed any comments that would make the disclosure more meaningful. Mr. Bortz suggested that the establishment of kiosks at employers may provide a means to have participants have a hands on attempt to calculate benefits individually.

Mr. Tani pointed out that many employers are sensitive to the inclusion of salary scale in any calculation scenario. Mr. Stapley suggested that it is always a challenge to get employees to focus and understand information provided to them. Mr. Bortz suggested that expressing a change in terms of percentage of pay may get around salary scale concerns.

September 9, 1999

David Cook

After Ms. Mazo outlined the group’s progress and emphasized that the focus is not on striving to reach a consensus view of the members on the issue but rather to recognize that there will be divergent opinions on hybrid plans, she introduced David Cook, Partner at Manley, Burke, Lipton and Cook, who addressed the implementation of Cash Balance Plan (CBP) from a union’s perspective. He stated that in many cases, the local unions are not prepared to deal with the complex issues surrounding CBP’s. Indeed, many union lawyers are unfamiliar with the ERISA and IRS rules under these plans. His suggestion is that they need to ask for help immediately. Mr. Cook gave examples from his personal experience. In many cases, union can be made accountable if they do not fairly represent their members. With CBP’s, it can sometimes result in balancing the needs of older versus younger union members. He further suggested that since the unions have limited resources, the effects of the conversions to CBP need to be fully disclosed and clearly explained to all. Ms. Uberti asked if the DOL can help attorneys ask the right questions. It was suggested that something similar to the 401 (k) template that is provided would be very helpful for all parties. In addition, he suggested that the real purpose of the conversion was to eliminate the early retirement supplements.September 9, 1999

Christopher Bone

Christopher M. Bone, Chief Actuary and Chief Information Officer at Actuarial Sciences Associates, Inc. provided an actuarial prospective on the topic and read from a prepared statement which is incorporated into this summary by reference. Mr. Bone discussed the change in the pattern of accrual between traditional and CBP’s. He addressed how benefit values change as interest rates rise and fall, how plan sponsor’s costs change as a result of conversion and how they change as interest rates change.September 9, 1999

Kathleen Roin

Kathleen Roin, Director of Capital Accumulation Programs for IBM Corporation, read from a prepared statement which is incorporated into this summary by reference.

Ms. Roin provided a plan sponsor’s prospective on IBM’s conversion to a CBP. She outlined the reason for changes which included the change in work force demographics, the early retirement subsidies and their need to respond to their competitors. The way that IBM provided their benefits in the past needed to be reviewed. The likelihood that a current employee will reach 30 years of service with the company has diminished. She also cited that the prior pension plan was underappreciated by their employees. The early retirement subsidy where one could retire with 30 years of service no longer appropriate as it would encourage employees to leave when their skills are still needed. Competition with others in the business area, who do not offer traditional defined benefit plans, needed to be addressed.Ms. Roin described the process that IBM went through to change their plan. Included in this was how they structured the transition benefit between the plans. In summary, the provided affected employees with a choice of the plans they want, an enhanced opening balance account, additional transition credits and an enhanced annuity.

September 9, 1999

Evelyn Adams

and Karen Ferguson

Evelyn Adams, an employee of IBM and a member of its Employee Coalition, and Karen Ferguson of the Pension Rights Center, read from prepared statements which are incorporated into this summary by reference.

Ms. Adams described her experience of the change in the traditional IBM pension plan to a CBP. She concentrated her remarks on the issue of disclosure and transition as well as the role and obligation of the plan administrator. In summary, she felt that IBM treatment of long service employees was inadequate. They did not provide sufficient information for employees to make an intelligent decision in the limited time just prior to conversion. She provided charts to support her claim.

Ms. Ferguson commented on architecture of the change, the positive (which she says her office has not heard of any) and negative comments and their recommendations. She expressed that the company profited at the expense of employees by citing the $200 million savings of the conversion as well as taking advantage of loopholes in the law. In many cases, employees are not likely to find out about the effects of the change until it is too late. She recommended that if choice is not given to employees, then the plan should be terminated or at least partially terminated. The company can then create a new plan which is clearly understood by all.

