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94-751 PDF 2004

EXAMINING CASH BALANCE 

PENSION PLANS: SEPARATING 

MYTH FROM FACT

HEARING

BEFORE THE

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

July 7, 2004

Serial No. 108-67

Printed for the use of the Committee on Education and the Workforce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

or 

Committee address: http://edworkforce.house.gov 

(II)

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice Chairman 

Cass Ballenger, North Carolina 

Peter Hoekstra, Michigan 

Howard P. ‘‘Buck’’ McKeon, California 

Michael N. Castle, Delaware 

Sam Johnson, Texas 

James C. Greenwood, Pennsylvania 

Charlie Norwood, Georgia 

Fred Upton, Michigan 

Vernon J. Ehlers, Michigan 

Jim DeMint, South Carolina 

Johnny Isakson, Georgia 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Patrick J. Tiberi, Ohio 

Ric Keller, Florida 

Tom Osborne, Nebraska 

Joe Wilson, South Carolina 

Tom Cole, Oklahoma 

Jon C. Porter, Nevada 

John Kline, Minnesota 

John R. Carter, Texas 

Marilyn N. Musgrave, Colorado 

Marsha Blackburn, Tennessee 

Phil Gingrey, Georgia 

Max Burns, Georgia 

George Miller, California 

Dale E. Kildee, Michigan 

Major R. Owens, New York 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Ron Kind, Wisconsin 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Betty McCollum, Minnesota 

Danny K. Davis, Illinois 

Ed Case, Hawaii 

Rau ́l M. Grijalva, Arizona 

Denise L. Majette, Georgia 

Chris Van Hollen, Maryland 

Tim Ryan, Ohio 

Timothy H. Bishop, New York

Paula Nowakowski, Staff Director 

John Lawrence, Minority Staff Director 

(III)

C O N T E N T S 

Page

Hearing held on July 7, 2004 .................................................................................

Statement of Members: 

Boehner, Hon. John A., Chairman, Committee on Education and the 

Workforce ....................................................................................................... 1

Prepared statement of ............................................................................... 4

Miller, Hon. George, Ranking Member, Committee on Education and 

the Workforce ................................................................................................ 5

Norwood, Hon. Charlie, a Representative in Congress from the State 

of Georgia, statement submitted for the record ......................................... 98

Porter, Hon. Jon, a Representative in Congress from the State of Nevada, 

statement submitted for the record ............................................................. 97

Statement of Witnesses: 

Clark, Dr. Robert, Professor, College of Management, North Carolina 

State University, Raleigh, NC ..................................................................... 30

Prepared statement of ............................................................................... 31

Collier, Ellen, Director of Benefits, Eaton Corporation, Cleveland, OH ...... 20

Prepared statement of ............................................................................... 22

Delaplane, James, Jr., Esq., Attorney, American Benefits Council, Washington, DC ..................................................................................................... 9

Prepared statement of ............................................................................... 10

Hill, Robert, Esq., Partner, Hill & Robbins, Denver, CO .............................. 40

Prepared statement of ............................................................................... 42

Pfotenhauer, Nancy, President, Independent Women’s Forum, Washington, DC ..................................................................................................... 47

Prepared statement of ............................................................................... 49

Additional materials supplied: 

AARP, letter submitted for the record ............................................................ 117

American Federation of Labor and Congress of Industrial Organizations, 

statement submitted for the record ............................................................. 116

Bureau of Labor Statistics, U.S. Department of Labor, table submitted 

for the record ................................................................................................. 147

Committee on Education and the Workforce, fact sheets submitted for 

the record ....................................................................................................... 73

Committee on Education and the Workforce, Democratic Staff, press release submitted for the record ..................................................................... 151

Companies That Have Converted to Cash Balance Pension Plans, submitted for the record ..................................................................................... 140

Cutrone, Larry, statement submitted for the record ..................................... 119

Employers Awaiting IRS Determination Letters Under the Cash Balance 

Moratorium, submitted for the record ......................................................... 143

ERISA Industry Committee, statement submitted for the record ................ 87

Krueger, Janet, statement submitted for the record ..................................... 120

National Association of Manufacturers, statement submitted for the 

record ............................................................................................................. 104

National Committee to Preserve Social Security and Medicare, statement 

submitted for the record ............................................................................... 149

Tarlau, Jimmy, statement submitted for the record ..................................... 122

Tax Notes, statement submitted for the record ............................................. 124

The Principal Financial Group, statement submitted for the record ........... 105

U.S. Chamber of Commerce, letter submitted for the record ....................... 83

U.S. Treasury Department, Office of Public Affairs, letter submitted for 

the record ....................................................................................................... 132

Watson Wyatt, press releases submitted for the record ................................ 111

Page

IV

Additional materials supplied—Continued

Winston, Janice, statement submitted for the record ................................... 121

(1)

EXAMINING CASH BALANCE PENSION PLANS: 

SEPARATING MYTH FROM FACT 

Wednesday, July 7, 2004

U.S. House of Representatives 

Committee on Education and the Workforce 

Washington, DC 

The Committee met, pursuant to call, at 10:33 a.m., in room 

2175, Rayburn House Office Building, Hon. John A. Boehner 

(Chairman of the Committee) presiding. 

Present: Representatives Boehner, Johnson, Isakson, Osborne, 

Kline, Carter, Blackburn, Burns, Miller, Kildee, Payne, Andrews, 

Woolsey, Tierney, Kind, Wu, McCollum, Van Hollen, and Bishop. 

Staff Present: Stacey Dion, Professional Staff Member; Kevin 

Frank, Professional Staff Member; Ed Gilroy, Director of Workforce 

Policy; Richard Hoar, Staff Assistant; Donald McIntosh, Staff Assistant; Alexa Marrero, Press Secretary; Greg Maurer, Coalitions 

Director for Workforce Policy; Jim Paretti, Workforce Policy Counsel; Deborah L. Samantar, Committee Clerk/Intern Coordinator; 

Kevin Smith, Communications Advisor; Jo-Marie St. Martin, General Counsel; Jody Calemine, Minority Counsel Employer-Employee 

Relations; Margo Hennigan, Minority Legislative Assistant/Labor; 

Marsha Renwanz, Minority Legislative Associate/Labor; and 

Michele Varnhagen, Minority Labor Counsel/Coordinator. 

Chairman BOEHNER. A quorum being present, the Committee on 

Education and the Workforce will come to order. 

We are holding this hearing today to hear testimony on ‘‘Examining Cash Balance Pension Plans: Separating Myth from Fact.’’ 

under the Committee rules, opening statements are limited to the 

Chairman and Ranking Member. Therefore, if other Members have 

opening statements, they will be included in the hearing record. 

With that, I ask unanimous consent that the hearing record remain open for 14 days to allow Members’ statements and other extraneous material referenced during the hearing to be submitted in 

the official hearing record. Without objection, so ordered. 

STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

I want to thank everyone for coming to the eighth in our series 

of hearings on defined benefits pension plans, a topic that is fairly 

timely. Cash balance plans have received a lot of attention recently, producing rhetoric that has often been misleading, if not in 

2

fact false. Today we hope to separate myth from fact about cash 

balance plans. 

As we all know, the number of defined benefit plans has declined 

significantly over the last 20 years from 114,000 plans in 1985 to 

31,000 plans last year, and the entire defined benefit system, I believe, remains at risk. Some experts have suggested that cash balance plans, which are types of defined benefit plans, offer today’s 

workers the type of secure and portable benefit that can help save 

and preserve the overall system. Unfortunately, fewer and fewer 

companies are offering cash balance plans because of a recent wave 

of litigation. 

Before I talk about this specifically, I would like to discuss some 

facts about how these plans work. Under cash balance plans, workers earn portable benefits through monthly pay and interest credits 

and benefits are earned more evenly over a career span, not just 

at the end of the worker’s career. This can result in greater retirement savings for workers who do not remain with the same employer for their entire career. As a result, a broader group of employees, including lower income workers and women, earn greater 

benefits with shorter service under cash balance plans than traditional plans. 

According to a study published by Watson Wyatt in 2000, more 

than 80 percent of participants fare better with a cash balance 

plan. The value of the benefit in a traditional plan spikes for workers who qualify for an early retirement subsidy, typically in their 

mid-50’s, but then declines if they fail to retire at a specific age and 

keep working. As a result, traditional plans are advantageous only 

for the small proportion of employees who work for the same employer for 20 to 30 years and retire in their mid-50’s. 

Conversely, traditional plans are disadvantageous for younger 

employees, for workers who change jobs or interrupt their careers, 

and for older workers who continue working after early and normal 

retirement age. 

The Employee Retirement Income Security Act, ERISA, prohibits 

employers from cutting back or reducing any pension benefits that 

have been earned by employees once they vest in their pension 

plan. Despite this current law protection, some critics have continued to express concern over cash balance conversions despite the 

fact that a large majority of them have been handled properly and 

legally. 

The real issue here is about a small number of prospective retirees’ expectation of receiving the full value of early retirement subsidies that have not yet been earned. This is not about normal retirement benefits. Rather, I am concerned that cash balance critics 

are focused not on providing meaningful retirement benefits to our 

overall workforce, but solely on protecting a small fraction of employees who could afford to retire early. 

It is important to note that under the voluntary pension system, 

let me just repeat that one more time for everyone, under our voluntary pension system, all defined benefit plan sponsors may 

change benefit formulas prospectively to either enhance or reduce 

future benefits that have not yet been earned by an employee. All 

employers need the flexibility to determine what is appropriate for 

the needs of their workers and their business. If this flexibility is 

3

taken away or if Congress were to unilaterally mandate certain 

pension benefits, employers would leave the voluntary pension system altogether and the defined benefit system would all but disappear. 

The recent wave of litigation surrounding cash balance plans has 

raised concerns from employers, workers, and policymakers alike. 

One well-documented court case involves IBM, but the initial ruling runs counter to, in my opinion, existing law and a large body 

of other court decisions. In this case the judge found the cash balance plan design inherently age discriminatory because equal pay 

credits for younger workers have a longer period of time to earn interest and accrue benefits before retirement than the same pay 

credits for older workers. This interpretation essentially means it 

would be age discriminatory to make equal contributions on behalf 

of workers with different ages. This is inconsistent with every other 

pension design and this logic could make a basic savings account, 

401(k) plans, and even Social Security benefits automatically age 

discriminatory. We are not here to debate the IBM case specifically, 

but we also need to make sure cash balance plans aren’t forced into 

extinction at the expense of the interests of American workers. 

Most courts have ruled no age discrimination occurs with cash 

balance plans if the pay and interest credits given to older employee accounts are equal to or greater than those of younger employees. The most recent ruling on this topic, issued just last 

month in the Tootle case, agrees that cash balance plans are not 

inherently age discriminatory. 

I would like to dispel another myth about these plans. The 

switch to cash balance plans is not motivated by cost savings, but 

rather by pressures imposed by an increasingly mobile workforce 

as well as fierce competition. Under current law, employers can 

freeze or terminate their traditional plan without the complexity or 

expense of converting to a cash balance plan, and most actually 

spend more on retirement benefits after the conversion as they did 

before. In a world where most employees will not spend 20 to 30 

years working for the same employer, the steady accrual of benefits 

under a cash balance plan provides greater retirement security 

than the distant accrual of back-loaded benefits under a traditional 

defined benefit plan. 

Our ultimate goal here is to ensure cash balance plans remain 

a viable option for employers who want to remain in the defined 

benefit system, and I think most of the Members here would agree 

that defined benefit systems, defined benefit plans are an important components of a solid retirement security for American workers. 

It is my hope that we can move forward with reforms to 

strengthen the cash balance plans for all workers as we craft a 

comprehensive proposal to reform and strengthen the defined benefit system. 

With that, I look forward to hearing from our witnesses and 

working with my colleagues on this issue as we move ahead. With 

that, I yield to my friend and colleague the Ranking Member, Mr. 

Miller. 

[The prepared statement of Chairman Boehner follows:]

4

Statement of Hon. John Boehner, Chairman, Committee on Education and 

the Workforce 

I’d like to thank everyone for coming to the eighth in our series of hearings on 

defined benefit pension plans for a topic that is particularly timely. Cash balance 

plans have received a lot of attention recently, producing rhetoric that has often 

been misleading if not false. Today, we hope to separate myth from fact. 

As we all know the number of defined benefit plans has declined significantly over 

the last 20 years, from 114,000 in 1985 to 31,000 last year, and the entire defined 

benefit system remains at risk. Some experts have suggested that cash balance 

plans, which are a type of defined benefit plan, offer today’s workers the type of secure and portable benefit that can help save and preserve the overall system. Unfortunately, fewer and fewer companies are offering cash balance plans because of a 

recent wave of litigation. 

Before I talk about this specifically, I’d like to discuss some facts about how these 

plans work. Under cash balance plans, workers earn portable benefits through 

monthly pay and interest credits, and benefits are earned more evenly over a career 

span, not just at the end of a worker’s career. This can result in greater retirement 

savings for workers who do not remain with the same employer for their entire career. As a result, a broader group of employees—including lower-income workers 

and women—earn greater benefits with shorter service under cash balance plans 

than traditional plans. According to a study published by Watson Wyatt in 2000, 

more than 80 percent of participants fare better with a cash balance plan. 

The value of the benefit in a traditional plan spikes for workers who qualify for 

an early retirement subsidy, typically in their mid–50s, but then declines if they fail 

to retire at a specific age and keep working. As a result, traditional plans are advantageous only for the small proportion of employees who work for the same employer for 20 to 30 years AND retire in their mid–50s. Conversely, traditional plans 

are disadvantageous for younger employees, for workers who change jobs or interrupt their careers, and for older workers who continue working after early and normal retirement age. 

The Employee Retirement Income Security Act (ERISA) prohibits employers from 

cutting back or reducing any pension benefits that have been earned by employees 

once they vest in their pension plan. Despite this current law protection, some critics have continued to express concern over cash balance conversions despite the fact 

a large majority of them have been handled properly and legally. 

The real issue here is about a small number of prospective retirees’’ expectation 

of receiving the full value of early retirement subsidies that have not yet been 

earned. This is not about normal retirement benefits. Rather, I’m concerned that 

cash balance critics are focused not on providing meaningful retirement benefits to 

our overall workforce, but solely on protecting a small fraction of employees who can 

afford to retire early. It is important to note that under the voluntary pension system all defined benefit plan sponsors may change benefit formulas prospectively to 

either enhance or reduce future benefits that have not yet been earned by an employee. All employers need the flexibility to determine what is appropriate for the 

needs of their workers and their business. If this flexibility is taken away or if Congress were to unilaterally mandate certain pension benefits, employers would leave 

the voluntary pension system altogether and the defined benefit system would all 

but disappear. 

The recent wave of litigation surrounding cash balance plans has raised concerns 

from employers, workers, and policymakers alike. One well-documented court case 

involves IBM, but the initial ruling runs counter to existing law and a large body 

of other court decisions. In this case, the judge found the cash balance plan design 

inherently age discriminatory because equal pay credits for younger workers have 

a longer period of time to earn interest and accrue benefits before retirement than 

the same pay credits for older workers. This interpretation essentially means it 

would be age discriminatory to make equal contributions on behalf of workers with 

different ages. This is inconsistent with every other pension design and this logic 

would make a basic savings account, 401(k) plans, and even Social Security benefits 

automatically age discriminatory. We’re not here to debate the IBM case, but we 

also need to make sure cash balance plans aren’t forced into extinction at the expense of the interests of workers. 

Most courts have ruled no age discrimination occurs with cash balance plans if 

the pay and interest credits given to older employee accounts are equal to or greater 

than those of younger employees. The most recent ruling on this topic, issued just 

last month in the Tootle case, agrees that cash balance plans are not inherently age 

discriminatory. 

5

I’d like to dispel another myth about these plans. The switch to cash balance 

plans is not motivated by cost savings, but rather pressures imposed by an increasingly mobile workforce as well as fierce competition. Under current law, employers 

can freeze or terminate their traditional plan without the complexity or expense of 

converting to a cash balance plan, and most actually spend more on retirement benefits after the conversion as before. In a world where most employees will not spend 

20 to 30 years working for the same employer, the steady accrual of benefits under 

a cash balance plan provides greater retirement security than the distant accrual 

of back-loaded benefits under a traditional plan. 

Our ultimate goal is to ensure cash balance plans remain a viable option for employers who want to remain in the defined benefit system and workers who prefer 

the portable and secure benefit this option provides. It’s my hope we can move forward with reforms to strengthen cash balance plans for all workers as we craft a 

comprehensive proposal to reform and strengthen the defined benefit pension system. With that, I look forward to hearing from our witnesses and working with my 

colleagues on this issue as we move ahead. 

STATEMENT OF HON. GEORGE MILLER, RANKING MEMBER, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

Mr. MILLER. Thank you, Mr. Chairman, and I want to thank you 

very much for holding this hearing. I think it is long overdue. In 

many ways today’s economy is hard on American families. Blue collar and white collar employees alike are being fired, outsourced, 

and downsized. Their real wages are declining, and on top of that 

their health care and retirement benefits are being reduced while 

costs are going up. 

People who work hard every day year after year have dreams 

about their retirement. They plan for it. But then with little warning their employers tear up those retirement plans. That is the context in which this hearing takes place. 

For hard working middle-class families, our Nation’s pension system is in crisis. We all know that an increasing number of employers are bailing out of the defined benefit plan. That is their decision. Companies used to believe it was the best way to attract and 

retain a qualified workforce. And while I personally believe that 

companies and workers alike benefit from a traditional benefit 

plan, Congress cannot require these companies to provide one. But 

Congress can and must require that companies abide by the law. 

The question for Congress now is what exactly is the law going 

to be when it comes to the new world of changing pension plans. 

After the Enron debacle, the stock market downturn of 2000, 

401(k) plans were no longer the golden child that we thought they 

were. With median account balances of approximately $13,000 it is 

highly unlikely that 401(k) plans will provide adequate retirement 

benefits for a majority of workers covered by them. But, then 

again, 401(k) plans were never originally designed as a retirement 

plan. They were designed to increase national savings. 

