Young and Old Hurt in Switch to Cash Balance
Pensions & Investments (10/02/00) Vol. 28, No. 20 p.1; Anand, Vineeta

The General Accounting Office (GAO) recently released two reports on cash balance plans, concluding that older workers suffer the most when employers convert traditional pension plans into cash balance plans--but younger workers are not much better off. Most employers do not vest employees sooner than five years, and young workers do not usually stay with a job that long. According to the studies, employers who are converting their plans do not usually delineate the full impact of the changes, which adds to employee confusion. Sen. Charles E. Grassley (R-Iowa) requested the reports, along with Reps. Robert E. Andrews (D-N.J.), Major R. Owens (D-N.Y.), and William J. Coyne (D-Penn.). Meanwhile, the Senate is considering a pension package that could firm the position of cash balance plans while making it more difficult for plan participants to sue employers for age discrimination. One GAO report states that cash balance plans can result in a declining rate of normal retirement benefit accrual over time; the agency found that the employees who do best in cash balance plans are those who stay with a company for at least 10 years. The GAO recommends that legislators adopt changes in the federal pension law and the tax code so that companies can no longer have periods when older workers earn no new benefits during plan conversion, but there is already a provision along those lines in the pension package. The agency also found that none of the Fortune 1,000 companies with cash balance plans that it surveyed explained the difference between the hypothetical account balance and the accrued benefit. The GAO also recommended that the Internal Revenue Service stop approving new cash balance plans until it issues regulations that make it clear that the plans are different from defined benefit or defined contribution plans. Employer groups support the latter recommendation.

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