Ms. Uberti asked Ms. Roin if she thought the voluntary changes should be required of all plan sponsors. Ms. Roin responded that she did not think it was a good idea to require other employers to follow the same pattern of disclosure. In response to a question from Mr. McTeague, Ms. Roin answered that employees were not consulted before the change was announced.

September 9, 1999

Robert G. Chambers

Robert G. Chambers of Montgomery, McCracken, Walker and Rhoads and a representative of The Association of Private Pension and Welfare Plans, read from a prepared statement which in incorporated into this summary by reference.

Mr. Chambers discussed the potential detrimental effect on CBP and the defined benefit system of pending legislation. He suggested that the defined benefit system is in trouble as the number of plans has steadily diminished. He suggested that CBP’s are the best hope of stemming the tide and preventing plan terminations. He cited that certain pending legislation, if enacted, would present burdensome requirements to employers.(October witness testimonies are not available for this report).

1999 Index on the Working Group Studying the Trend in Defined Benefit Plans Toward Hybrid Plans (Including Cash Balance Plans) of the Advisory Council on Employee Benefit and Pension Plans

Chair: Judith F. Mazo

and Vice Chair: Rose Mary Abelson

(Actual Transcripts/Executive Summaries for the Council’s full meetings and working group sessions are available — at a cost — through the Department of Labor’s contracted court reporting service, which is Executive Court Reporters at 301-565-0064/301-589-4280 FAX.)April 7, 1999:

Agenda

Official Transcript

Executive Summary of Official Transcript

“Citicorp Makes Move to Change Pension Benefits - Firm Will Place Thousands of Citibank Workers in 'Cash-Balance' Plan” by Paul Beckett, Wall Street Journal, April 2, 1999.

“Pension Conversions Require Close Scrutiny” by Albert B. Crenshaw, Washington Post, March 28, 1999.

“CBS Is Replacing Its Pension Program With Cash-Balance Plan, Stock Options” by Ellen E.

Schultz and Kyle Pope, Wall Street Journal, March 24, 1999.

“Aetna lets older employees choose their plans” by Vineeta Anand, Pensions & Investments, March 22, 1999.

“Pomeroy, PBGC Pension Proposal To Include Cash Balance Plan Provisions” by Colleen T.

Congel, BNA Pension & Benefits Reporter, March 22, 1999.

“Bills to Tighten Cash Balance Plan Disclosure Rules Introduced in House, Senate” by Colleen T.

Congel, BNA Pension & Benefits Reporter, March 22, 1999.

“New Pension Plans Are Cash and Carry” by Fred Brock, New York Times, March 21, 1999.

“IBM Considers Adopting New Pension Plan” by Jon G. Auerbach, Wall Street Journal, March 18, 1999.

“Cash Balance Pension Plans Draw Both Praise, Criticism” by Colleen T. Congel, Erik Lekus and

Elizabeth White, BNA Pension & Benefits Reporter, March 3, 1999.

“Older Workers Fight ?Cash Balance’ Plans” and “Pension Protester: Fired for Complaining” by

Ellen Schultz, Wall Street Journal , February 11, 1999

Written Testimony Before the Working Group Provided by Kenneth S. Cohen, Senior Vice

President, Massachusetts Mutual, on April 7, 1999.May 6, 1999:

Agenda

Official Transcript

Executive Summary of Official Transcript

Summary of Comments on Defined Benefit Plans Received by the Pension Benefit Guaranty Corp. Defined Benefit Plan Working Group, provided by Stuart Sirkin after his April 6 appearance before the ERISA Advisory Council working group. July 14, 1998 date of publication.

“Why Cash Balance?”, the written testimony, including charts, by Richard Shea, Covington & Burling after his May 6 appearance.

“IBM retools pensions: New plan sweeping corporate America” by Stephanie Armour, USA Today, May 4, 1999.