There are many in Congress and the pension community who 

argue that hybrid pension plans like the cash balance plans can be 

the future of the retirement system. Congress needs to have that 

debate. This debate must be fact based and honest and we should 

begin by acknowledging that there is a lot we do and a lot we do 

not know about cash balance pension plans. We know that during 

the 1990’s hundreds of large companies amended their traditional 

defined benefit plans and adopted cash balance pension plans instead. We know that over 8 million workers and retirees were afVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 H:\DOCS\94751 EDUWK PsN: NNIXON
6

fected. We know that many workers lost pension benefits that they 

had every reason to expect to receive. 

The General Accounting Office found that without transition protection, older workers, workers over 45, can lose up to 50 percent 

of their expected pension benefits. What we do not know, however, 

is whether all of these plans in these conversions comply with the 

laws protecting workers’ pensions generally and are protecting 

them from age discrimination. ERISA, our governing Federal pension law, does not recognize cash balance plans since these plans 

did not exist when the law was enacted in 1974. 

During the time the cash balance plans were being created no 

one ever came to Congress and asked us to amend ERISA to include these plans. Congress was mostly unaware of how they 

worked. The consultants who created cash balance plans sought the 

approval of the Treasury Department and the IRS in particular. 

The IRS approved most of these plans, although only as far as 

their adherence to existing tax code. The IRS did not examine the 

plans to see whether or not they were fair to older workers or 

whether they violated provisions of law against age discrimination 

in employee benefits. There was disagreement within the IRS on 

the legality of these plans, and then along came IBM, as you have 

noted, Mr. Chairman. 

In 1999 IBM announced it intended to convert its traditional 

plan to cash balance. IBM only gave its workers a handful of weeks 

to prepare for that change. It only protected workers who were 5 

years from retirement or with 25 years of service. IBM put a pension calculator on the company Web site and pulled it when workers started figuring out that they would lose benefits under the 

new plan. 

The computer savvy workers that worked at IBM quickly used 

the Internet to mobilize a grass roots army to express their concerns to Congress and we ended up with a moratorium. In a callous 

move, which many believe proposed serious dangers to the retirement security of millions of employees, the Bush administration in 

2001 tried to overcome the controversy surrounding the cash balance plans by issuing draft regulations lifting the moratorium. 

Older workers can’t earn enough under cash balance plans and 

they don’t have time to go to another company and start again, 

particularly in an economy that is producing too few jobs. These 

are the workers that Congress needs to protect, and that was the 

concern that was raised when the Bush plan was announced, that 

people would not have the ability to protect the retirement that 

they had come to expect upon. But the Congress on a bipartisan 

basis voted to stop the regulations and require Treasury to propose 

legislation that would protect older workers. 

The administration finally relented to the congressional public 

opinion and withdrew the proposed regulations, and that is why we 

are here today. When the Treasury formally withdrew the rejected 

regulations in June, it announced it would work with Congress to 

achieve the legislation based upon the framework President Bush 

put forth in his 2005 budget. But the present proposal is still far 

off the mark when it comes to protecting older workers and their 

pensions. That is the challenge before us. How do we assure fair 

7

protection for older workers and pension plans while allowing companies the flexibility and employees the flexibility that they need? 

Most of these workers are too old to start over again. They may 

have given 20 or 30 years of their working life to the companies 

and they are stuck. I think that is the issue that we have tried to 

raise with Treasury, we tried to raise with the administration and 

found bipartisan support, and that really is that we have got to 

allow workers to have a choice in this and to make a determination 

about their pension benefit that will allow the company to change 

plans but at the same time protect these individuals. 

In many instances these are not mom and pop low-profit margin 

companies when we discuss these issues. As you know, it is AT&T, 

American Express, Citicorp, Compaq, CSX, Georgia Pacific, Prudential and hundreds more. Congress needs to decide what the future of these cash balance plans should be. 

Representative Bernie Sanders and I and 134 other Republicans 

and Democrats introduced legislation to require workers at age 40 

or older with 10 or more years of service to be provided a choice 

between the old and new plans. Treasury Secretary Snow readily 

admits this was very similar to what he did when he was chief executive at CSX. CSX gave its workers a choice between plans. I 

think I quote him correctly when he said, I believe he was the director of Verizon when Verizon made the decision to finally, after 

much turmoil, to give its employees the choice. 

It is what the Congress did when the Congress changed its pension plans for Members. Members went down, they sat down with 

an analyst, they decided which plan they thought would be better 

for them given their expectations of how long they would stay here, 

whether they would leave or what have you, and they made that 

choice. I think that that is the kind of fairness that we are seeking 

when we look forward to these changes in the pension plans. 

But it is important, Mr. Chairman, and I want to commend you 

for giving the time and attention and resources of this Committee 

to this issue, because it is absolutely fundamental to the economic 

well-being of our country and to our families. 

I would add one final note, that I think while we consider whether or not people are going to make this choice and they make the 

decisions whether they go into a 401(k) and how that 401(k) is administered, we must also look at those components of it. We have 

seen too many headlines where there is a lack of transparency, 

there is a difference in practices on fees that are charged, the purpose of those fees. Again, this morning we see the SEC has renewed and asked additional questions about how 401(k) plans are 

put into different funds, to different investment instruments without transparency. What are the reasons for those fees they are paying? It adds up to about $10 billion a year that people are paying. 

Does it really, in fact, benefit the investors? 

I think that as we think about the ability of employers and employees to utilize these other investment and retirement instruments we have got to make sure that there is transparency for the 

employer, for the employees, as they make those decisions. Because 

it appears that more and more families are going to be relying on 

their decisions about their retirement and even in the case where 

the employer helps them with, that we have got to make sure that 

8

they are not influenced, as was reported in the paper today where 

they said there was substantial evidence that certain mutual funds 

because of payments they received from fund companies or their investor advisers as part of sales agreements, that people were 

placed in those investments to get high cost and poorly performing 

funds into a 401(k) or similar retirement plans. 

I think we have got to question those activities, and employees 

and employers both have got to understand the risks that are involved here and insist upon that kind of transparency. Thank you. 

Chairman BOEHNER. It is my pleasure to introduce our distinguished panel of witnesses today. Our first witness is Mr. James 

Delaplane, Jr., or as most of us know him, Jamie Delaplane. He is 

a partner in the law firm of Davis & Harman, LLP, where he 

serves as special counsel to the American Benefits Council, which 

is the national association representing the employee benefits interest of major U.S. employers. Mr. Delaplane also represents financial institutions, employers and employer coalitions, trade associations, and public policy organizations on a full range of legislative regulatory matters affecting employee benefits. 

We will then hear from Ms. Ellen Collier. Ms. Collier is the Director of Benefits for Eaton Corporation. Eaton has 51,000 employees worldwide and sells products to customers in more than 100 

countries. Ms. Collier is responsible for the strategy, design, communication, legal compliance and delivery of the employee benefits 

program for Eaton’s 27,000 North American employees. 

We will then hear from Dr. Robert Clark. Dr. Clark is a Professor of Economics and Business Management at North Carolina 

State University. Professor Clark has conducted research examining the retirement decisions, the choice between defined benefit 

and defined contribution plans, the impact of pension conversions 

to defined contribution and cash balance plans, the role of information and communications on 401(k) contributions, government regulation of pensions and Social Security. 

Then we will hear from Mr. Robert Hill. Mr. Hill is an attorney 

in private practice in the Denver, Colorado, law firm of Hill & Robbins. Mr. Hill has represented employees in several lawsuits challenging the legality of conversions from traditional defined benefit 

plans to cash balance plans, including being the lead counsel for 

the plaintiffs in Cooper vs. IBM. 

Then we will hear from Ms. Nancy Mitchell Pfotenhauer. Ms. 

Pfotenhauer joined the Independent Women’s Forum as President 

in 2001 from her previous position at Cook Industries where she 

was Director of the Washington office. Ms. Pfotenhauer began her 

career in Washington, D.C., in 1987 as a Senior Economist at the 

Republican National Committee and was promoted to Chief Economist in 1988. She was also selected by the Bush transition team 

at age 24 where she served as the Economist for the Independent 

Agencies Task Force for President-Elect George Bush. 

I want to welcome all of you, and I am sure someone has explained to you how the lights work down there. 

With that, Mr. Delaplane, you may begin. 

9

STATEMENT OF JAMES DELAPLANE, JR., ESQ., ATTORNEY, 

AMERICAN BENEFITS COUNCIL, WASHINGTON, D.C. 

Mr. DELAPLANE. Thank you, Mr. Chairman, Ranking Member 

Miller, I appreciate the opportunity to appear today. The American 

Benefits Council is an organization representing Fortune 500 employers and other entities that assist employers in providing benefits to employees. Many of our members sponsor cash balance or 

other hybrid defined benefit plans. 

Rather than merely summarize my written statement, let me ask 

all of you to put yourselves in the shoes of a chief executive facing 

today’s pension environment. Your firm voluntarily sponsors a defined benefit plan even though most competitors do not. You fund 

these benefits, bear the investment risk, and pay insurance premiums to PBGC. You have retooled your company to stay competitive and your workforce has likewise changed. You have fewer career-long employees, you make more mid-career hires and you face 

worker shortages in several job categories. You realize that the 

company’s traditional pension was not delivering meaningful benefits to this new workforce. As much as 75 percent of total benefits 

were going to the small share of workers that stayed for a full career. 

In particular, you paid significant benefits to those who retired 

at 55 under the plan’s rich early retirement subsidy. These subsidized benefits and the departures they encouraged aggravated 

your labor shortages. After much analysis you and your board decided to convert to cash balance and remove the early retirement 

subsidy from the plan. 

While earned benefits are protected absolutely, these changes allowed you to reallocate dollars so that future benefits were delivered more equitably to workers of all tenures. The new plan offered 

the portability and transparency that employees wanted and was 

more attractive to recruits. The removal of additional early retirement incentives encouraged skilled workers to stay. Following the 

conversion, some of your workers experienced a plateau in their 

benefit levels for a period. This plateau, which some call wearaway, is a natural outgrowth of removing the early retirement subsidy. Any subsidy employees have earned in your prior plan is legally protected but you need not and did not include it in their cash 

balance accounts. So for some period of time, the value of the subsidized prior plan benefit exceeded the value of the new account. 

Since these employees were entitled to this higher benefit if they 

left, they experienced a benefit plateau until their cash balance account caught up. 

You disclosed this plateau to employees as part of your comprehensive disclosure about the conversion. While they would have 

preferred their benefits to keep growing without interruption, they 

understood the plateau resulted from the rich subsidies in the prior 

plan and that continuing to pay productive workers to retire early 

made no sense. 

They also understood you could have removed the subsidy from 

the traditional plan and this too would have produced a plateau. 

With your conversion successfully accomplished you were eager to 

return your focus to growing your business, but pension developments intervened. Despite significant legal authority to the conVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 H:\DOCS\94751 EDUWK PsN: NNIXON
10

trary, a single Federal judge rules that the basic cash balance design is age discriminatory. Under this theory, each of the 1,200 hybrid plans in the country is illegal. Your general counsel tells you 

that damages in this lawsuit are expected to run between $1 and 

$6 billion, and that a growing list of companies faces copycat suits. 

You learn that Congress has prevented the regulatory agencies 

from addressing the age discrimination issues and is now considering legislation that would for the first time grant employees a 

legal entitlement to future benefits not yet earned. 

Your company’s board grows increasingly nervous. How can we 

risk so much liability on something unrelated to our core business, 

they ask. Why not have say a 401(k) plan only like many of our 

competitors? Will proposals guarantee employees pension expectations be extended to other benefit programs? You and the board 

feel you have little choice but to freeze the cash balance plan. New 

hires will get no pension benefits and current employees will earn 

no additional benefits. 

Mr. Chairman and Members of the Committee, as policymakers 

dedicated to the retirement security of American families, we cannot imagine this is the result you want. Yet this is reality. Several 

clients of our firm have already frozen their hybrid plans and 41 

percent of hybrid sponsors say they will do so within a year absent 

legal certainty. It is within your power, however, to change this result. 

First, make clear that the basic hybrid designs do not violate age 

discrimination rules. Second, provide legal certainty for employers 

that convert hybrid plans in good faith. Third, avoid bans on benefit plateaus. And fourth, reject mandates for future conversions 

that will discourage employers from making new benefit commitments. 

Thank you for the opportunity to appear today. I would be please 

today answer your questions. 

[The prepared statement of Mr. Delaplane follows:]

Statement of James M. Delaplane, Jr.,Esq., Attorney, American Benefits 

Council, Washington, DC 

Chairman Boehner, Ranking Member Miller, thank you very much for the opportunity to appear before you today. My name is James Delaplane and I am a partner 

with the Benefits Group of Davis and Harman LLP. I serve as Special Counsel to 

the American Benefits Council (Council), and I am appearing today on the Council’s 

behalf. The Council is a public policy organization representing principally Fortune 

500 companies and other organizations that assist employers of all sizes in providing benefits to employees. Collectively, the Council’s members either sponsor directly or provide services to retirement and health plans covering more than 100 

million Americans. 

The Council is very pleased, Mr. Chairman, that you have called this hearing to 

examine the important policy issues involving hybrid defined benefit plans. Many 

of our members sponsor cash balance and pension equity plans and the Council believes that the legal uncertainty currently enveloping these hybrid defined benefit 

plans is the most significant and pressing retirement policy issue presently before 

Congress. Congressional action to provide legislative clarity and certainty for hybrid 

plans is urgently needed to prevent (1) the demise of these plans, (2) the resulting 

exit from the defined benefit system by a large number of American employers, and 

(3) the harm to the retirement income prospects of millions of American families 

that will unquestionably result. 

Mr. Chairman, we believe it is absolutely critical that the effort to craft hybrid 

legislation be led by the congressional committees of jurisdiction and we thank you 

for spearheading this effort. As you are well aware, pension policy is a notoriously 

complex and technical area, one in which it is easy to produce unintended results, 

11

1 U.S. Census Bureau, Statistical Abstract of the United States: 2002, No. 524 (Source: U.S. 

Department of Labor, Pension and Welfare Benefits Administration, Private Pension Plan Bulletin, Number 10 winter 2001, and unpublished data). 2The Organization for Economic Cooperation and Development, Main Economic Indicators 

(Paris: OECD, January 2004). 3 In fact, data from the Employee Benefit Research Institute shows that in 2001 the average 

401(k) account balance (net of all plan loans) was only $43,215 and the median (mid-point) 

401(k) account balance was a mere $12,810. Facts from EBRI, 401(k) Plan Account Balances, 

Asset Allocation, and Loan Activity in 2001 (June 2003). Even when looking at 401(k) plan participants in their 60s who had been at their job for at least 30 years, the average account balance was only $162,042. This would translate into a relatively meager monthly lifetime annuity 

payment at retirement. 4The total number of PBGC-insured defined benefit plans has decreased from a high of more 

than 114,000 in 1985 to 32,321 in 2002. PBGC Pension Insurance Data Book 2002, 44 & 72. 

This downward trend becomes even more sobering if you look at just the past several years. 

Not taking into account pension plan freezes (which are also on the rise but not officially 

tracked by the government), the PBGC reported that the number of defined benefit plans it insures has decreased by 7,000 (or 18%) in just the last four years. Id. 5The Council recently released a white paper discussing in detail each of these threats to the 

defined benefit system, along with recommendations for ensuring that defined benefit pension 

plans remain a viable retirement plan design. See American Benefits Council, Pensions at the 

Precipice: The Multiple Threats Facing our Nation’s Defined Benefit Pension System (May 

2004), available at http://www.americanbenefitscouncil.org. 

such as disincentives for employers to remain in our voluntary pension system. The 

legislative process works best when those who are most knowledgeable about an 

area are the ones to tackle the complex issues. We applaud your commitment to 

avoid what has sometimes occurred in the past with respect to hybrid plans—a haphazard and incomplete debate pursued outside of the committees of jurisdiction and 

as part of the appropriations process. 

In my testimony today, I hope to convey the value of the defined benefit system 

and hybrid plans specifically for millions of Americans and their families. I will describe the current legal and regulatory landscape that is endangering the continued 

existence of hybrid plans, and set forth why the Council and its members believe 

congressional action is urgently needed to prevent the extinction of these retirement 

programs. Lastly, I will describe the Council’s recommendations for resolving this 

pension crisis. 

The Value of the Defined Benefit System 

The defined benefit pension system helps millions of Americans achieve retirement security. It does this by providing employer-funded retirement income that is 

guaranteed to last a lifetime. Employees are not typically required to make any contributions toward their benefits in these plans and the assets of the plan are managed by investment professionals. Employers, rather than employees, bear the investment risk of ensuring that plan assets are sufficient to pay promised benefits. 

And insurance from the Pension Benefit Guaranty Corporation means employees’’ 

retirement benefits are guaranteed even if the plan or the employer’s business experiences financial trouble. 

As of 1998 (the most recent year for which official Department of Labor statistics 

have been published), more than 18 million retirees were receiving benefits from defined benefit plans, with over $111 billion in benefits paid out in that year alone.1

Given that America’s personal savings rate remains one of the lowest among industrialized nations 2 and that average balances in 401(k) plans are quite modest, 3

there is no doubt that in the absence of defined benefit pensions fewer Americans 

would be financially prepared for retirement. Furthermore, the absence of defined 

benefit pensions would result in increased strain on federal entitlement and income 

support programs, not to mention an increase in the number of American seniors 

living in poverty. 

