As pensions fade, some firms try hybrid plans

Opponents, however, have been vocal. They certainly were when IBM converted its traditional pension system to a cash-balance plan. Thousands of older employees - in the 40- to 60-year range - charged that the plan illegally cut their benefits.

The federal district judge dealing with the IBM lawsuit agreed. He ruled over a year ago that IBM's new plan discriminated against some 130,000 current and former older workers. The judge is expected to rule any day now on how much IBM owes them.

Last month, IBM agreed to settle part of the suit by paying $320 million to the aggrieved workers. One crucial question remains: whether cash-balance plans, by definition, discriminate against older workers.

Other courts have ruled that hybrid plans are not discriminatory. That has encouraged IBM to promise it will appeal the case. Other firms have grandfathered their older workers to avoid such suits.

About 57 percent of full-time workers are covered by some kind of company retirement plan, a figure that has changed little in recent years. But the type of plan that covers them has changed dramatically. In 1980, 60 percent of such plans were traditional pensions, called defined-benefit plans. By 2000, that share had fallen to 13 percent. But the number of 401(k) and other defined-contribution plans soared in that period.

Cash-balance plans are classified as defined-benefit plans because the employer both provides all the money and invests it. While traditional pensions have fallen out of favor, the number of companies offering cash-balance plans has risen dramatically. Already, a fifth of large companies have converted traditional pension plans to cash-balance plans. About 4.4 million workers were covered by cash- balance plans in 1999. By 2002, that number had grown to 7.3 million.

Since then, such conversions have stalled, partly because of the still unresolved IBM suit, partly because of regulatory and tax questions. For example, the Internal Revenue Service has not provided "determination letters" on the tax-exempt status of employer contributions to cash-balance conversions. It has granted that tax advantage to new cash-balance plans.

Another key question is what to do with older workers in such conversions. While current law prohibits employers from reducing pension benefits that have been earned by employees once they're vested, they can enhance or reduce future benefits that have not yet been earned. The problem is that long-time employees in traditional pension plans figure that they have an implicit bargain with their firms for a level of pensions higher than they've legally earned.

Now, Rep. John Boehner (R) of Ohio is trying to draft legislation that would remove the legal uncertainty for cash- balance plans. As chairman of the House Education and the Workforce Committee, he held hearings last July and has met with parties on various sides of the issues. But no consensus has emerged. And Mr. Boehner hasn't settled on key details.

His goal is to have a bill ready by year end for consideration by the new Congress in 2005. Fact sheets issued by Boehner's committee hint that his bill will certainly reflect business concerns. But he also notes that pension wealth often starts to decline for workers in traditional pension plans in their early 60s.

Page: 1 | 2