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Proposed Cash Balance and Hybrid Pension Legislation – Two Steps Forward, Two Steps Back
WASHINGTON, February 17, 2004 — The Treasury Departments legislative recommendations regarding hybrid pension plans contain some positive news for employers and employees. If adopted, they would provide that cash balance and other hybrid pension plans are generally not age discriminatory. In addition, Treasury has addressed the counterintuitive and anti-employee “whipsaw” issue so that cash balance plan sponsors would no longer be penalized for providing employees with interest credits that exceed Treasury bond rates.
“Clearly, the Administration is seeking to bring greater certainty to the design and operation of retirement plans, and we greatly appreciate its efforts,” said Janet VanAlsten, Global Benefits Director of The Dow Chemical Company, on behalf of the Coalition to Preserve the Defined Benefit System. “Validating the hybrid plan design is one important step in this process.”
However, the proposals overly broad rules for future conversions of traditional defined benefit plans to hybrid plans would be problematic for the future of the defined benefit system and should be overhauled. Also, since the proposed rules on age discrimination are only prospective, the 1,200 employers that have already adopted hybrid plans in good faith are not given the same compliance clarity that newly formed hybrids would enjoy.
“We are disappointed that the Administrations recommendations — which are prospective only in nature — offer no assistance to the many employers with existing hybrid plans that have been eagerly awaiting guidance that clarifies the legitimacy of their plans and conversions,” added VanAlsten.
While the proposal indicates that transition rules are intended to protect “older workers” in cash balance conversions, the rules as written would apply to all participants regardless of age and service at conversion. This provision would be unworkable, and any mandatory transition approach should be focused on workers approaching retirement age.
For example, the proposal would impose a “hold harmless” period after a conversion, during which even a 20-year-old participant with a single year of service would be guaranteed continued benefit accruals for five years that are at least as generous as the benefits the employee would have earned under the prior plan.
The proposal would also require employers that had heavily subsidized early retirement benefits in the past to continue adding to the subsidy. At present, employers can subsidize early retirement benefits to induce employees to retire early when warranted, but not add to the already accrued subsidy in the future if their business conditions change. Under the proposed changes, employers would maintain this flexibility for every type of plan change except for conversions to hybrids. In order to avoid these unprecedented handcuffs on future benefits, employers that would have remained in the defined benefit system will instead freeze their defined benefit plan if they want to implement an individual account-based plan.
Despite the Administrations good intentions, requirements that so significantly restrict employers flexibility to make plan changes would surely contribute to more employers exiting the defined benefit system.
The Coalition to Preserve the Defined Benefit System has more than 65 members ranging in size from small businesses to some of the largest corporations in the U.S. Together, members provide retirement benefits for more than 1 million American workers. For more information, go to www.preservedb.com
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