Given these statistics, the value of defined benefit plans to many American families is undeniable. Yet we have seen an alarming decline in defined benefit plan 

sponsorship 4 and today is a particularly precarious time for the defined benefit system. Employers are increasingly exiting the defined benefit system for a variety of 

reasons, including uncertainty about how future pension liabilities will be measured, a flawed pension funding regime marked by complexity and volatility, potential changes to the rules governing pension accounting, and, most relevant for our 

discussion today, legal uncertainty surrounding hybrid defined benefit plans.5 Objective observers agree that policymakers must take action to address these threats or 

12

6 ‘‘Policymakers should take action sooner rather than later in order to create greater regulatory certainty for plan sponsors. Decisions are needed on the status of cash balance pension 

plans, permanent funding rules, and interest rates to be used in plan calculations, accounting 

treatment related to using smoothing versus mark-to-market for investment returns and interest rates, and rules and premiums under Title IV of ERISA and the Pension Benefit Guaranty 

Corporation. Until these kinds of policy decisions are made, further erosion of the defined benefit system can be expected to continue.’’ Jack VanDerhei and Craig Copeland, Employee Benefit 

Research Institute, ERISA At 30: The Decline of Private–Sector Defined Benefit Promises and 

Annuity Payments? What Will It Mean?, Issue Brief No. 269 (May 2004). 7Traditional defined benefit plans tend to provide the bulk of earned benefits at the very end 

of a worker’s career. 8Sylvester J. Schieber, et al., Watson Wyatt Worldwide, The Unfolding of a Predictable Surprise: A Comprehensive Analysis of the Shift from Traditional Pensions to Hybrid Plans 44 

(February 2000) (96% of respondents indicated employees’’ appreciation of the plan was either 

very important or important in the decision to convert to a hybrid plan; 93% of respondents indicated facilitation of communication and the ability to show the benefit amount in a lump sum 

format were either very important or important in the decision to convert to a hybrid plan). 9Data released just this year shows that retirement plan costs have increased an average of 

2.2% following a conversion, and when companies that were in severe financial distress were 

excluded from the pool, this figure increased to 5.9%. Watson Wyatt Worldwide, Hybrid Pension 

Conversions Post–1999: Meeting the Needs of a Mobile Workforce 3 (2004). In addition, conversions are often accompanied by improvements to other benefit programs, such as 401(k) plans, 

bonuses, and other post-retirement benefits. In fact, one recent survey found that when these 

improvements are taken into account, 65% of respondents expected the costs of providing retirement benefits following a cash balance conversion to increase or remain the same. Mellon Financial Corporation, 2004 Survey of Cash Balance Plans 15. Another survey, conducted in 2000, 

also found that overall costs following a conversion were expected to increase or remain the 

same in 67% of the cases. PricewaterhouseCoopers, Cash Balance Notes 4 (May 2000). 10Women rank promoting portable pensions as their top retirement policy priority. Center for 

Policy Alternatives and Lifetime Television, Survey: Women’s Voices 2000. 

defined benefit plans and the income they provide to American retirees will become 

increasingly scarce.6

Before going on, Mr. Chairman, I want to thank you and the members of the 

Committee for enacting a temporary replacement for the 30-year Treasury bond interest rate used for pension calculations. As you know, one of the threats to the defined benefit system has been the required use of an obsolete interest rate, and we 

sincerely appreciate your leadership in enacting a corporate bond replacement rate 

for 2004 and 2005. The Council and its members look forward to working with you 

and the Committee to find an appropriate permanent replacement for the 30-year 

Treasury bond rate and enacting this replacement in the very near future. 

The Specific Advantages of Hybrid Defined Benefit Plans 

Hybrid plans are defined benefit pensions that also incorporate attractive features 

of defined contribution plans. The most popular hybrid plans are the ‘‘cash balance’’ 

design and the ‘‘pension equity’’ design. In a cash balance plan, employers provide 

annual ‘‘pay credits’’ to an employee’s hypothetical account and ‘‘interest credits’’ on 

the balance in the account. In a pension equity plan, employers provide credits for 

each year of service and these credits are multiplied by an employee’s final pay to 

produce a lump sum figure. Hybrid plans not only offer the security of employer 

funding and assumption of investment risk, federal guarantees and required lifetime 

and spousal benefit options, but also show account balances in lump sum format, 

are portable, and provide for a more even benefit accrual pattern across a worker’s 

entire career.7 Hybrid plan participants are able to reap these rewards typical of 

defined contribution plans without bearing any concomitant loss of security (i.e., a 

decline in account balance due to stock market conditions). 

Employers like hybrid plans primarily because the benefits in the plans are so 

tangible to employees, resulting in greater appreciation of the pension program. In 

fact, a survey published in 2000 found that the dominant motives for employer conversions were employee appreciation of the plan, facilitating communication with 

employees, and the ability to show the benefit amount in a lump sum format.8 Many 

assume that conversions are pursued to cut employer pension costs. While this has 

been the case for some companies, for most employers it is neither the rationale for 

the conversion nor the reality that results.9 We trust you will agree that, when employers do conclude that costs must be reduced, it is better for them to retain an 

affordable defined benefit plan (and one that fits the realities of the modern workforce) than to not have one at all. 

Hybrid plans and their level benefit accrual pattern are also effective in helping 

employers attract and retain employees in today’s fluid job market where few individuals plan or expect to stay with one employer for a career.10 Employees likewise 

appreciate hybrid plans because they are more transparent, more portable, and deVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 H:\DOCS\94751 EDUWK PsN: NNIXON
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11The Federal Reserve, Cash Balance Pension Plan Conversions and the New Economy 5 (Oct. 

2003) (‘‘[R]easons that workers may want pensions include the desire to earn tax-favored returns, or to realize economies of scale on the transaction costs of investment, although both of 

these goals can be realized in a [defined contribution] plan as well as a [defined benefit] plan. 

In a [defined benefit] plan workers may also realize the opportunity to insure to some degree 

against mortality, inflation, macroeconomic, and disability risks through inter-and intragenerational risk sharing.’’). 12Watson Wyatt Worldwide 2004, supra note 9 at 6. 13Watson Wyatt Worldwide 2000, supra note 8 at 24–25. 14Watson Wyatt Worldwide 2004, supra note 9 at 6 –7. In fact, only 9.5% of employees work 

in the same job for 20 years or more. Employee Benefit Research Institute. 15Watson Wyatt Worldwide 2004, supra note 9 at 6. The Federal Reserve has likewise reported that ‘‘conversions have generally been undertaken in competitive industries that are 

characterized by tight and highly mobile labor markets. Since mobile workers benefit most from 

such conversions, we conclude that this trend may have positive implications for the eventual 

retirement wealth of participants.’’ The Federal Reserve, supra note 11 at 3. 16Watson Wyatt Worldwide 2000, supra note 8 at 23–25 (February 2000) (Among the 78 plans 

studied, on average a worker age 50 with 20 years of service would have earned benefits 1.48 

times as great if he had participated in a cash balance plan rather than a traditional plan). 17Mellon Financial Corporation, supra note 9 at 12. 18Watson Wyatt Worldwide 2004, supra note 9 at 2. 

liver benefits more equitably to short, medium and longer-service employees than 

traditional pensions, while also retaining the favorable security features of the defined benefit system.11

The unique value of hybrid plans in meeting employee retirement plan preferences is demonstrated in a new survey. The survey reveals that workers prefer 

two retirement plan attributes above all others—the portability of benefits and benefit guarantees.12 It is only hybrid plans that can deliver both these advantages. 

Traditional defined benefit plans typically do not provide for portability, and benefits in 401(k) and other defined contribution plans are not guaranteed. Indeed, if 

policymakers were today working from a blank slate to produce the ideal retirement 

plan, it is a hybrid plan they would likely develop. Clearly, preserving hybrid plans 

as a viable pension design is critical if employers are to maintain retirement programs that meet employee needs and preferences. 

Perhaps most important of all, studies show that nearly 80% of participants build 

higher retirement benefits under a hybrid plan than a traditional plan of equal 

cost.13 Why? Traditional defined benefit plans tend to award disproportionate benefits (often as much as 75% of total benefits under the plan) to employees with extremely long service. Yet very few employees spend a career with a single employer.14 Hybrid plans were designed to respond to this reality. The advantage of 

hybrid plans for most workers is confirmed by a recent study that shows that if an 

employee changes jobs just three times in the course of his career, she or he can 

expect to receive in excess of 17% more in retirement benefits from participating in 

cash balance plans than had his or her employers provided traditional plans instead.15

The advantages of the hybrid plan are not reserved for younger workers. Even 

longer-service workers often fare better under a hybrid plan.16 One of the many 

ways in which hybrid plan sponsors address the needs of longer-service and older 

employees is by contributing pay credits that increase with the age and service of 

employees. Recent surveys show that 74% of cash balance plan sponsors provide pay 

credits that increase with age or service, 17 while 87% of pension equity plan sponsors do the same.18

Employers also devote significant energy and resources to developing transition 

assistance programs to help older and longer-service employees who may not accrue 

as much in benefits on a going forward basis under a hybrid plan as they would 

under the prior plan. Successful conversion assistance techniques vary, but generally include one or more of the following: grandfathering some or all current employees in the prior pension plan, allowing certain employees to choose whether to 

remain in the traditional plan or move to the hybrid plan, providing whichever benefit is greater under either the traditional or new formula, providing additional 

transition pay credits in an employee’s account over some period of time, or making 

extra one-time contributions to employees’’ opening accounts. Employers draw from 

these varying techniques and apply them to smaller or larger groups of employees 

as appropriate to suit the needs of their workforce and carry out the goals of the 

conversion. Studies conducted within the last few years show that employers provide older and longer-service employees with these special transition benefits in 

14

19Mellon Financial Corporation, supra note 9 at 11 (90% of conversions contain special transition benefits); Watson Wyatt Worldwide 2004, supra note 9 at 4 (89% of conversions contain 

special transition benefits). In those instances where these special transition benefits are not 

provided, it is usually because the business is in financial distress at the time of the conversion. 20 ERISA section 204(h); Notice of Significant Reduction in the Rate of Future Benefit Accrual, 

68 Fed. Reg. 17,277 (Apr. 9, 2003) (to be codified at 26 C.F.R. pts. 1, 54, and 602). 21 ERISA section 204(g); Internal Revenue Code section 411(d)(6). 22 It is worth noting that the use of benefit plateaus as a method of transitioning between 

benefit formulas has been expressly approved under IRS pension regulations for many years. 

Indeed, plateau periods can result from constructive and necessary plan changes, such as updating plan mortality assumptions to provide more accurate benefits, aligning the benefits of employees from different companies in the wake of business acquisitions and mergers, or revising 

a plan to meet new statutory requirements (such as legislative restrictions on the amount of 

benefits that may be paid under a plan). 23 ERISA section 205(g); Internal Revenue Code section 417(e). This required use of the 30-

year Treasury bond rate was not changed by the recently enacted legislation replacing the 30-

year rate for pension funding calculations. 

nearly all conversions.19 Indeed, employers’’ already significant focus on the needs 

of older workers has only increased in light of public and congressional interest in 

the effect of conversions. 

As this data reveals, hybrid plans are proving extremely successful in delivering 

valuable, appreciated, and guaranteed retirement benefits to employees of all ages. 

The Legal and Regulatory Landscape 

Let me now turn to a discussion of the history of hybrid plans and how the current uncertainty in the legal and regulatory landscape came about. The first cash 

balance plan was adopted in 1985 and the first pension equity plan was adopted 

in 1993. For nearly fifteen years after adoption of the first cash balance plan, the 

Internal Revenue Service (IRS) regularly issued determination letters for hybrid 

plan conversions indicating that the plans and conversions satisfied all Internal 

Revenue Code requirements (including those related to age discrimination). In 1999, 

however, the IRS announced a moratorium on such letters partly in response to several high-profile conversions that were receiving significant congressional and media 

scrutiny. As a result of this scrutiny and after thorough review of the issues through 

numerous congressional hearings in the committees of jurisdiction, Congress in 2001 

enacted legislation to require employers to provide a more detailed and more understandable advance notice to participants regarding any hybrid conversion (or any 

other defined benefit plan amendment) that significantly reduced future benefit accruals.20 At the time, some in Congress proposed various benefit mandates and design restrictions as a response to cash balance conversions, but these proposals were 

all rejected. Congress concluded that the best response to the issues that had been 

raised was to ensure absolute transparency for employees about how their benefits 

would be affected by hybrid plan conversions. 

Benefit Plateaus (‘‘Wear–Away’’). Let me now turn to a discussion of one of the 

conversion issues that has generated questions and concerns throughout the congressional review of hybrid plans—so called ‘‘wear-away.’’ At the outset, it is important to understand that parallel rules in ERISA and the Internal Revenue Code protect all benefits that an employee has already earned for service to date.21

Thus, despite assertions to the contrary, existing benefits are never reduced in a 

hybrid plan conversion. 

‘‘Wear-away’’ is the term used for the benefit plateau effect that some employees 

can experience in conjunction with a cash balance conversion. When employers convert to a cash balance plan, they typically provide an opening balance in employees’’ 

cash balance account. A benefit plateau results if the value of the employee’s cash 

balance account is less than the value of the benefit he or she accrued under the 

prior plan as of the date of the conversion. Until the value of the cash balance account catches up to the value of the previously accrued benefit, it is the higher accrued benefit to which the worker is entitled if he or she departs the company—

hence the plateau.22 We believe that the term ‘‘wear-away’’ is, in fact, confusing and 

even misleading, as the employee always receives the higher of the two benefit levels and nothing earned is taken away. Thus, we use the term benefit plateau 

throughout the discussion below. 

There have been three leading causes of this plateau effect in the conversion context. • First, the plateau can result simply from a change in the rate of interest on 

30-year Treasury bonds. Our pension laws require that when benefits earned 

in a defined benefit plan are converted from an annuity payable at retirement 

into a lump sum present value, this calculation must be performed using the 

30-year Treasury bond rate.23 As interest rates on 30-year bonds fall, the lump 

15

24This is because one needs a larger pool of money today to grow to an equivalent benefit 

at age 65 if that pool will be earning less in interest. 25This is yet another reminder of how important it is for Congress to move quickly to enact 

a permanent replacement for the 30-year Treasury bond rate, including for calculations that determine lump sum benefits in defined benefit plans. 26 In a 2000 study of cash balance conversions, Watson Wyatt reports that of the 24 plans 

it reviewed that converted to a hybrid design since 1994, 22 of them (92%) set opening account 

balances using the Treasury rate or a rate more beneficial to employees. Watson Wyatt Worldwide 2000, supra note 8 at 40; Mellon Financial Corporation, supra note 9 at 6 (77% of 101 

cash balance conversions did the same). 27 An early retirement subsidy provides an enhanced benefit if the employee leaves the company at a specified time prior to normal retirement age. For example, a fully subsidized early 

retirement benefit might provide an employee the same pension at age 55, say, $1,500 per 

month for life, which he would not normally receive until age 65. The ability to earn the higher 

pension without any actuarial discount for the additional 10 years of payments provides a strong 

financial incentive to retire at the earlier age. The value of such an early retirement subsidy 

decreases every year until normal retirement age, at which point no subsidy remains. 28Opening account balances do not typically include the value of early retirement subsidies 

because doing so would provide the value of the subsidy to a large number of workers who will 

work until normal retirement age and therefore not be entitled to the subsidized early retirement benefits. Those few employers that have included some or all of the subsidy in opening 

accounts have done so as a particular conversion assistance technique. 

sum present value of the benefit earned by the employee prior to the conversion 

will increase.24 The result can be that although a worker’s previously earned benefit and opening cash balance account were both equal to $50,000 at the 

time of conversion, a decrease in 30-year bond interest rates can increase the 

value of the previously earned benefit to $55,000. Until the cash balance account reaches $55,000, this worker will experience a benefit plateau. • Second, benefit plateaus can result when employers translate the previously accrued traditional benefit into an opening cash balance account using an interest 

rate higher than the 30-year bond rate. When this is done, the value of the 

opening cash balance account will be lower than what the employee would be 

eligible to take under the prior plan (since the present value of that benefit 

must be calculated using the 30-year bond rate). The result is that workers will 

plateau at the higher level until the cash balance account catches up. Employers generally use a higher interest rate when they believe the 30-year Treasury 

bond rate is historically low (which has been the case in recent years).25 Yet 

because using a higher interest rate can produce benefit plateaus and plateaus 

have been of concern to employees, few employers have set opening balances in 

this way. The clear trend has been for employers to determine opening account 

balances using the Treasury rate or a rate more favorable for employees.26

Thus, this use of higher interest rates is not a frequent cause of benefit plateaus today. • Third, benefit plateaus can result when employers eliminate early retirement 

subsidies (on a prospective basis) from the pension.27 A plateau can result in 

this instance because workers who have already earned a portion of an early 

retirement subsidy prior to a conversion will typically have a previously earned 

benefit under the prior plan that is higher than the opening cash balance account (which is typically based on the normal retirement age benefit earned 

under the prior plan as of the date of the conversion and does not include the 

value of any early retirement subsidy).28 Elimination of the early retirement 

subsidies on a prospective basis is the primary cause of benefit plateaus in most 

conversion cases where plateaus are seen today. It should be noted that benefit 

plateaus can also occur in cases where early retirement subsidies are eliminated 

from traditional defined benefit plans. 

While some may be concerned about the plateau effect resulting from subsidy removal, Mr. Chairman, we feel strongly that employers must maintain their flexibility to eliminate these early retirement subsidies on a going forward basis. Early 

retirement subsidies are certainly a preferable alternative to layoffs and can help 

a company manage its workforce in a humane way. But employers will never adopt 

such a feature of their plan if policymakers make it difficult or impossible to eliminate these subsidies prospectively when they no longer make sense. Today, for example, given the significant shortages that employers experience in certain job categories, it makes no sense for them to continue to offer highly-productive employees 

rich financial incentives to retire in their 50s. While current law protects any subsidy that employees have already earned for their service to date, it wisely allows 

employers to remove such incentives from their plan going forward. 

