The Bush administration is proposing controversial new pension rules that, if adopted, will make it easier for employers to implement cash-balance pension plans, a type of defined-benefit plan that looks like a 401(k). But unlike traditional pension plans, where workers' retirement benefits increase the longer they stay, workers under cash-balance plans accumulate benefits at the same rate no matter how long they stay. Some large companies have saved millions by switching to them.
Cash-balance plans have been around since the mid-1980s, but employers who converted to them were vulnerable to age-discrimination claims and didn't receive tax-exempt status for the plan from the IRS-two things these rules will change.
Critics, however, say cash-balance plans discriminate against baby boomers, particularly those who've spent many years at one company but are still 10 years away from retirement. These workers aren't old enough to be protected by rules that obligate employers to stick to the original plan if the employee is a few years from retirement."Employees mid-40s and up are going to get hammered by this," says Jeff Gates, who crafted federal pension law in the 1980s as benefits counsel to the U.S. Senate Finance Committee.
Then there's the ethical question of switching plans on employees who have been counting on a pension. "[The company] says 'That $1,800 a month you were expecting? It's going to be 30 to 50 percent less,'" Gates says. "That's a major ethical issue."
Large employers have offered credits added to a worker's cash-balance plan to ease the transition for older workers, says Eva T. Cantarella, senior litigation counsel for pensions and employee benefits at Hertz, Schram & Saretsky in Bloomfield Hills, Michigan. "Companies that haven't done that have been accused of being age-discriminatory," Cantarella says. She says cash-balance plans might work better for young companies that aren't converting from an older pension and anticipate higher turnover. If you have an existing pension plan and employees over 40, however, tread carefully.