“Cash balance: Best of both worlds?” by Lawrence J. Sher, PwC Kwasha HR Solutions, published in Plan Sponsor Magazine, April 1999.

“IRS Agreement Facilitates Partial Settlement in Suit Over Cash Balance Plan Conversion” by Colleen T. Congel, BNA Pension & Benefits Reporter, April 5, 1999.

Suggested Questions for Work Group Witnesses prepared by Anita Stewart for Rose Mary Abelson, vice chair, on April 27, 1999

Written testimony from Ron Gebhardtsbauer, American Academy of Actuaries, in addition to news release issued May 6 about his appearance before the working group.

Special Set of Minutes of the Meeting of April 7, 1999, prepared by Rose Mary Abelson, including synopses of the speakers for the day, Kenneth S. Cohen of Massachusetts Mutual and Stuart Sirkin and David Gustafson, both of the Pension Benefit Guaranty Corporation.June 9, 1999:

Agenda

Official Transcript

Executive Summary of Official Transcript

“Understanding Cash Balance Plans” by the ERISA Industry Committee (ERIC) plus Internet announcement of its educational campaign on behalf of Cash Balance Plans.

Reviews prepared by Judith Mazo onH.R. 1102, the Comprehensive Retirement Security and Pension Reform Act sponsored by Representatives Portman and Cardin;

The actual bill;

S. 659, the Pension Right to Know Act,” sponsored by Senators Moynihan, Robb and Kerrey.The actual bill.

An overview of the May meeting prepared by Rose Mary Abelson for the session as well as the synopsis of Richard Shea’s appearance.

Testimony of Jim Durfee, director of actuarial practice for Towers Perrin, plus news release his company issued on his appearance before the Working Group

Testimony Given on Behalf of the United Food & Commercial Workers International Union by Brian O’Konski, assistant director, Office of NegotiatedJuly 14, 1999:

Agenda

Official Transcript

Executive Summary of Official Transcript

Special Section on Cash Balance Plans from the May 31, 1999 Issue of Pensions & Investments, including:

  1. Editorial on “Dare to tell the truth;”

  2. “Cash balance catches fire: At least 325 companies have converted a total of $330 billion plus;

  3. “Opinions split on how workers fare;”

  4. “Age discrimination issue raised by EEOC, others - Commission looking at whether conversions hurt older employers;”

  5. “Other firms build on trend that Bank America initiated;”

  6. “It quacks like a DC plan, but it’s not one;”

  7. “Trouble for bank plans? IRS scrutinizes shortened retirement ages,” and

  8. A list of cash balance and hybrid pension plans.

Hybrid Plans Topic Outline prepared by Rose Mary Abelson for the Meeting.

Statements on Introduced Bills and Joint Resolutions, Senate, June 29, 1999 - Sen. Thomas Harkin Bill, S 1300, prohibiting the use of the wear away grand fathering mechanism when a defined benefit plan is converted to a cash balance plan.

“Hanging in the cash balance” by Alan Feigenbaum, from the Raging Bull website at http:\www.ragingbull.com

“Cash-balance pensions: Scrambling the Nest Egg” by Horace B. Deets, AARP Executive Director, and “Is your pension leaking? Long-termed workers see losses from new cash-balance pensions” by Robert Lewis, both in the AARP Bulletin, July/August, 1999 issue.

“Behind cash-balance pensions: A bust for older employees, young workers may benefit from controversial plans” by CNN Financial staff writer Nicole Jacoby on July 1, 1999.

“Managers, Like Other Staffers, Are Fighting Pension Cutbacks” by Ellen E. Schultz, Wall Street Journal, July 1, 1999.

“Advocates say cash-balance pension plan offers flexibility” by Christine Dugas, USA Today, June 30, 1999.

“Pension plan switches under scrutiny” by Brian Tumulty, Gannett News Service for USA Today, June 29, 1999.