Moreover, any legislative requirement that employers maintain ongoing early retirement subsidies in their pension plans—and this is what a ban on plateaus would 

16

29 Cooper v. IBM Pers. Pension Plan, 274 F. Supp. 2d 1010 (S.D. Ill. 2003). The pension age 

discrimination statute in question provides that the rate of a participant’s benefit accrual may 

not decline on account of age. The district court interpreted this rule to mean that the amount 

of annuity benefit received at age 65 for a year of service cannot be less for an older worker 

than a younger worker. The defendants in the case argued that it is nonsensical from an economic perspective to compare the age 65 benefit accrual rate of a 25-year old and a 64-year old 

because the 64-year old will receive his or her benefit much sooner and have a much shorter 

period of time to accrue interest. In other words, the ‘‘time value’’ of money must be taken into 

account. The court itself acknowledges the strength of this argument, stating, ‘‘From an economist’s perspective, Defendants have a good argument.’’ Nonetheless, the court goes on to argue 

incorrectly that the age discrimination laws require rejection of basic economic common sense. 30The court’s reading of the 1986 pension age discrimination statute would invalidate a broad 

range of long-standing pension designs, including contributory defined benefit plans (common 

in the state and local government sector and among multiemployer plans), plans that are integrated with Social Security and plans with pre-retirement indexation to help protect employees 

from the effect of inflation. These plans were all regarded as perfectly age appropriate when 

Congress enacted the pension age statute. 31 If the Cooper court’s reasoning were applied to the Social Security program, even it would 

be considered age discriminatory. 32The most recent government data indicates that as of the year 2000 there were 1,231 hybrid 

plans covering more than seven million participants. PBGC, supra note 4 at 3–6. 33 H.R. Conf. Rep. No. 1012, 99th Cong., 2d Sess. at 376–379. A number of other federal district courts that have had the opportunity to review this issue have likewise concluded that the 

pension age discrimination statute is only applicable to benefit accruals after a participant has 

reached normal retirement age. See Tootle v. ARINC, Inc., Civ. Action No. CCB–03–1086 *15–

entail—would be out of step with congressional actions regarding our nation’s public 

pension system, Social Security. With respect to Social Security, Congress has raised 

the retirement age and repealed the earnings test in order to encourage older Americans to work longer. Requiring employers to continue to offer private pension plan 

incentives to retire early would be flatly inconsistent with these actions. 

Although we understand that benefit plateaus can be confusing and even upsetting to some employees, they result from interest rate anomalies and valid actions 

taken by employers to eliminate early retirement subsidies. Nonetheless, given the 

employee concern, many employers design their conversions to mitigate these plateaus or eliminate them altogether. Moreover, the disclosure requirements enacted 

by Congress in 2001 (and implemented by the Treasury Department through regulations) ensure that employees are fully aware of the possible benefit plateau effects 

of a conversion. The Council believes these steps appropriately respond to the concerns that have been raised about plateaus. 

Age Discrimination Principles. Subsequent to Congress’’ enactment of disclosure 

legislation, the Treasury Department and IRS drafted proposed regulations in consultation with the Equal Employment Opportunity Commission addressing retirement plan design and age discrimination principles. These proposed regulations 

were issued in December 2002. Among other items, the proposed regulations established the validity of the cash balance design under the pension age discrimination 

statute and provided guidelines on how employers could convert from traditional to 

hybrid pension designs in an age-appropriate manner. 

Disregarding the interpretation contained in the proposed regulations and other 

legal authorities, one federal district court judge dramatically shifted the focus of 

the debate surrounding hybrid plans by declaring in July 2003 in the case of Cooper 

v. IBM that hybrid plan designs were inherently age discriminatory.29 According to 

the court’s flawed logic, simple compound interest is illegal in the context of defined 

benefit pension plans.30 Under the Cooper court’s reasoning, a pension design is discriminatory even if the employer makes equal contributions to the plan on behalf 

of all its workers and, ironically, even in many instances where the design provides 

greater contributions for older workers. Such a conclusion flies in the face of common sense.31 It would hold all 1,200 plus hybrid pension plans, 32 regardless of 

whether adopted as new plans or through conversion from traditional plans, to be 

in violation of the pension age discrimination laws. 

The conclusion that all hybrid plan designs are inherently age discriminatory begs 

the question why the Internal Revenue Service issued favorable determination letters for fifteen years blessing hybrid plan designs and issued proposed regulations 

providing that the cash balance plan design is not inherently age discriminatory. It 

is surprising, at a minimum, that the Cooper decision completely ignored this history. Even more astonishing is the fact that the Cooper decision ignores the legislative history of the pension age discrimination statute adopted in 1986. That legislative history makes clear that the intent of Congress was limited to prohibiting the 

practice of ceasing pension accruals once participants attained normal retirement 

age.33 Moreover, an example in the 1986 legislative history that clarifies a separate 

17

16 (D. Md. June 10, 2004); Engers v. AT & T Corp., No. 98–3660, letter op. at 9 (D. N.J. June 

6, 2001); Eaton v. Onan, 117 F. Supp. 2d 812, 827–29 (S.D. Ind. 2000). 34 H.R. Conf. Rep. No. 1012, 99th Cong., 2d Sess. at 381. 35 Eaton acknowledged this inconsistency and concluded it was illogical to read the pension 

age discrimination statute in such a way as to invalidate this example and with it a wide variety of defined benefit plans. 117 F. Supp. 2d at 830, 834. 36 Campbell v. BankBoston, N.A., 206 F. Supp. 2d 70 (D. Mass. 2002) (rejecting the notion 

that hybrid plan designs are inherently age discriminatory, the court stated that a ‘‘claim based 

on the fact that older workers will have a smaller amount of time for interest to accrue on their 

retirement accounts—is not permitted under the [age discrimination laws].’’ ), aff’d 327 F.3d 1 

(1st Cir. 2003); Eaton v. Onan, 117 F. Supp. 2d 812, 826 (S.D. Ind. 2000) (in holding that the 

cash balance pension design is not age discriminatory the court stated: ‘‘Plaintiffs’’ proposed interpretation would produce strange results totally at odds with the intended goal of the OBRA 

1986 pension age discrimination provisions.’’). 37Tootle v. ARINC, Inc., Civ. Action No. CCB–03–1086 (D. Md. June 10, 2004). 38See Section 205 of the fiscal year 2004 Omnibus Appropriations Act (PL 108–199). 39These recommendations were recently issued by the Treasury Department as part of the 

Bush Administration’s fiscal year 2005 budget submission to Congress. 40 H.R. Conf. Rep. No 401, 108th Cong., 1st Sess. at 1185 (2003). 

but related pension issue describes approvingly a type of plan (a ‘‘flat dollar’’ plan) 

that would be deemed age discriminatory under the Cooper decision.34 It makes absolutely no sense that Congress would use as an example of a viable pension design 

one that would fail the age discrimination prohibition it was enacting at the very 

same time.35 Lastly, prior to the Cooper decision, numerous other federal district 

courts addressed and rejected charges that the basic hybrid plan designs were age 

discriminatory.36 These too were ignored in the Cooper decision. Importantly, another federal district court decision decided subsequent to Cooper has rejected its 

logic and concluded that the cash balance pension design is age appropriate.37

Spurred on by the Cooper decision, cash balance critics in Congress pushed 

through an appropriations prohibition preventing the Treasury Department from finalizing its age regulations addressing hybrid plan designs and conversions.38 Congress at the same time directed the Treasury Department to make legislative recommendations regarding conversions from traditional to cash balance plans.39 In 

the relevant legislative history, however, Congress did make clear that ‘‘[t]he purpose of this prohibition is not to call into question the validity of hybrid plan designs 

(cash balance and pension equity). The purpose of the prohibition is to preserve the 

status quo with respect to conversions through the entirety of fiscal year 2004 while 

the applicable committees of jurisdiction review the Treasury Department’s legislative proposals.’’ 40

While the Cooper decision is an isolated one, and there is clear and significant 

authority to the contrary concluding that hybrid plans are age appropriate, Cooper 

is a high-profile case that has led to copycat class action lawsuits being filed against 

a number of employers for the alleged discriminatory nature of their plan design. 

Applying the rationale in the rulings to date in the Cooper case, ultimate damages 

against the defendants are estimated to be between $1 and $6 billion dollars. It is 

this range of figures that are required to overcome and ‘‘correct for’’ the natural operation of compound interest. Employers are understandably extremely anxious 

about the crippling effect of such lawsuits and potential damage awards, and are 

concerned that they will be the next on the growing list of companies targeted for 

class-action suits. While employers certainly expect the anomalous Cooper decision 

ultimately to be overturned on appeal, such a result is many years away and many 

hybrid plan sponsors may find the intervening risks unbearable. 

The Need for Congressional Action 

Mr. Chairman, the operation of the hybrid pension system is at a standstill. Employers cannot get determination letters from the IRS regarding the compliance of 

their plans with legal guidelines. The regulatory agencies that normally assist the 

smooth functioning of the system through issuance of periodic interpretive guidance 

have been told by Congress through the appropriations process not to do so. Any 

final resolution of the age discrimination question by appellate courts is years away 

at a minimum. 

Moreover, the judicial system is not the appropriate forum for resolving an issue 

of this sort, which has far-reaching public policy ramifications. The very nature of 

the judicial process makes it difficult for these types of broad public policy issues 

to receive thorough examination much less appropriate handling. Not all stakeholders are present before the court and the system-wide ramifications are intentionally given less weight than the narrow legal issues. 

Perhaps some are tempted to view this current legal uncertainty and regulatory 

standstill as a victory of sorts. Perhaps they will see the slowdown in the number 

18

41 Hewitt Associates LLC, Current Retirement Plan Challenges: Employer Perspectives 2 

(2003). 42 A majority of companies have made it clear that if hybrid plans become untenable they will 

be offering only a 401(k)/defined contribution program going forward. They will not be reverting 

to a traditional defined benefit plan design. Deloitte Consulting LLP, Pension Crisis Prompting 

Majority of Surveyed Companies to Change or Consider Changing Their Plans 2 (2004). While 

defined contribution plans provide valuable retirement benefits, defined benefit plans provide 

unique retirement security features for employees and their families that are hard to replicate. 

Employees are typically best served by the ability to participate in both types of plans. The 

Council believes that our nation’s retirement income policy should be crafted to promote maximum flexibility so that employers and employees can utilize the plan or plans that best suit 

their needs. 43This figure is derived from data collected by the PBGC indicating that, as of the year 2000, 

the PBGC protected 34,342,000 single-employer defined benefit plan participants, 7,155,000 of 

whom participate in hybrid plans. PBGC, supra note 4 at 6. 44The hybrid plan proposals made by the Treasury Department in the Bush Administration’s 

fiscal year 05 budget contain a provision recognizing that this is the appropriate way to evaluate 

age discrimination for hybrid plans. However, this clarification regarding the hybrid plan designs is prospective only in the Treasury recommendations, leaving employers with hybrid plans 

already in existence open to legal suit regarding the legality of their plan designs. 

of hybrid plan conversions as a positive development for employees. They should 

not. In a recent survey, 41% of hybrid plan sponsors said they would freeze their 

plans if the legal uncertainty was not resolved within a year.41 As we noted earlier, 

other pressures in the defined benefit system are already prompting employers to 

consider freezes or terminations. The hostile climate for hybrid plans and the litigation risks and extreme damage potential are unfortunately starting to make this an 

easier and easier decision for corporate decision-makers.42 If employers are pushed 

to abandon hybrid plans, we will lose a retirement vehicle that delivers higher benefits to the vast majority of employees and meets workers’’ key retirement plan 

needs—for portability and benefit guarantees—all while utilizing transition methods 

that protect older workers. How, exactly, is this good for employees and their families? 

The prospect of hybrid plan freezes and terminations poses another risk—to the 

Pension Benefit Guaranty Corporation (PBGC). We must be mindful that many of 

the companies that sponsor hybrid plans are financially strong companies in healthy 

industries. These strong companies today pay insurance premiums to the PBGC. If 

these employers are forced to exit the defined benefit system, the loss of premiums 

could aggravate the long-term financial challenges faced by the agency. Hybrid plan 

participants comprise 21% of all plan participants protected by the PBGC insurance 

program. Hence employer insurance premiums on these participants comprise 21% 

of the revenue generated by the PBGC through its per-participant premium program.43 If hybrid plans were removed from the defined benefit system, future premiums to the PBGC would be reduced significantly. 

Mr. Chairman, the situation today is distressingly clear. The harms that result 

from today’s legal uncertainty are unmistakable. The regulatory agencies and courts 

are unable to act effectively to prevent these harms. Only through prompt legislative action can Congress rescue hybrid defined benefit plans and prevent the damage to the retirement security of millions of American families that will unquestionably result from their demise. 

Recommendations 

Clarify the Age Appropriateness of the Hybrid Plan Designs. The first and most 

important step for Congress to take is to clarify that the cash balance and pension 

equity designs satisfy current age discrimination rules. Congress must make clear 

that the legal interpretation holding these designs discriminatory merely because 

the accounts of younger workers have more years to earn interest is unfounded. 

Rather, Congress must clarify that age discrimination in hybrid plans is measured 

by the pay credits contributed on workers’’ behalf. If the pay credits for older workers are the same, or greater, than the pay credits for younger workers, then the pension age discrimination rules are satisfied.44 This clarification is consistent with the 

legal authorities and with plain common sense. It will end the needless legal jeopardy in which every hybrid plan sponsor today finds itself and will preserve the important benefits that millions of employees today earn under these plans. 

Provide Legal Certainty for Past Hybrid Conversions. In addition to clarifying the 

age appropriateness of the hybrid plan designs, the Council believes it is essential 

for Congress to provide legal certainty for the hybrid plan conversions that have already taken place. These conversions were pursued in good faith and in reliance on 

the legal authorities in place at the time. Transition methods, such as benefit plaVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 H:\DOCS\94751 EDUWK PsN: NNIXON
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45Whipsaw is the term used to describe the anomaly that occurs when employers must project 

a departing employee’s cash balance account forward to normal retirement age using the plan’s 

interest crediting rate and then must discount the resulting amount back to a present value 

using the statutorily-mandated 30-year Treasury bond rate. When an employer’s interest crediting rate is higher than the 30-year rate, this process results in a plan liability to the employee 

in an amount greater than the employee’s actual account balance. The only way to avoid this 

‘‘whipsaw’’ effect is to reduce a plan’s interest crediting rate to the same 30-year rate the law 

requires for discounting future benefits into present value lump sums. In the wake of several 

court decisions mandating this whipsaw effect, this is what cash balance sponsors around the 

country have done to insulate themselves from liability. However, the unfortunate result is that 

employees in cash balance plans earn lower rates of interest on their accounts than would otherwise be the case. Even a modestly lower rate of interest earned on an account over the course 

of a career can translate into a significant reduction in the ultimate account balance at retirement. The Treasury Department helpfully included this same resolution of the whipsaw problem 

in its legislative recommendations contained in the Bush Administration’s fiscal year 05 budget 

proposal. As with the provision regarding hybrid plan design, however, the recommended whipsaw fix was prospective only. This would require employers to continue to pay low interest rates 

on employees’’ existing cash balance accounts. 46See H.R. 1677, which has been introduced by Representative Bernie Sanders (I–VT). 47See H.R. 2101, which has been introduced by Representative George Miller (D–CA). 

teaus, that have not given rise to concerns about age discrimination in other contexts should not now do so merely because of the context of hybrid plan conversions. 

Resolve Legal Uncertainties with Anti–Employee Effects. Beyond resolving the 

questions about the basic hybrid designs and the treatment of past conversions, the 

Council believes Congress should take a number of additional steps to provide legal 

clarity regarding hybrid plans. Addressing these additional issues will very concretely aid the employees who participate in hybrid plans. • Whipsaw. First, we recommend that you make clear that, so long as a cash balance plan does not credit interest in excess of a market rate of return, the proper benefit payment to a departing employee is that employee’s account balance. 

This will remedy the so-called ‘‘whipsaw’’ problem that has forced employers to 

reduce the rate of interest they pay on employees’’ cash balance accounts.45

• Inclusion of Early Retirement Subsidies. Second, we recommend that you make 

clear that employers may include some or all of the value of early retirement 

subsidies in employees’’ opening account balances. A number of employers have 

chosen to do this as a conversion technique to assist those nearing early retirement eligibility but some in the regulatory agencies are suggesting that to do 

so is problematic under our current pension age discrimination rules. • Protection of ‘‘Greater Of’’ Transition Method. Third, we recommend that you 

make clear that employers that voluntarily choose to offer employees the greater of the benefits in the prior traditional or new hybrid plan do not run afoul 

of the pension back-loading rules. Some regulators have suggested this ‘‘greater 

of’’ conversion approach violates these rules. • Protection of Employee–Friendly Transition Techniques. Fourth, some conversion approaches that employees and Members of Congress have praised (choice, 

greater of, grandfathering in the prior plan) are likely to violate the non-discrimination rules over time. Why? The group of typically older employees who 

remain under the prior plan formula will over time and very naturally have a 

greater and greater proportion of so-called highly-compensated employees (those 

making $90,000 and above) and may well be the only group eligible for continued accrual of benefit features exclusive to the prior traditional plan (e.g., early 

retirement subsidies). This creates a problem under the non-discrimination 

rules. We urge you to make clear that these employee-friendly conversion techniques can be pursued. 

Reject Benefit Mandates That Prevent Employers from Modifying Benefit Programs. Some in Congress are seeking to impose specific benefit mandates when employers convert to hybrid pension plans. For example, some would require that employers pay retiring employees the greater of the benefits under the prior traditional 

or new hybrid plan.46 Others would require employers to provide employees the 

choice at the time of conversion between staying in the prior traditional plan or 

moving to the new hybrid plan.47 Pursuant to a directive from Congress, the Treasury Department has also made legislative recommendations regarding requirements 

for hybrid plan conversions undertaken in the future. The Treasury proposal would 

require employers to pay benefits at least as high as were provided under the prior 

traditional plan for a period of five years following the conversion. 

These proposals may perhaps sound innocuous to some, and indeed some employers have voluntarily adopted the transition techniques that would be mandated 

under these proposals, but each of the proposals embraces a fundamental and truly 

radical shift in the rules of the game for our nation’s voluntary employer-sponsored 

20

benefits system. Under these proposals, Congress would be (1) guaranteeing employees future retirement plan benefits for service that the employees have not yet performed, and (2) preventing employers from changing the benefit programs they voluntarily offer. Indeed, Congress would be converting the natural and understandable hopes and wishes of employees that their benefits will remain the same into 

concrete legal rights. Such enshrinement of expectations is a fundamental departure 

from the existing rules of the voluntary benefits system. The Council believes this 

would be an extremely unwise—and extremely counterproductive—step for Congress 

to take. 

Under such regimes, it is unfortunately clear what actions employers will take. 

If they conclude that a traditional defined benefit plan is no longer meeting business 

and employee needs, they will not remain in the defined benefit system through conversion to a hybrid plan. They will exit the defined benefit system altogether knowing they can avoid these unprecedented mandates by simply utilizing a defined contribution plan going forward. As discussed above, this is typically not the response 

that best serves employees’’ retirement income needs. 

Perhaps even more damaging than pushing employers from the defined benefit 

system is the dangerous precedent that would be set by these mandates that seek 

to enshrine expectations. Employers will naturally ask themselves whether, if other 

developments in the benefits and compensation landscape come in for heightened 

scrutiny, Congress will respond by preventing them from making changes to those 

programs (through imposition of greater of, mandated choice or hold-harmless requirements). Will employers be unable to redesign their health plans? Will they be 

unable to remove early retirement subsidies from their traditional defined benefit 

plans? Will they be unable to reduce cash bonuses? Will they be unable to shift from 

profit-sharing to matching contributions in their defined contribution plans? Will 

they be unable to reduce the degree of price discount in their stock purchase programs? Where exactly will it end? There appears to us to be no principled stopping 

point. 

Given the extremely significant administrative burdens, financial costs and legal 

exposure that already accompany voluntary employer sponsorship of benefit programs today, we hope all who believe in employer-provided benefits as we do will 

see that these are not the questions you want stirring in the minds of corporate decision-makers. They can only result in a world where employees are offered fewer 

benefits. 

Conclusion 

The American Benefits Council believes that hybrid defined benefit plans play an 

invaluable role in delivering retirement income security to millions of Americans 

and their families. Nevertheless, hybrid plans are facing legal uncertainties that 

threaten their continued existence. Of these, the most pressing threat is a rogue judicial interpretation that declares all hybrid plans in the nation illegal. To prevent 

widespread abandonment of hybrid plans by employers and the resulting harm to 

employees, we hope Congress will provide the legislative certainty and clarity for 

hybrid pension plans we have recommended above. 

Thank you again, Mr. Chairman and Ranking Member Miller, for the opportunity 

to appear today. I would be pleased to answer any questions you may have. 

Chairman BOEHNER. Ms. Collier. 

STATEMENT OF ELLEN COLLIER, DIRECTOR OF BENEFITS, 

EATON CORPORATION, CLEVELAND, OHIO 

Ms. COLLIER. Chairman Boehner, Ranking Member Miller, thank 

you for the opportunity to appear here today. My name is Ellen 

Collier, and I am the Director of Benefits for Eaton Corporation. 

Eaton is a diversified industrial manufacturer with world headquarters in Cleveland, Ohio. We have over 51,000 employees worldwide, including 27,000 employees in more than 40 States. 

I am appearing today on behalf of the Coalition to Preserve the 

Defined Benefit System, a broad based employer coalition that 

works exclusively on legislative and regulatory issues related to hybrid pension designs. 

21

This is a critical time for defined benefit pension plans and hybrid plans in particular. Congressional action is urgently needed to 

confirm the validity of cash balance and pension equity designs. If 

Congress does not clarify the current legal uncertainty, employers 

facing the threat of class action lawsuits will increasingly be forced 

to abandon these retirement programs. Given the success of hybrid 

plans in delivering meaningful guaranteed retirement benefits to 

today’s workers, abandonment of these programs would be disastrous for employees and for our Nation’s retirement system. Employees will not win if the current uncertainty persists. 

Let me now discuss why we at Eaton concluded that a cash balance plan was right for us. Eaton’s diverse business nature and acquisition activity created a challenge for our retirement programs. 

Our challenge is to continually attract and retain high level talent 

and to reduce the confusion resulting from multiple pension structures. 

Eaton began to examine pension plan alternatives in the mid90’s. While this was under way, we acquired Aeroquip Vickers, a 

company with about 5,000 nonrepresented employees. These employees had no defined benefit pension plan, making the development of a new pension design even more urgent. 

We considered several options for a new pension design, but in 

the end we decided that a cash balance plan was best for Eaton 

and our employees. Why? The simplicity, visibility, portability and 

ease in integrating acquired companies into Eaton. Once we settled 

on an ongoing design we had to make sure we responded to the 

needs of employees that were already in existing pension designs. 

All new hires would enter the cash balance plan on 1/1/02 as would 

the Aeroquip Vickers employees. Fifteen thousand nonrepresented 

employees would get an informed choice effective 1/1/03 between 

remaining in their existing traditional plan and switching to the 

cash balance pension plan. 

Employee reaction to our cash balance design was overwhelmingly positive. It is important to note that choice may not make 

sense for all employers. Companies need to have flexibility to modify their retirement plans to meet their individual business needs. 

Let me emphasize Eaton did not introduce a cash balance plan 

to reduce costs. In fact, the cash balance design has increased 

costs. Although the choice process required a significant amount of 

money and resources, the cost of congressional inaction would be 

far greater. If certain proposed judicial remedies were applied to 

Eaton, the cost to modify our plan could curtail discretionary 

spending in vital areas like research and development. Furthermore, there would be increased litigation, confusion and complexity 

if we were forced to modify or freeze our plan at this time. The resulting damage to employee morale and trust would greatly disrupt 

Eaton’s day-to-day manufacturing operations. Without legislative 

action, the efforts to align our benefit structure with our business 

needs will have been wasted. 

Legislation is the only effective way to address today’s uncertainties surrounding the hybrid pension designs. Why? Congress has 

indicated through the appropriations process that it does not want 

these important policy issues being determined by the agencies, 

and final resolution of the age discrimination question by appellate 

22

1The Treasury Department recently withdrew proposed regulations addressing hybrid plans 

and age discrimination, which had the potential to provide the needed clarity. The Treasury 

acted in response to clear indications—expressed through the congressional appropriations process—that Congress did not want these issues definitively addressed by the regulatory agencies. 

I.R.S. Announcement 2004–57, I.R.B. 2004–27. 2 Nearly 80% of employees earn higher benefits under a hybrid plan than a traditional plan 

of equal cost. Watson Wyatt Worldwide, The Unfolding of a Predictable Surprise: A Comprehensive Analysis of the Shift from Traditional Pensions to Hybrid Plans 24–25 (February 2000). As 

discussed below, those employees who do better under a traditional defined benefit plan are 

typically granted transition assistance and/or remain under the traditional formula after the hybrid plan is introduced. 

courts is years away at a minimum. This will be too late to address 

the litigation risks that are already beginning to drive employers 

from the system. In the meantime, the retirement security of millions of American families will remain in limbo. 

To prevent widespread abandonment of pension plans by employers, Congress must clarify the legality of hybrid plans. Thank you 

again for the opportunity to appear today. I would be pleased to answer any questions. 

[The prepared statement of Ms. Collier follows:]

Statement of Ellen Collier, Director of Benefits, Eaton Corporation, 

Cleveland, OH 

Chairman Boehner, Ranking Member Miller, thank you for the opportunity to appear today. My name is Ellen Collier and I am the Director of Benefits at Eaton 

Corporation. Eaton Corporation is a diversified industrial manufacturer 

headquartered in Cleveland, Ohio. We have over 50,000 employees worldwide, including over 27,000 employees in 100 locations in the U.S. The states with our 

greatest concentration of employees are Michigan, Ohio, Pennsylvania, North Carolina and South Carolina. In total, we have employees in over 40 states. 

Eaton has four main business groups that manufacture highly-engineered components: Fluid Power, which manufactures hydraulic components, hoses and connectors, and Aerospace products; Electrical, which manufactures residential and commercial power distribution equipment; Automotive, which manufactures engine 

valves, lifters and superchargers; and Truck, which manufactures transmissions for 

heavy and medium duty trucks. Our 2003 sales topped $8 billion, with sales in over 100 countries. The business 

mix of the company has evolved significantly in the past 10 years as a result of over 

50 acquisitions and 48 divestitures. 

I am appearing today on behalf of the Coalition to Preserve the Defined Benefit 

System, a broad-based employer coalition that works exclusively on legislative and 

regulatory issues related to hybrid plans. The Coalition’s nearly 70 member companies, which range from modest-size organizations to some of the largest corporations 

in the U.S., sponsor hybrid defined benefit plans covering more than one million 

participants. 

Before I turn to the specifics of the hybrid issue, I want to thank you Chairman 

Boehner, Ranking Member Miller and other members of the Committee for your 

hard work earlier this year to enact a corporate bond replacement for the obsolete 

30-year Treasury bond rate. As you know, we defined benefit plan sponsors face a 

range of challenges today and having an appropriate replacement rate was critical 

to the functioning of the pension system. 

The Need for Legislative Action 

I want to thank you for calling this hearing to address what is the most pressing 

challenge today in the defined benefit system—the legal uncertainty surrounding 

hybrid plans, and in particular the radical judgment by a single court that hybrid 

plans are age discriminatory. Congressional action is urgently needed to confirm the 

dominant view—expressed by all other legal authorities—that the cash balance and 

pension equity designs satisfy current age discrimination rules.1 Absent such action 

by Congress to clarify the current legal environment, employers facing the threat 

of copycat class action lawsuits over the validity of their plan designs will increasingly be forced to abandon these important retirement programs. Given the success 

of hybrid plans in delivering meaningful, guaranteed retirement benefits to today’s 

workers, 2 abandonment of these programs would be a disastrous result for employees and for our nation’s retirement system. None of us should kid ourselves that 

23

3This correlates with the general experience of other employers. Surveys show that improving 

communication about and employee appreciation of the pension plan, as well as being able to 

show benefits in a lump sum format, are the most important factors underlying employer conversions to hybrid plans. Watson Wyatt Worldwide 2000, supra note 1 at 44. 4Once again, Eaton’s reasons are consistent with those of other employers that move to hybrid 

plans. Watson Wyatt Worldwide 2000, supra note 2 at 44. 

somehow employees win if the current uncertainty persists. Nor should any of us 

assume that a retreat from hybrid plans will be accompanied by a return to traditional defined benefit plans. Indeed, it is far more likely that employers will abandon defined benefit plans altogether. 

To give you a feel for the valuable role hybrid plans play, let me now discuss why 

we at Eaton concluded that a cash balance plan was right for us. Our experience 

is comparable to those of many other companies in our Coalition. 

The Need for a New Pension Design 

Eaton’s presence in various lines of business, and our substantial acquisition activity, created a challenge for our retirement programs: We needed to continue to 

attract and retain high-level talent to remain competitive and continue our growth, 

and we also needed to reduce the confusion and administrative cost resulting from 

multiple pension structures inherited through various acquisitions. Through different acquisitions and across different lines of business we had 6 ongoing pension 

designs for 15,000 non-union represented employees. These included two final average pay designs, one Social Security offset design, two flat-dollar multiplier designs, 

and one cash balance design. Based on employee survey results, we also knew we 

needed to make our pension plans easier for employees to understand.3

Eaton began to examine pension plan alternatives in the mid–1990’s. We knew 

the resulting design would need to be attractive to high-skills talent, easy to understand, and suitable to a mobile workforce. This attention to mobility was important—not only in the labor marketplace, but also within Eaton, as we do have employees that transfer between business groups with different pension plans. Under 

our existing traditional designs, one employee could have benefits from two pension 

plans, simply by transferring from Pittsburgh (headquarters of our Electrical group) 

to Minneapolis (headquarters of our Fluid Power group). Finally, any new retirement program would have to permit seamless integration of new employees brought 

on as a result of acquisitions. This was necessary in order to provide equitable and 

uniform benefits across our workforce and to enhance Eaton’s ability to grow. 

While the examination of pension plan alternatives was underway, Eaton acquired Aeroquip Vickers, a company with about 5,000 non-union represented employees. These employees had a defined contribution plan from the prior owner, but 

no ongoing defined benefit plan—their pension plan had been frozen many years before. We at Eaton felt strongly that we wanted to provide these employees once 

again with the security of a defined benefit plan—in addition to Eaton’s 401(k) plan 

(which has an employer match). We knew that employer funding and assumption 

of investment risk, professional investment management and federal insurance 

guarantees translated into tangible retirement income and significant peace of mind 

for employees. Thus, the need to integrate the Aeroquip Vickers employees into 

Eaton’s benefit structure made the development of a new pension design even more 

urgent. 

Key Considerations 

We considered several options for a new pension design, including a final average 

pay plan, a pension equity plan, and a cash balance plan. We even considered a defined contribution-only program (which we did not prefer, since it lacked the security of a defined benefit plan). In the end, the simplicity, visibility, portability, and 

ease with which an acquired company could be integrated led us to choose a cash 

balance design.4 Along the way, we kept abreast of all regulatory and judicial developments to ensure we were designing a plan that would meet the relevant legal 

standards. Like most other companies that consider switching to a cash balance 

plan, Eaton engaged the top legal, actuarial, and human resources consulting available to help with this process. 

Now that the basic hybrid designs have been called into question, employers facing a set of circumstances similar to ours would have far fewer options. One choice 

would be to stay with the traditional pension design, which tends to deliver meaningful benefits to a relatively small number of career-long workers, has limited 

value as a recruitment device in today’s marketplace and makes integration of new 

employees difficult. The other alternative would be to exit the defined benefit system and provide only a defined contribution plan, which while an important and 

popular benefit offering, provides none of the security guarantees inherent in deVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 H:\DOCS\94751 EDUWK PsN: NNIXON
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5Mellon Financial Corporation, supra note 4 at 11 (90% of employers provide special transition benefits); Watson Wyatt Worldwide, Hybrid Pension Conversions Post–1999: Meeting the 

Needs of a Mobile Workforce 4 (2004) (89% of employers provide special transition benefits). 

Those employers that do not (and that solely convert the prior accrued benefit into an opening 

account balance without additional transition techniques) are typically experiencing financial 

distress at the time of the conversions. Yet despite their financial challenges, they are interested 

in retaining a defined benefit plan that delivers meaningful benefits across their workforce. 6This discussion of conversions highlights another reason why legislative action is so urgently 

needed. Many employers that have converted to hybrid plans using these successful and generous conversion methods have nonetheless been unable to obtain a determination letter from 

the Internal Revenue Service (IRS) stating that their plan complies with the requirements of 

the Internal Revenue Code. This is due to the fact that the IRS announced a moratorium on 

issuance of such letters for hybrid conversions in September 1999 pending review of some of 

the hybrid issues by the IRS national office. Memorandum from the Internal Revenue Service, 

to the EP/EO Division Chiefs (Sept. 15, 1999). It has become clear that the IRS will not begin 

issuing determination letters (for either past conversions caught up in the moratorium or new 

conversions) until Congress resolves the legal uncertainty surrounding hybrid plans. 7Seventy-four percent of 146 employer respondents to a Mellon survey provided pay credits 

in their cash balance plans that increased with age or service. Mellon Financial Corporation, 

2004 Survey of Cash Balance Plans 9. Eighty-seven percent of pension equity plans analyzed 

fined benefit plans. Clearly, it is employees that lose out as a result of today’s uncertainty surrounding hybrid plans. 

As we at Eaton analyzed our specific situation, we took into account the needs 

of employees that were already in our other pension designs. We knew that a cash 

balance design might not meet the needs of every current employee in our existing 

traditional plans. However, we also knew that forcing current workers to remain in 

their existing traditional defined benefit plan, while working side-by-side with new 

workers who earned what might be perceived as a more valuable benefit under the 

new cash balance design, was also not desirable. 

Once we settled on cash balance as our ongoing design, we focused on the particular transition approach we would adopt. We were aware of the diversity of transition approaches and knew that each of these transition techniques had proven successful at addressing the needs of particular companies’’ older workers. Such approaches include grandfathering employees in the prior traditional plan, offering 

employees the choice between the prior and new hybrid formulas, providing the 

‘‘greater of’’ the benefits under the prior or hybrid plan, providing transition pay 

credits or making one-time additions to employees’’ opening cash balance accounts. 

These special transition techniques are used in the vast majority of conversions 

and the variety of approaches provides the flexibility companies need to address 

their unique circumstances and employee demographics.5 Indeed, congressional concerns about how older and longer-service workers are treated during conversions 

have been successfully addressed by employers through the use of the variety of 

transition protections.6

The absence of determination letters harms both employers and employees. The 

determination letter process works as a partnership between employers and the government to ensure that plans are maintained in accordance with our nation’s very 

complex pension statutes and regulations. The fact that this process has broken 

down means plans are not getting the definitive guidance they rely upon to operate 

their plans in full compliance with the law. 

We decided that all 15,000 current non-union employees—regardless of age or 

service—would be able to choose whether to remain in their existing traditional plan 

or earn a pension benefit under the cash balance formula. This choice would be effective 01/01/03. All of the recently acquired non-union Aeroquip Vickers employees 

would enter the new cash balance plan on 01/01/02, and all non-union Eaton employees hired on or after 01/01/02 would enter the new cash balance plan. 

We should emphasize that Eaton did not introduce a cash balance plan to reduce 

cost, and in fact the new plan increased costs in the short-term, and will slightly 

increase plan costs in the long term. This is described in more detail below. 

Description of Plan Design 

Our new cash balance design—the Eaton Personal Pension Account, or EPPA—

consists of several important features. Each participant earns monthly pay credits 

based on the sum of their age and years of service (including any service with an 

acquired company). These credits range from 5% of pay up to 8%, increasing as the 

sum of age and years of service increases. To reiterate, we contribute higher pay 

credits to the cash balance account of older employees and those with longer service. 