“Pension changes pose risks” by Andrew Leckey in his Personal Investing column, Washington Times, June 29, 1999.

“Pomeroy Pushes for Disclosure for Cash Balance Plan Conversions” and “Senate Finance Aides Address Disclosure During Cash Balance Conversions” by Colleen T. Congel, BNA Pensions & Benefits Reporter, June 21, 1999.September 9, 1999:

Agenda

Official Transcript

Executive Summary of Official Transcript

Written statement of testimony presented by Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries on May 6 and June 9, 1999.

A packet put together by Ms. Mazo on Cash Balance Plan/Legal Issues explaining the Present Value of Accrued Benefits (Whipsaw) and Age Discrimination, and including IRS 96-8 on Cash Balance Pension Plans; U.S. Code Section 411, 26 USCS on Minimum Vesting Standards and Section 623, 29 USCS on Prohibition of Age Discrimination as well as Jerry L. Lyons v. Georgia-Pacific Corporation Salaried Employee Benefit Plan, March 22, 1999; Genevieve W. Corcoran v. Bell Atlantic Corp. September 24, 1999; Lynn Esden v. the Retirement Plan of the First National Bank of Boston, September 28, 1998.

Written Testimony of Christopher M. Bone, Actuarial Sciences Associates, Inc. on September 9, 1999.

Written Statement of Kathleen Roin, Director, Benefits, IBM Corporation, on September 9, 1999.

Written Statement of Evelyn Adams, 23-year employee of IBM Corporation, on September 9, 1999.

Written Statement of Karen Ferguson, Director of the Pension Rights Center, on September 9, 1999, plus a copy of a news release issued September 1, 1999, by the Coalition for Retirement Security, “Grassroots Coalition Calls on National Organizations to Join in Closing Pension Loopholes” and a copy of the letter the coalition sent to various organizations.

Written Testimony of Robert G. Chambers, Montgomery, McCracken, Walker & Rhoads on behalf of the Association of Private Pension and Welfare Plans on September 9, 1999 as well as an APPWP news release issued the same day “APPWP Advises DOL that Cash Balance Plans Serve Needs of Participants and Plan Sponsors”.

A series of news articles on the topic:

“Companies Cash In on New Pension Plan: But Older Workers Can Face Penalties” by Richard A. Oppel, Jr., for the New York Times, August 20, 1999 and “I.R.S. Memo Appears to Oppose a Type of Pension Conversion” by Mr. Oppel on September 2, 1999.

“IRS Reviews whether pension plans such as one IBM switched to discriminate” by Associated Press, September 1, 1999.

“New Pensions May Violate Laws, IRS Says” by Robert A. Rosenblatt, LA Times Staff Writer, September 1, 1999.

“IRS to Continue to Green Light New Pension Plan” by Ellen E. Schultz, Wall Street Journal, September 1, 1999.

“Rep. Sanders Repeats Call for Review of Cash Balance Age Discrimination Issues” on September 2, 1999, “Firm’s Conversion Disqualifies Plan: Court Should Lift Exempt Status, IRS Says” on August 30, 1999, and “Rep. Sanders Drafting Bill to Target Employers Converting to Cash Balance Plans” on August 23, 1999. All appeared in BNA Pension & Benefits Daily and were written by Colleen Congel.

Court Filings by Tax Analysts, Feb. 10, 1999, which is Steven Seidlitz, et al, v. Commissioner, Tax Ct. Dkt. No. 334-99, U.S. Tax Court as regards Onan Corporation, in addition to the Amended Petition for Declaratory Judgment (Retirement Plan) on May 7, 1999, and Answer to Amended Petition, August 13, 1999.

Georgia-Pacific Corporation Salaried Employees Retirement Plan and Georgia-Pacific Corporation on appeal from the Judgment of the U.S. District Court for the Northern District of Georgia (Brief for the U.S. as Amicus Curiae in support on the appellant and for several of the Judgment Below.) August 1999.