Indeed, providing pay credits that increase with age or service is the typical approach in hybrid plans.7 Under Eaton’s plan, the pay credits accumulate, with interVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 H:\DOCS\94751 EDUWK PsN: NNIXON
25

in a recent Watson Wyatt study provided pay credits that increased with age or service. Watson 

Wyatt Worldwide 2004, supra note 4 at 2. 8Due to the IRS moratorium on determination letters discussed above, we do not have a determination letter for our core cash balance conversion affecting Eaton employees as of 1/1/03. 9 An early retirement subsidy in a pension plan provides a financial bonus for employees to 

retire early. To provide a simple example of a fully subsidized benefit, a worker retiring at age 

55 might receive the full $1,000 per month pension benefit he would normally only be entitled 

to at age 65. In other words, there is no actuarial reduction in benefits for the early retirement 

date. One thousand dollars per month for life beginning at age 55 is more valuable than $1,000 

per month for life beginning at age 65; hence the subsidy. The subsidy declines in value if the 

employee remains at the company beyond age 55 and has no remaining value if the employee 

works until 65. In contrast, early retirement supplements are additional temporary benefits payable until Social Security normal retirement age. Employers have taken a variety of approaches 

to the question of whether to include early retirement subsidies in employees’’ opening account 

balances. Some have chosen not to do so since it is impossible to know at the time of conversion 

whether an employee will actually leave the company at a time in the future when they would 

have qualified for the subsidy. Others, like Eaton, have included some or all of the value of the 

subsidy in the opening cash balance account as one technique to minimize the effect of the conversion for employees nearing early retirement eligibility. It is important to note that current 

law protects any subsidy that an employee may have already earned at the time of a conversion. 

To qualify for this subsidy, the employee must of course retire at the retirement eligibility age. 

Of equal importance, current law also allows employers to remove such incentives from their 

plans on a going forward basis. 

est based on the rate of interest for 30-year Treasury bonds, to create the ‘‘personal 

pension account.’’ This design benefits employees of a company acquired by Eaton 

since it recognizes past service with that company when calculating pay credits. The 

cash balance design is also helpful in recruiting mid-career talent, since age (and 

not just service) is a component in the calculation of pay credits. Note that we received an IRS determination letter for this basic cash balance design in November 

of 2002 as it applied to the new Eaton hires and the Aeroquip Vickers employees 

(none of whom experienced a conversion).8 We have also received determination letters for our other active cash balance plan, and another cash balance plan that has 

since been frozen due to a spin-off. 

An employee who chose to switch to the new Eaton Personal Pension Account 

would start with an opening account balance, equal to the value of their pension 

benefit under the existing traditional pension plan—including any early retirement 

subsidies or supplements.9 Since one of our goals with the new design was to make 

our pension plan easier for employees to understand, we felt that using an opening 

balance approach, as opposed to using the existing traditional formula for past benefits and a cash balance formula for future benefits (the so-called ‘‘A+B’’ approach), 

was appropriate. To calculate these opening balances, we assumed a retirement date 

of the later of age 62 or 01/01/06. Employees whose prior pension formula was tied 

to their final pay (this included the vast majority of the employees eligible for making an informed pension choice) also received indexing credits on the opening balance amount for as long as they remained active employees. These indexing credits 

were based on annual changes in the Consumer Price Index (CPI) to mimic the effect that pay increases would have had on the employees’’ prior pension benefit. 

These indexing credits were in addition to the ongoing interest and pay credits mentioned above. So, each month a participant’s balance would increase by pay credits, 

interest credits on the prior balance (including any past pay credits), and indexing 

credits (on the opening balance only). 

A final, but important, note regarding this plan design change is that we made 

several costly changes to the existing traditional plans as well. Our intention was 

to remove certain differences in the plan designs in order make the choice process 

even more equitable. For instance, we added a non-spousal death benefit and an enhanced disability pension provision to the traditional plans—both were features of 

the new cash balance design—to ensure that an employee’s choice would not be 

skewed by concerns over unexpected death or disability. We had concluded that the 

existing ‘‘spouse-only’’ death benefit in our traditional plans was not meeting the 

needs of single parents working at Eaton. 

Along with changes in our pension plan, we also made important changes in our 

401(k) savings plan. These changes included permitting diversification of the company stock matching contribution. The decision to permit diversification had been 

made prior to news reports of troubled company savings plans, such as Enron. 

Under the changes we have adopted, all company stock matching amounts will be 

fully diversifiable by the end of 2004. 

Informed Choice Process 

After deciding on the design, and to give existing employees choice, we had to ensure that the new plan, and the choice, were communicated clearly to all affected 

26

10Section 204(h) of ERISA requires employers to provide advance notice of amendments to 

defined benefit plans that provide for a significant reduction in the rate of future benefit accrual. 

Congress amended section 204(h) as part of the Economic Growth and Tax Relief Reconciliation 

Act of 2001 to require employers to provide a more detailed and more understandable notice 

of any hybrid conversion or other plan amendment that significantly reduces future accruals. 

This reflected Congress’’ view that the appropriate response to the issues that had been raised 

about cash balance conversions was to ensure transparency rather than to impose benefit mandates on employers. The Treasury Department has subsequently issued regulations carrying out 

this expanded notice requirement. Notice of Significant Reduction in the Rate of Future Benefit 

Accrual, 68 Fed. Reg. 17,277 (Apr. 9, 2003) (to be codified at 26 C.F.R. pts. 1, 54, and 602). 11Wear-away is the benefit plateau effect that some employees can experience incident to a 

cash balance conversion. When employers change to a cash balance plan, they typically provide 

an opening account balance in the cash balance account. A benefit plateau results if the value 

of the employee’s cash balance account is less than the value of the benefit he accrued under 

the prior plan as of the time of the conversion. Until the value of the cash balance account 

catches up to the value of the previously accrued benefit, it is the higher accrued benefit to 

which the worker is entitled—hence, the term ‘‘plateau.’’ This benefit plateau typically results 

from the fact that the prior accrued benefit includes an early retirement subsidy while the opening account balance does not. It should be noted that wear-away has long been approved by the 

regulatory agencies as a valid method for transitioning between benefit formulas. 12Those employees who experienced a wear-away as part of the conversion process did so only 

because they chose the new cash balance formula, concluding that even with some period of 

wear-away the new cash balance design was best for them. 

participants. For the recently acquired Aeroquip Vickers employees, who would be 

receiving a new pension for the first time since joining Eaton, we issued Summary 

Plan Descriptions, held on-site meetings, and created a website where employees 

could model future EPPA benefits under a variety of economic assumptions. 

For the choice process, we drafted written communication materials with the intent of satisfying—and, in fact, exceeding—ERISA section 204(h).10 Each employee 

received a detailed Decision Guide, an individualized Personal Choice Statement, 

and an easy-to-read Quick Comparison Chart. In developing these materials, we 

kept in mind the high standard that had been set by Kodak—whom Senator Moynihan publicly cited as the ‘‘gold standard’’ for hybrid conversion communications—

during its choice process, and strived to meet or exceed it. In addition, we made continual use of employee focus group feedback to refine these materials. 

The Decision Guide explained, in detail, the features of the participant’s existing 

traditional plan and the EPPA, including details regarding the calculation of the 

opening balance. This document displayed charts of both options—the current plan 

and the EPPA—and how they compared at future ages under a certain set of assumptions, using hypothetical examples. In addition, we explained the concept of 

wear-away, 11 and graphically described the effect it could have on employees. The 

Quick Comparison Chart was a side-by-side comparison of the main provisions of 

each option. We should note that Eaton’s approach minimized the effect of wearaway. The inclusion of early retirement supplements and subsidies, as well as the 

effect of indexing credits, mitigated the effect of, and shortened the duration of, 

wear-away in most cases. In fact, often it was the inclusion of early retirement supplements in the value of the protected benefit under the existing current design—

which is not required by law—that caused an appearance of wear-away.12

The Personal Choice Statement used actual individualized participant data so 

that each employee could compare their estimated future benefit accruals under 

each option, under a certain set of assumptions. The data used for these statements 

was audited in advance of, and in anticipation of, this project. In particular, each 

of the 15,000 eligible employees was asked to review and confirm or correct their 

work history so that accurate service data was used for any estimate. 

After the written materials were sent out, we held over 250 educational meetings 

and web casts at all 100 U.S. and Puerto Rico locations. Spouses and financial advisors of employees were also invited to attend these meetings, which were led by 

independent third-party pension experts. 

We also developed a website where employees could model individualized scenarios based on their own differing economic assumptions, including salary increases and interest rate assumptions. In addition, the Choice Website contained all 

the educational information that was included in the written materials. 

If employees had questions, they could call the Pension Choice Helpline, where 

independent third-party pension experts answered questions about the different 

plans and ran individualized comparisons on the spot. If there was a question that 

the Pension Choice Helpline representatives could not answer, we made sure the 

employee was connected to someone at Eaton who could answer his or her question. 

27

If an employee did not make a choice, he or she remained in his or her existing 

traditional plan. In addition, we permitted employees to make a one-time change 

in their initial choice during a ‘‘grace period.’’

The Reception 

At the end of the day, we wanted to make sure that all participants had enough 

information to make an informed choice. Based on the overwhelmingly positive reaction we received from employees, we believe we accomplished that goal. 

Across the board, employee reaction was very positive regarding the pension 

choice process. The vast majority of employees said that the materials provided 

helped them make an informed decision. In fact, employee feedback indicates that 

this process helped employees understand their existing traditional pension plan as 

well as the new cash balance option. In addition, we received many comments that 

this process only strengthened the trust that existed between Eaton and its employees. We received no letters of complaint, and encountered no disruption in daily 

business operations during the conversion process. 

In the end, about one-third of eligible employees chose the EPPA. The breakdown 

by age and service went as expected. Of the employees more than 20 years away 

from retirement, over 60% elected to switch to the EPPA. Of the employees at retirement age, or within 10 years of retirement, over 80% elected to remain in their 

existing traditional pension plan. However, there were several instances where, 

after modeling personalized scenarios and reviewing examples in the Decision 

Guide, employees close to or at retirement eligibility chose the EPPA. It was not 

unusual for the EPPA to provide a greater benefit for a retirement eligible employee 

some years in the future, largely due to the inclusion of early retirement supplements and subsidies in the opening balance and the application of indexing credits. 

Had we kept these employees in their current pension design, we would have deprived them of a chance to increase their pension benefit, even at a point late in 

their careers. Of the employees between 10 and 20 years from retirement, over 40% 

switched to the EPPA. 

I was in the ‘‘in-between’’ group mentioned above, and although I chose to remain 

in the existing traditional plan, both benefit designs had distinct advantages depending on my expectations regarding my future career path. Before joining Eaton 

I worked at a company where I participated in a cash balance plan for 12 years. 

As a mid-career hire at Eaton, and as a full-time working mother, it’s important 

to me to have retirement benefits that fit my needs. The employee reaction to 

Eaton’s decision to implement a cash balance plan and provide an informed choice 

was overwhelmingly positive. This, along with similar data from numerous surveys, 

indicates that employees understand and appreciate the need for companies to have 

flexible retirement programs that fit the needs of today’s workforce. 

All in all, the choice process set a new standard at Eaton for communicating 

change throughout the company. However, we recognize that choice may not be the 

right answer for other businesses and other employee populations and, under different circumstances, it might have been the wrong answer for Eaton. Some employers, for example, have focused on grandfathering employees or pursuing a ‘‘greater 

of’’ approach rather than asking their employees to choose between the plans. Other 

companies, while scrupulously protecting benefits already earned (as current law requires), have been limited by economic circumstances in the degree of special transition benefits they can provide. 

Our Coalition believes it would be extremely unwise to mandate particular transition techniques for future conversions, as some in Congress have proposed to do, 

since a broad range of methods is available to ensure that employees are treated 

fairly in the transition process. One mandated conversion method—or even several—would deny employers needed flexibility to customize their transition approaches to their particular workforce. Such conversion mandates—to pay the greater of the traditional or hybrid benefits or to offer choice, for example—also provide 

employees with a guaranteed right to future benefits that have not yet been earned. 

These mandates would represent a disturbing shift in the basic norms of American industrial relations. Employee hopes or expectations as to future benefits would 

be converted into explicit legal entitlements. This profound change from existing 

principles suggests that the terms and conditions of a worker’s employment may not 

be revised from those in existence at the time the employee is hired. Such a regime 

would rob employers of the ability to adapt to changed circumstances and would undermine the business flexibility on which America’s prosperity and robust employment are built. Presumably, policymakers would not restrict employers from being 

able to alter—on a prospective basis—their 401(k) match level or the design of their 

health plan—but this is exactly the kind of restriction that mandated conversion 

techniques impose. Our Coalition sees no end to the harm if Congress goes down 

28

14Watson Wyatt Worldwide 2004, supra note 4 at 3. 15 Id. In addition, conversions are often accompanied by improvements to other benefit programs, such as 401(k) plans, bonuses, and other post-retirement benefits. In fact, one very recent survey found that when these improvements are taken into account, 65% of respondents 

expected the costs of providing retirement benefits following a cash balance conversion to increase or remain the same. Mellon Financial Corporation, supra note 4 at 15. Another survey, 

conducted in 2000, also found that overall costs following a conversion were expected to increase 

or remain the same in 67% of the cases. PricewaterhouseCoopers, Cash Balance Notes 4 (May 

2000). 16This decision, Cooper v. IBM Pers. Pension Plan, 274 F. Supp. 2d 1010 (S.D. IL 2003), held 

that the cash balance and pension equity hybrid designs were inherently age discriminatory. 

The court concluded that such pension designs violate the pension age discrimination statute 

which provides that the rate of a participant’s benefit accrual may not decline on account of 

age. The court interpreted the pension age discrimination statute to mean that the amount of 

annuity benefit received at normal retirement age for a period of service (e.g., 1 year) cannot 

be less for an older worker than a younger worker. Such a conclusion is clearly contrary to the 

basic ‘‘time value of money’’ principle that a younger worker will have a longer period of time 

to accrue interest, and thus will have a larger benefit amount at retirement based on an equal 

contribution today. Under this decision, any pension plan that contains a compound interest feature is inherently age discriminatory. This misguided logic not only impugns hybrid plans, but 

also contributory defined benefit plans (common among state and local government employers), 

plans that are integrated with social security and plans that provide indexing of benefits to 

guard against inflation. All other federal courts that have addressed this issue, including those 

decided subsequent to the Cooper case, have reached the opposite conclusion and indicated that 

the cash balance design is age appropriate. Tootle v. ARINC, Inc., Civ. Action No. CCB–03–1086 

(D. MD June 10, 2004); Campbell v. BankBoston, N.A., 206 F. Supp. 2d 70 (D. MA 2002); Eaton 

v. Onan, 117 F. Supp. 2d 812 (S.D. IN 2000). See also Godinez v. CBS Corp., 31 Employee Benefits Cas. (BNA) 2218 (C.D. CA 2002), afff’d, No. 02–56148, 2003 U.S. App. LEXIS 23923 (9th 

Cir. 2003); Engers v. AT&T, No. 98–3660 (D. NJ June 6, 2001). Nonetheless, a number of employers have now been sued for the alleged discriminatory nature of their plan design based on 

the Cooper decision. 

the path of converting expectations into legal rights. Certainly, employers will be 

extremely reluctant to institute any new benefit program in the future, and those 

employers that today do not offer pension or health plan coverage for their employees will be extremely unlikely to do so. 

The Cost 

It is very important to note that Eaton did not introduce a cash balance plan to 

reduce costs. In fact, the long-term ongoing cost of the EPPA is slightly higher than 

the steady-state costs of the prior plan designs. In addition, we incurred higher 

short-term costs due to the fact that most participants maximized their benefits, 

and therefore the cost to Eaton, when they made their individual pension choice. 

Outside of plan-related costs, Eaton spent several million dollars in the overall 

choice effort, including consulting fees, communication materials and pension modeling tools, as well as lost work hours due to employee meetings. 

Based on press accounts about cash balance conversions, one might expect that 

Eaton’s cost experience is atypical. This is not the case. Recent surveys confirm that 

conversions to hybrid plans typically increase costs. Recent data from a Watson 

Wyatt Worldwide study examining 55 large companies that have recently converted 

from traditional defined benefit plans to hybrid plans shows that retirement plan 

costs increased by an average of 2.2% following a conversion.14 This figure further 

increased to 5.9% when seven companies that were in severe financial distress were 

excluded from the pool.15

The Ramifications if Congress Does Not Provide Clarity 

If Congress does not move quickly to provide legal certainty for hybrid plans, 

many Americans may soon lose valuable retirement benefits. The current legal landscape is ominous. One rogue judicial decision has made the threat of age discrimination class action litigation a very real concern for employers.16 Potential damage 

awards from such suits could reach astronomical figures—into the hundreds of millions or even billions of dollars—and the potential amounts of these awards continue 

to grow the longer the plans remain in effect. In Eaton’s case, the cost to modify 

our plan for alleged ‘‘age discrimination’’ in its design could curtail our ability to 

commit funds for other important functions, such as for research and development—

and this is for a plan that has not yet been in existence for 3 years! 

Beyond the cost in dollars, there would be increased complexity in the administration of our benefit programs and the programs would be harder to understand 

should we have to ‘‘correct’’ for the natural effect of compound interest. Moreover, 

any change to our well-received conversion process would greatly disrupt our dayto-day business operations. If a remedy would require Eaton to redo the choice process, there would be even more confusion, complexity and business disruption. Worst 

29

17 Hewitt Associates LLC, Current Retirement Plan Challenges: Employer Perspectives 2 

(2003). 18These figures are based on data from the Pension Benefit Guaranty Corporation (PBGC) 

indicating that, as of the year 2000, there were 1,231 hybrid plans in existence with 7,155,000 

participants. PBGC, Pension Insurance Data Book 2002, at 5–6. 

of all, there would be a huge impact on employee morale and employee trust. Eaton 

prides itself on building trust with its employees, and we believe that the cash balance conversion experience strengthened that trust. 

Like the majority of other employers who switch to a cash balance design, Eaton 

made every effort to act in ‘‘good faith’’ during this conversion. As opposed to adopting a less costly, less secure and less controversial defined contribution design, 

Eaton incurred additional cost through the conversion process, provided a variety 

of communications materials and tools, used a fair conversion method, and minimized the effects of wear-away. While Eaton was able to provide a generous ‘‘choice’’ 

conversion, it is by no means the only suitable method by which employers can 

change benefit designs, and does not reflect the business realities for all companies. 

Without legislative clarification that our cash balance design is age appropriate, the 

efforts we made to align our benefit structure with our business needs, while at the 

same time enhancing benefits for and strengthening trust with our employees, will 

have been wasted. 

In today’s economic climate, prudent business leaders seek to minimize corporate 

risks not associated with the company’s core business. Absent congressional action 

to mitigate such risks associated with hybrid plan sponsorship, these leaders will 

likely be forced to terminate or freeze hybrid pension plans in order to limit exposure to class-action litigation with 9 or 10 figure damage awards. In an October 

2003 survey, 41% of hybrid plan sponsors said they would freeze their plans if the 

legal uncertainty surrounding hybrid plans was not resolved within a year.17 Based 

on the most recent government data available, this translates into approximately 

506 hybrid plan terminations or freezes, which could affect as many as 3 million 

participants and their families.18 It should be noted that the bulk of these employers have concluded that the traditional pension design no longer meets the needs 

of large numbers of their current and future employees. Thus, these employers are 

extremely unlikely to return to a traditional defined benefit plan after freezing or 

terminating their hybrid plan. This unfortunate reality of widespread freezes and 

terminations will only become more stark should legislative resolution take longer. 

Why must Congress be the one to act to clarify the validity of the hybrid designs? 

First, Congress has indicated through the appropriations process that it does not 

want these important policy issues being determined by the regulatory agencies. As 

a result, the Treasury Department has withdrawn its proposed regulations addressing hybrid plans and age discrimination principles, which had the potential to settle 

the open issues regarding hybrid plans. Second, final resolution of the age discrimination question by appellate courts is years away at a minimum, too late to address 

the litigation risks that are beginning to drive employers from hybrid plans and the 

defined benefit system. Neither are the courts the appropriate forum to consider the 

broad public-policy ramifications (for employees and their families, for employers, 

and for our nation’s retirement policy) of holding the cash balance and pension equity designs to be age discriminatory. 

In order to prevent widespread abandonment of hybrid plans by employers—and 

the loss of retirement security this would produce for millions of American families—Congress must clarify that the cash balance and pension equity designs are 

age appropriate under current law. Congress should also provide legal protection for 

the hybrid plan conversions that have already taken place in good faith reliance on 

the legal authorities operative at that time. Finally, should Congress decide to establish rules to govern future conversions, our Coalition strongly recommends that 

it avoid the mandates guaranteeing future benefits that will merely accelerate employers’’ departure from the defined benefit system. 

Conclusion 

Mr. Chairman, I want to thank you once again for calling this hearing. Legislation is the only effective way to address today’s uncertainty surrounding hybrid pension designs and prevent further erosion of the retirement benefits of American families. Our Coalition looks forward to working with you and members of the Committee to achieve this objective. 

Thank you, again, for the opportunity to appear today. I would be pleased to answer any questions you may have. 

30

Chairman BOEHNER. Professor Clark. 

STATEMENT OF DR. ROBERT L. CLARK, PROFESSOR, COLLEGE 

OF MANAGEMENT, NORTH CAROLINA STATE UNIVERSITY, 

RALEIGH, NORTH CAROLINA 

Dr. CLARK. Mr. Chairman, Members of the Committee, ladies 

and gentlemen, I appreciate the opportunity to testify today on 

characteristics of cash balance plans. Over the past 5 years I have 

written a series of papers examining advantages and disadvantages 

of hybrid plans and the impact of the transition from traditional 

defined benefit plans to cash balance plans. The Committee staff 

has reviewed many of these papers. 

My comments today will focus on three important issues that 

form the basis of the current policy debate on cash balance plans. 

First, starting a new cash balance plan where there was none previous to that, what are the primary issues and are there concerns; 

second, converting a traditional defined benefit plan to a cash balance plan; and, third, the presence of the present value of pension 

benefits, how does it change with continued work and what is this 

wear-away issue? 

First, starting a new pension plan, Table 1, which is in the testimony I think available to all the Members, illustrates the different 

characteristics of defined benefit plans, defined contribution plans, 

and hybrid plans. By looking at this, even a cursory review of these 

characteristics would convince us that most workers, some workers, 

and some firms are likely to prefer traditional defined benefit 

plans. Other workers and other firms are likely to prefer defined 

contribution plans. And some other workers will prefer cash balance or their hybrid plans. It is this choice that makes our system 

work in many regards. 

Cash balance plans, for example, do not have some of the characteristics of defined contribution plans that worry many policy analysts. Cash balance plans tend to cover all workers, participation 

is not voluntary. Investment risk is primarily borne by the firm 

and not individual workers. They provide an annuity option. In addition, cash balance plans provide the portability that is lacking in 

most traditional defined benefit plans. So workers in firms can 

choose what kind of pension plan most directly fits their own preferences and needs. 

Thus, I do not see any social policy reason for excluding cash balance plans as an option for firms and workers when they are first 

considering the adoption of their plans. 

Second, converting existing defined benefit plans. In fact most of 

the adverse reaction to cash balance plans has come not from new 

startup plans but from conversion of traditional plans and the potential loss expected by senior workers. I would just reiterate the 

comments of Mr. Miller, who used very carefully the words ‘‘can 

lose unexpected benefits.’’ these are not earned benefits, they are 

not promised benefits, as he must well know, instead the potential 

to gain these benefits. 

In a series of papers I have examined the change in pension 

wealth associated with plan conversions. Virtually all of these studies show that plan conversions are likely to increase the lifetime 

pension wealth of most workers covered by pension plans on their 

31

current jobs. This finding is due primarily to the portability or the 

various lack of portability inherent in defined benefit plans. 

In contrast, traditional defined benefit plans also subsidize the 

long tenured senior workers while penalizing mobile workers. As a 

result of this subsidy most senior workers who expect to remain 

with the company until early retirement will, in fact, face a decline 

in potential retirement benefits. Please note I use the word ‘‘potential.’’

It is important to consider what relevant comparisons should be 

used in assessing the impact of plan conversions. Most discussion 

has assumed that the relevant counter-factual is that the worker 

would remain with the firm, the old pension would remain in place, 

and wage growth would continue. This perception is in part due to 

some of the ways that companies have in the past communicated 

their information to their workers. 

Again, Mr. Miller mentioned the pension calculators that companies use, that actually assume, make those assumptions. But are 

these assumptions consistent with the reality that we face today? 

Again Mr. Miller went through a long list of problems in our economy today that make those assumptions seem less reasonable or 

less likely. 

First, a worker could be fired or laid off from their job. Second, 

the plant could close. Third, the company could be facing difficult 

financial problems and terminate a plan without starting a new 

plan. Fourth, the company could be facing difficult financial problems and reduce the rate of growth of earnings. Fifth, the company 

could terminate the defined benefit plan and start a defined contribution plan. Sixth, the worker could leave for personal reasons. 

If any of these events were to happen, they would have essentially 

the same impact as the company converting from a traditional defined benefit plan to a cash balance plan. 

So one would have to then question why would you pick out one 

of these options and have legislation restricting it when all of these 

other events would have essentially the same effect. 

In several papers I have shown that the potential loss in pension 

wealth is basically the same as the early retirement subsidy in 

these plans. And as Mr. Delaplane pointed out, this is certainly a 

key in the future with population aging, concern about Social Security financing, and other issues related to our slowly growing labor 

force. The idea that companies want to restrict or encourage workers to leave is going to be less important. They may actually be trying to encourage them to stay in the traditional defined benefit 

plan when the early retirement subsidies are certainly not consistent with that. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Clark follows:]

Statement of Dr. Robert L. Clark, Professor, College of Management, North 

Carolina State University, Raleigh, NC 

INTRODUCTION 

Coverage of employees by traditional defined benefit plans has been declining for 

almost three decades. Initially, the shift was away from traditional defined benefit 

plans to greater coverage by defined contribution plans, especially 401 (k) plans. 

This trend was most prominent among small employers (Clark and McDermed, 

1990). Beginning in the 1980s, many large employers began converting their tradiVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 H:\DOCS\94751 EDUWK PsN: NNIXON
32

tional defined benefit plans to hybrid plans, primarily cash balance plans. Interestingly, the conversion to cash balance plans has generated a major policy debate 

while the more comprehensive shift to defined contribution plans has continued with 

relatively little controversy. 

In my testimony today, I will address key aspects of the plan conversion process 

and why changes in pension plans are being made. In addition, I will review the 

policy issues associated with these conversions and place them in the broader context of labor market policies in the U.S. Two questions seem paramount. First, 

should federal regulations allow traditional defined benefit plans, defined contribution plans, and cash balance plans to continue to exist? Second, are new regulations 

needed to deter plan conversions for workers covered by an existing defined benefit 

plan or at least to compensate these workers for potential loses incurred by the plan 

conversion? Given the current discussion in Congress and the on-going judicial review, it is important to understand the pros and cons of each type of pension plan 

and to determine whether these plans help working Americans to achieve an adequate retirement income. 

CHOOSING A PENSION PLAN TYPE 

The value of participation in any type of pension plan is a function of lifetime 

working patterns, rates of growth in annual earnings, risk preferences, tax rates, 

and retirement ages. Employers offer pensions to help attract, retain, motivate, and 

then retire workers. Both employers and employees are interested in the cost of providing a dollar of pension benefits. In a free labor market, workers search for the 

firm and the compensation package that best meets their preferences while companies use pensions (or the lack their of) to entice individuals with the desired employment characteristics to become part of their workforce. 

Workers who expect to change employers frequently will desire jobs that have a 

higher percentage of total compensation in earnings and pensions that are portable. 

Employees who believe that they will remain with a company for their entire career 

will be satisfied with pensions that penalize turnover and are based on their final 

earnings. Companies that offer noncompetitive compensation packages will tend to 

have more difficulty hiring and retaining quality workers. Employers must attempt 

to provide the compensation package that provides the greatest value to workers per 

dollar of cost. 

Over time, events can change the pension plan that workers and firms find most 

desirable. Changes in regulatory costs, shifts in labor demand, and the changing 

composition of the labor force will affect the type of pension that provides the highest value per dollar of cost to workers. In response, companies may (1) transform 

traditional defined benefit plans to cash balance plans, (2) terminate the defined 

benefit plan and establish a defined contribution plan, or (3) terminate the defined 

benefit plan and offer no pension plan. Any of these changes will have an impact 

on current workers and in general, a change in pension plan will make some workers better off while potentially having an adverse impact on others. My testimony 

today examines the three basic choices of pension plans that are currently available 

in the U.S. labor market. The basic premise is that some workers and some firms 

will prefer traditional defined benefit plans while other workers and firms will find 

greater value in defined contribution and cash balance plans. 

Employers offer pension plans to their employees because they help in the management of human resources. Retirement policies are integral components of employment contracts. Some individuals will seek out firms that provide pension plans 

and alter their careers to remain with these employers, while other workers have 

a higher preference for current income and will select employers who do not provide 

deferred compensation. Traditional defined benefit plans impose financial penalties 

on workers who leave ‘‘too early’’ and thus these firms will tend to have lower turnover rates than companies with defined contribution and cash balance plans. 

Most traditional defined benefit plans also provide substantial early retirement 

subsidies. These subsidies to retire at ages as early as 50 or 55 have been a major 

determinants of retirement ages in these firms. Early retirement subsidies are one 

of the major differences between traditional defined benefit plans and cash balance 

plans and it is the elimination of these subsidies that is often at the core of the debate over plan conversions. 

TYPES OF PENSION PLANS 

Pension plans have traditionally been divided into two basic types: defined benefit 

and defined contribution plans; however, in the past decade many large employers 

have converted their traditional defined benefit plans into cash balance plans. These 

three plan types differ substantially in the manner in which benefits are determined, their methods of funding, who bears the investment risk associated with the 

33

pension portfolio, the portability of benefits from one company to another, and the 

regulatory status of the two types of plans. The basic characteristics of defined benefit plans, defined contribution plans, and cash balance plans are shown in Table 

1. 

In general, defined benefit plans promise a specified benefit based on years of 

service, average earnings over the last three or five years of employment, and a generosity parameter chosen by the firm.1 These plans typically provide significant retirement benefits to career employees but award much smaller benefits to employees 

who remain with the company for a shorter period. In defined contribution plans, 

employers and employees make periodic contributions into individual accounts for 

each worker. Workers often determine the size of their annual contributions and 

they decide how their pension funds will be invested. Cash balance plans are legally 

defined benefit plans but have many characteristics of defined contribution plans. 

The benefit in these plans is specified as a lump sum that workers may claim when 

they leave the firm. 

Each type of plan has advantages and disadvantages for workers and for the plan 

sponsor. Which plan type is best for employees? The highest value plan for a worker 

will depend on individual risk preferences and expected lifetime work patterns. 

None of the three plan types dominates the other two for all workers. Some workers 

and firms will be better off with traditional defined benefit plans while others will 

have greater lifetime income if they participate in a defined contribution or cash 

balance plan. 

The major disadvantage to workers of participation in defined benefit plans is the 

lack of portability of the pension benefits. Workers who change jobs frequently will 

have significantly lower benefits than those that remain with a single firm throughout their careers. Lower total retirement benefits are the result of final pay benefit 

formulas. Final earnings for workers who leave before retirement are not indexed 

to prices or future wage growth. Individuals who leave a pension-covered job relatively early in their careers will have retirement benefits from their first job based 

on average earnings many years in the past. 

A key point for policy makers to understand is that defined benefit plans systematically provide greater benefits to senior workers with long years of service while 

providing only minimal benefits to mobile workers who expect to remain with the 

company for only a few years. Advocates that argue that traditional defined benefit 

plans are the ‘‘best’’ type of pension tend to ignore the limited benefits that these 

plans provide to short-term workers. The more frequent transitions of working 

women means that they are most vulnerable to suffering repeated losses in potential pension wealth throughout their working careers. 

Another disadvantage of defined benefit plans is that the method of benefit accrual and the value of benefits are more difficult to understand compared to the 

value of individual accounts under defined contribution plans. Managers report that 

workers often do not understand the difference between the current and future 

value of these pensions, the annual gain in value or cost associated with the plans, 

and the impact of job changes on ultimate retirement benefits (Clark and 

Munzenmaier, 2000). The difficulty in communicating the value of defined benefit 

plans has led many employers to conclude that their employees do not give them 

sufficient credit for the costs of defined benefit pensions. This implies that workers 

do not correctly assess the cost and value of defined benefit plans. Managers often 

give this as a reason for converting traditional defined benefit plans to cash balance 

plans with individual accounts that are easier to explain to their workers (Clark, 

Haley, and Schieber, 2001). 

The retirement benefit for participants in defined contribution plans depends on 

the size of employer and employee contributions throughout the work life and the 

returns to the investments made with the pension funds. Under these plans, the 

value of the pension at any point in time is the account balance. If contributions 

are made at a relatively even rate throughout a worker’s career, the value of the 

account will grow more proportionately than under a defined benefit plan of comparable generosity. An important advantage of these pension plans is that the benefits are portable and can be taken with the workers when they change jobs. 

Potential disadvantages of defined contribution plans for employees are contributions are often voluntary, workers bear the investment risk of these plans, and the 

benefits are typically paid in the form of lump sum distributions. Many defined contribution plans require workers to decide if they will make a pension contribution. 

Employer contributions may be contingent on employee contributions. Workers who 

are myopic may decide not to make pension contributions early in their careers and 

will therefore accumulate relatively low retirement accounts. In defined contribution 

plans, workers generally must make decisions concerning how to invest their funds. 

34

Some participants may invest too conservatively while others may make more risky 

choices that affect the size of their ultimate retirement accounts. 

Primary policy concerns with the growing incidence of defined contribution plans 

include their reliance on worker decisions on when to participate and the level of 

contributions, the financial market risk that the worker must bear, and use of lump 

sum distributions. Thus, workers may start contributing late in their working lives 

and accumulate relatively low retirement benefits, they may contribute too little and 

thus have only small retirement accounts, or they may make bad investment choices 

that could dramatically lower retirement benefits. The lack of annuitization also 

raises the possibility that workers and spouses could outlive their retirement income. In the past decade, many large employers have increasingly converted traditional 

defined benefit plans into cash balance plans (Brown, et al, 2000). In many regards, 

the conversion of traditional defined benefit plans into cash balance plans by employers is an attempt to offer workers a pension plan that combines desirable features of both defined benefit and defined contribution plans. Cash balance plans are 

legally defined benefit plans but they contain many of the features of defined contribution plans that workers seem to prefer. 

In cash balance plans, all qualified workers are covered by the plan and the firm 

typically makes all of the contributions into the pension fund. The firm is responsible for insuring that sufficient monies are in the pension account to pay all promised benefits and the plans are regulated as defined benefit plans. Benefits are specified as an account balance similar to defined contribution plans. Upon leaving the 

firm, the worker receives the full value of the pension account. The account grows 

each year from new contributions and from the crediting of a specified return on 

the existing monies in the account. In addition, cash balance plans tend to be more 

age neutral in their retirement incentives compared to defined benefit plans. 

Compared to traditional defined benefit plans, cash balance plans provide the advantage of distributing benefits more equally across years of service, are easier to 

explain to workers, and provide portable benefits to mobile workers. Compared to 

defined contribution plans, cash balance plans typically provide universal coverage 

to qualified workers, keep the investment risk with the employer, and offer a choice 

of an annuity or a lump sum distribution. 

Given the differences in plan characteristics and how they affect ultimate retirement benefits, it is easy to see why some workers and firms will prefer each type 

of pension plan. Consider an economy where employer-based pensions were previously banned. Now let this legal restriction be eliminated and assume that firms 

could choose to establish a traditional defined benefit plan, a cash balance plan or 

a defined contribution plan. It is likely that we would observe a distribution of plan 

types that would reflect the human resource objectives of firms and the preferences 

of their workers. Plan choices would maximize the well being of workers and their 

employers. 

ESTABLISHING NEW PENSION PLANS 

Based on this analysis, it is difficult to understand why anyone would oppose limiting the choice of pension plan types that are available to workers and firms provided that they are consistent with broad national retirement objectives and federal 

regulations. Each of the three plan options provides value to workers; however, 

workers with different characteristics will benefit more or less under various plan 

options. Individuals who remain with a single firm for many years, especially those 

that stay with the company until they retire are the big winners in traditional defined benefit plans. In contrast, more mobile workers accumulate far less benefits 

and are the big losers in defined benefit plans. 

The trend toward greater use of defined contribution plans and the transition toward cash balance plans clearly indicates changes in the composition of the labor 

force and the emergence of workers who do not expect to remain with the same company over their entire career. In addition, workers are now leery about accepting 

the implicit promise of lifetime employment that many larger firms formerly offered. 