August 16, 1999 letter to Louis V. Gerstner, Jr., Chief Executive Officer of IBM Corporation from Sen. James M. Jeffords, Vt.; Mr. Gerstner’s response to the Senator dated August 17, 1999, and the Senator’s August 20, 1999 back to Mr. Gerstner.

Written Statement from Donald W. Shuper, Redmond, Wash., a Boeing retiree who wanted to express his comments on his company’s conversion to such a plan.

A series of letters from members of IBM’s Employee Coalition, including:

Tim Barritt, Burlington, Vt.

   Bertha Basil, Austin, Tex.

   Peter Volkmar, Raleigh, N.C.

   Jay W. Johnson, Raleigh, N.C.

   Calvin Amason, Communications Director for the Coalition, Portland, Ore.

   Alan Crudden, Austin, Tex.

   Sam Gutierrez, Jr., Austin, Tex.

   Three articles from Contingencies, a publication of the American Academy of Actuaries, September 8, 1999, including:

   What Are Cash Balance Pension Plans? - An Overview;

   A Workable Alternative to Defined Benefit Plans by Larry Sher, Principal and Chief Actuary at PricewaterhouseCoopers;

Some Serious Questions About Cash Balance Plans by Norman Stein, Douglas Arant, Professor of

   Law, University of Alabama Law School, and

   There’s No Need to Retired Traditional Pensions by David Strauss, Executive Director of

   the Pension Benefit Guaranty Corp.October 6, 1999:

Agenda

Official Transcript

Executive Summary of Official Transcript

The Use of Demographic Analysis When Designing Retirement Plans,” the Statement of Eric Lofgren, F.S.A.of Watson Wyatt Worldwide, and slides he used in a presentation March 16, 1999, at the Enrolled Actuaries Meeting.

Statement and Testimony Prepared by Treasury Benefits Tax Counsel J. Mark Iwry, before the September 21 Committee on Health, Education, Labor and Pensions, U.S. Senate.

Statement before the Senate Health, Education, Labor and Pensions Committee Hearing on Hybrid Plans by Jack VanDerhei, Temple University, and Fellow, Employee Benefits Research Institute, September 21, 1999.

Testimony of Lawrence Lorber, partner with the law firm of Sonnenschein Nath & Rosenthal on September 21, at the Hybrid Plans Hearing.

Statement before the Hybrid Plans Hearing on the Impact on Older Workers of Cash Balance Pension Plan Conversions by David Certner, Federal Affairs, AARP, on September 21 as well as a table called Frontloaded Plan Interest Credits Accrued by Projecting to NRA, prepared for “Litigation Issues in Cash Balance Plans” by Howard Shapiro and Robert Rachal, Glasser Legal Works Seminars, 1999.

A letter dated September 17, 1999 from Kathleen Roin, who represented IBM at the September 9 meeting and was responding to statements made by other witnesses at the hearing. Included was a fact sheet on details of IBM Pension Plan Adjustments made September 17 as well as the letter sent to affected IBM staff.Members of the 1999 Working Group Studying the Trend in Defined Benefit Plans

Toward Hybrid Plans

Chair: Judith Mazo

The Segal Company

Vice Chair: Rose Mary Abelson

Northrup Grumman Corp.

Michael J. Gulotta

Actuarial Sciences Associates, Inc.

Michael R. Fanning

Central Pension Fund International Union

of Operating Engineers and Participating Employers

Janie Greenwood-Harris

Mercantile BanCorporation

Eddie Brown

Brown Capital Management

Neil Grossman

William M. Mercer

Michael J. Stapley

Deseret Mutual Benefit Association

Richard Tani, Retired, William M. Mercer

Patrick N. McTeague

McTeague, Higbee, MacAdam, Case, Watson & Cohen

Thomas J. Mackell, Jr.

Ex Officio as the Advisory Council vice chair

Massachusetts Financial Consultants Inc.

Barbara Ann Uberti

Ex Officio as the Advisory Council chair

Wilmington Trust Company