In the past, many workers employed by large industrial corporations thought they 

had lifetime jobs and were willing to accept benefits that were based on that 

premise. With the recent history of significant layoffs of senior workers, many of 

these corporate giants have lost their traditional aura as companies where workers, 

even highly productive ones, can expect to spend an entire career. Thus, workers 

are much less willing to participate in defined benefit plans and are much more 

likely to demand cash balance plans or defined contribution plans. 

Thus, in answer to my first question, I believe that a reasonable public policy is 

one that allows employers and employees to choose from among these three types 

of retirement plans when first considering the establishment of a pension. This 

35

range of choices should be good for employers and allow workers to select the type 

of pension plans that maximizes their chances of saving for retirement. 

In fact, it is not the establishment of new cash balance plans that has spawned 

the rebellion against these plans. Instead, worker criticism and the demand for policy actions to restrict the use of cash balance plans has been the result of companies 

converting existing defined benefit plans into cash balance plans. It is in the conversions where winners and losers are most clearly identified. One can only wonder 

why critics have focused on conversions to cash balance plans while devoting much 

less attention to the much large trend of terminating defined benefit plans and establishing defined contribution plans. All of the issues are the same concerning the 

lost opportunities to earn future pension benefits based on final earnings and how 

starting values or termination benefits are determined. Yet for almost 30 years, the 

trend away from defined benefit plans toward defined contribution plans went basically unchallenged while the more recent movement toward cash balance plans has 

been aggressively opposed. 

Consider an economy much like that prevailing in the United States prior to 1975 

in which defined benefit plans dominated. Now allow the economic, demographic, 

and regulatory environments to change. Other changes follow. Congress imposes significant new government regulations, there are major changes in the composition 

and growth rate of the labor force, and domestic employers face increased global 

competition. In response to these new conditions, turnover rates increase and job 

tenure declines. In such a changing economic environment, it is not surprising that 

workers and firms consider amending their pension plans. These shifts provide 

choices to workers just entering the labor market but also have important implications for current employees who have been participants in existing defined benefit 

plans. Current employees, especially senior workers who are nearing early and normal retirement ages face the potential of reductions in future pension benefits. It 

is these potential adverse affects that are now considered. 

ACCUMULATING PENSION BENEFITS IN DEFINED BENEFIT PLANS 

A defined benefit pension plan promises a stream of future income in exchange 

for the current labor of plan participants. When employees leave the firm or the 

company terminates a pension plan, the plan sponsor is legally required to pay 

workers the value of all vested benefits based on the existing benefit formula, earnings to date, and their years of service. This is the benefit that would be paid when 

the worker reaches the normal retirement if she were to quit the company today. 

In the case of a plan termination, this is the benefit that the firm is legally required 

to pay the worker at the normal retirement age. 

The present value of vested benefits beginning at the normal retirement age discounted back to the current age or the termination date can be found. This is the 

present value of the legally vested pension accrued to date. Changes in this value 

with continued employment represent annual benefit accruals. It is easily shown 

that the accrued benefit rises with increases in years of service, increases in annual 

earnings, and as the age of retirement approaches (Kotlikoff and Wise, 1985, 1989). 

The present value of vested benefits increases as a proportion of earnings as the 

individual remains with the firm and approaches retirement. A worker who remains 

with the firm with a traditional defined benefit plan will see pension wealth and 

pension compensation grow rapidly with continued employment. A worker who quits 

loses the opportunity to achieve this higher pension at older ages. 

Most defined benefit plans offer early retirement benefits. Typically, the there is 

a sharp increase in the value of pension benefits when the worker reaches the early 

retirement age. This occurs because plans usually do not actuarially reduce benefits 

when they are started between the early and normal retirement ages. Instead these 

benefits provide a higher level of lifetime pension benefits than if the receipt of benefits was delayed until the normal retirement age. This early retirement subside 

provide a strong incentive for workers to retire at the earliest possible age and 

many employees choose to retire at that time. 

Prior to reaching the age of early retirement, each additional year of service produces increases in future benefits that progressively increase in absolute value and 

as a percent of annual compensation. The present value of benefits is also increasing 

with additional years of employment. This pattern of benefit accrual is often called 

‘‘backloading’’ and is the reason that defined benefit plans provide higher benefits 

to workers who remain with a single company compared to more mobile workers 

who change jobs throughout their careers. If the worker continues to work after the 

early retirement, the gain in future benefits is substantially reduced in a form of 

wear away of pension benefits. It is possible that continued employment would ultimately result in a decline in the present value of lifetime benefits, yet another form 

of wear away in existing plans. 

36

The shift to cash balance plans has sometimes been characterized as plan sponsors reneging on their employment and pension contract. If the company simply provides workers their vested benefit as required by law, the workers will suffer the 

same pension loss as if they had voluntarily left their employer or if they had been 

laid off. It is important to recognize that the effect on the present value of pension 

benefits is the same whether the plan is terminated, converted to a cash balance 

or defined contribution plan, the worker quits to take a new job, the company lays 

off the worker, or there is a plant closing. In most conversions to cash balance plans, 

plan sponsors have used a combination of grandfathering and other transition provisions to eliminate or reduce the extent to which workers are adversely affected by 

plan changes. 

Virtually all traditional defined benefit plans have subsidized early retirement 

provisions. These plan characteristics have been an integral component of company 

retirement policies since the 1960s or 1970s and have been used to encourage workers to retire at specified ages. The economic expansion of the 1990s was accompanied by a slowing in the growth the labor force. The twin forces of rapid economic 

growth accompanied by very low unemployment rates and a relatively slow growth 

in the labor force meant that many firms were having difficulty attracting the desired number of young, quality workers. These same companies observed that they 

had in place policies that encouraged skilled older workers to retire. In response, 

many large companies converted their traditional defined benefit plans to cash balance plans that do not have these early retirement incentives (Clark and Schieber, 

2002). 

Eliminating the early retirement subsidy is an important part of human resources 

policies for many firms in the twenty-first century as firm adapt to an aging labor 

force. Extending worklife is also part of our national retirement policy and increasing labor force participation among older persons would help ease the funding problems of Social Security. Ending these subsidies is also consistent with Congressional 

action that does not provide subsidized Social Security benefit taken prior to the 

normal retirement age. One should also note that companies could eliminate the 

early retirement subsidies in the current plans without converting to cash balance 

plans. 

PENSION VALUES AFTER PLAN CONVERSIONS 

The level and composition of labor compensation are the products of worker preferences and the desire of firms to attract and retain quality workers. Changes in 

the labor market and other economic conditions can alter the equilibrium level of 

compensation and the characteristics of employee benefits. In recent years, there 

has been a dramatic shift away from traditional defined benefit plans as many companies have terminated their existing plans and established new defined contribution plans or transform the old defined benefit plans into cash balance plans. We 

now turn to the impact of plan conversions on real and expected pension benefits 

and identify the winners and losers in the plan conversion process. 

There are two major questions associated with the conversion of pension plans: 

1. How is the opening balance in the new accounts for current employees determined? 

2. Are current workers, especially senior employees, given an option to continue 

in the old plan until they retire? 

When all workers are given a choice of remaining in the old plan or shifting to 

the new plan, there typically is little opposition or objection to plan conversions. 

However, this option implies that the company may have to continue to manage the 

old plan for as much as 40 years into the future. In actuality, most young workers 

with relatively few years of experience are likely to opt for the new cash balance 

plan or a new defined contribution plan because the expected value of participation 

in these plans will be greater than continued coverage by the traditional defined 

benefit plan. While relatively few employers have given all workers a choice, many 

companies have given this option to senior workers who are close to the normal retirement age in the plan. Depending on the age and service requirements associated 

with this option, companies can avoid most objections to the plan conversion; however, this does require the continued management of the plan for 10 to 20 additional 

years. 

The closeout value from the old defined benefit plan and/or the starting balance 

in the new pension plan is a crucial component of any plan conversion. Companies 

can decide if they want to roll the closeout account balance from the old plan into 

the new plan or start the new account balance at zero. The closeout value from the 

old pension is the legally accrued benefit as specified in the plan’s benefit formula. 

This is the benefit that would be paid when the worker reaches the normal retirement if she were to quit the company. In the case of a plan termination, this is the 

37

benefit that the firm is legally required to pay the worker at the normal retirement 

age. Having determined the value of participation in the old defined benefit plan, 

firms could pay the workers this value or transfer it to individual accounts under 

the new cash balance or defined contribution plan. The closeout value and the start 

up amounts are at the heart of workers’’ views on whether they have been treated 

fairly. 

Some critics of cash balance plans have argued that this form of evaluation imposes significant losses on senior workers and thus, should not be allowed. In effect, 

the argument is that once a firm establishes a traditional defined benefit pension 

plan it must guaranty all workers enrolled in this plan the right to remain in that 

plan until they retire as long as the company retains a defined benefit plan. Interestingly, few analysts question the right of firms to eliminate an existing defined 

benefit plan without instituting any new plan. Also, there have been few questions 

raised when companies have terminated a traditional defined benefit plan and established a new defined contribution plan. Why then has the animosity been aimed 

at almost exclusively at cash balance plans? 

In fact, the conversion of a traditional defined benefit plan to a cash balance does 

impose ‘‘potential’’ losses on senior workers. These losses would occur if that the 

firm retained the pension plan and the worker stayed with the company until retirement age. Neither of these conditions is a certainty. First, some individuals may 

choose to quit their current job and move to another firm. In this case, they would 

receive only the legally required value of their pension. Second, the company could 

terminate the worker due to adverse economic conditions or for cause. Once again, 

the worker would likely receive only the legally required benefit (of course, the company could offer a greater benefit through an early retirement plan). Third, the company could terminate the plan and not start a new plan. Here again, the worker 

would only be guaranteed the legally required benefit. All of these possibilities are 

legal and all have occurred throughout the American economy during the past three 

decades. It is important to remember that no company is required to offer a pension 

and once established, a company has the legal right to terminate the plan provided 

it pays all vested workers the benefits that they are legally owned. 

If workers receive the amount that they are legally guaranteed, why do they feel 

that they have been treated unfairly? The answer follows from expectations concerning future employment, earnings growth, and the formula under the old defined 

benefit plan. Workers expectations are a function of the information provided by employers. Many employers may have provided their employees access to benefit calculators that show workers the retirement benefits that they could expect prior to 

the plan conversion. After a plan conversion, senior workers making the same type 

of conditional projections of future benefits would find that they can now expect 

smaller benefits if they remain with the company until retirement. Thus, some senior workers could easily reach the conclusion that they have been mistreated. The 

potential response by senior employees highlights the need for full and detailed communication with workers during the termination/conversions process.2 This assessment should also be a warning to companies that still provide traditional defined 

benefit plans that they should improve their communications to better illustrate retirement benefits conditional on staying with the firm and if the worker were to 

leave at various ages. Of course, no worker is guaranteed employment until the 

specified retirement age and there is no promise of a specific rate of earnings 

growth. Obviously, employment conditions have been changed by the conversion of 

the pension plan. 

Studies by Clark and Schieber (2000, 2002, 2004 forthcoming) have shown that 

a large majority of workers under age 40 will ultimately have higher total benefits 

under a new cash balance plan. The primary reason for this is the mobility risk described earlier and the prospect of a plan termination or layoff in the future. In general, the closer workers are to the early retirement age specified in the plan, the 

more likely they are to be losers after the plan conversion. This is primary reason 

that most companies have attempted to provide some additional benefits or choice 

to their senior workers. However, studies have shown that many senior workers also 

will gain from a transition to a cash balance because of the uncertainty of future 

employment with their career firm. 

A final issue is that much of the potential loss in pension wealth for senior workers in a conversion to a cash balance plan occurs due to the elimination of early 

retirement subsidies. It should be noted that a company could eliminate these early 

retirement subsidy by requiring an actuarial reduction of benefits at early retirement. Thus, the existing defined benefit plan could be retained without a subsidized 

early retirement benefit. Clark and Schieber (2002) have shown that many cash balance conversion impose less severe reductions in benefits than if companies simply 

eliminated the early retirement subsidy. 

38

DETERMINING WINNERS AND LOSERS IN PLAN CONVERSIONS 

Calculating the impact of plans on the lifetime value of retirement benefits for 

specific workers requires a series of assumptions including: the probability that a 

worker will remain with the firm until retirement, the probability that the firm will 

remain in business, the rate of growth of future earnings, the probability that the 

current pension plan will be terminated at some future date, and the probability 

that the parameters of the current and/or the new plan will be changed in the future. In addition, we need to know the cost implications of the conversion process 

including: whether the firm is attempting to reduce its total pension cost or simply 

altering the distribution of pension benefits and whether the firm is attempting to 

reduce its total labor costs or restructuring expenditures away from pension contributions while increasing earnings, stock options, or payments to health plans. Another key to understanding the impact of plan conversions on specific workers is 

whether the company provides transition benefits to some or all of its current workers to offset potential losses in pension wealth. 

Clark and Schieber (2002) examined 77 companies that converted traditional defined benefit plans to cash balance plans or another type of hybrid pension plan between 1985 and 2000. They simulated the impact of plan conversions on workers 

of different ages of first employment, age at the time of the conversion, and level 

of pay. Their underlying assumption was to assume that the company will remain 

in business for the working life of their employees, either the old plan would have 

remain unchanged until all current workers reached retirement or the new plan 

would remain unchanged during this period, and that earnings growth would be unaffected by changes in the economic climate or by the change in pension plan. They 

applied age-specific turnover probabilities that reflected the experience of large clients of Watson Wyatt. 

The results of Clark and Schieber’s analysis indicate that the vast majority of 

workers who quit or are laid off before age 55 could expect to receive greater benefits under the new cash balance or hybrid plans compared to their continued participation in the traditional defined benefit plans. Workers who remained on the job 

past age 55 would expect to receive considerably lower benefits under the new plan. 

Obviously, older workers at the time of the plan transition are more likely to anticipate that they would still be with the company at age 55. Thus, it is senior workers 

that are most likely to be adversely affected by the transition and most likely to 

oppose these changes in the employment contract. 

It should be noted that Clark and Schieber’s analysis focuses solely on the mobility risk associated with these plans and ignored other risks associated with economic fluctuations such as significant declines in the number of workers needed by 

the company due to adverse economic conditions, future changes in pension characteristics, and the possible termination of the pension plan at some future date. Explicitly modeling these risks would in most cases reduce any projected losses associated with converting a traditional defined benefit plan to a cash balance plan.3

While there have been relatively few studies of plan transitions and their impact 

on actual workers, the basic designs of the plan types have unmistakable implications for current and future workers. Adjusting for mobility risk, most newly hired 

workers will be better off working for companies with cash balance and defined contribution plans. Among existing employees, senior workers are more likely to be adversely affected while younger workers are likely to gain from plan conversions. Of 

course, all comparisons depend on the level of generosity that is provided by either 

the defined benefit plan or the cash balance plan. 

The potential impact of plan conversions to cash balance plans or defined contribution plans is well known to both workers and firms. In recognition of this, 

many companies provide significantly higher benefits to senior workers. Such transition benefits reduce the potential loss in pension wealth associated with the plan 

conversion and typically, result in many fewer complaints. High quality human resource planning is a key to the plan conversion process. 

In response to the second question I raised earlier, policy makers must remember 

that the pension system is voluntary and employers have many choices. A key concern is what is the appropriate counterfactual if conversions to cash balance plans 

are not allowed. If cash balance plans are not an option, firms my terminate their 

defined benefit plans and have no new plan, they might terminate their defined benefit plans and establish a new defined contribution plan, or them may retain the 

current plan but change the benefit formulas to reduce or eliminate the early retirement subsidies. Would the opponents of cash balance plans prefer one of these options? With this caveat in mind, regulations that are only aimed at preventing cash 

balance conversions would seem unwise and unlikely to achieve the desired results.. 

39

CONCLUSIONS 

Employer-sponsored pension plans are an important component of retirement income for many Americans and a significant part of total compensation for many 

workers. In the U.S., our pension system is voluntary. No company is required to 

offer a pension plan and no company is required to retain a plan forever. Pension 

regulations and the accompanying administrative costs alter the pension choices of 

workers and firms. A policy to preclude the establishment of cash balance plans 

would restrict pension choices and adversely affect American workers. A policy that 

would not allow companies to convert traditional defined benefit plans to cash balance plans would likely result in other forms for changes in retirement plans that 

would have similar effects on pension benefits of senior workers. 

Comprehensive analysis of the impact of plan conversions indicates that most 

workers will have higher lifetime pension benefits in a world of cash balance plans 

(and defined contribution plans) compared to traditional defined benefit plans. Turnover and the lack of portability is the primary determinant of this finding. Senior 

workers who are near retirement do face the potential loss in lifetime pension benefits; however, this loss is only realized if the worker remains with the company until 

the age of early retirement. It should also be remembered that layoffs, plant closings, voluntary quits, firings, and plan terminations have the same impact on senior 

workers as conversion to cash balance plans. It is unlikely that all of these options 

will be restricted. 

Finally, the primary reason for the loss in pension wealth with plan conversions 

is the prevalence of early retirement subsidies in current defined benefit plans. In 

the coming years, it is highly likely that firms will continue to try to eliminate these 

subsidies as they compete for workers. The aging population and the projected slow 

growth of the labor force will increase the value of senior workers to the firm. Why 

pay highly valuable senior workers to leave at relatively young ages only to have 

to search for new workers? Ending early retirement subsidies is also consistent with 

our emerging national retirement policies and the need to promote greater labor 

force participation among older persons. 

REFERENCES 

Brown, Kyle, Gordon Goodfellow, Tomeka Hill, Richard Joss, Richard Luss, Lex Miller, and Sylvester Schieber. 2000. The Unfolding of a Predictable Surprise, Bethesda: Watson Wyatt. 

Clark, Robert, John Haley, and Sylvester Schieber. 2001. ‘‘Adopting Hybrid Pension 

Plans: Financial and Communication Issues,’’ Benefit Quarterly, first quarter, 

7–17. 

Clark, Robert and Ann McDermed. 1990. The Choice of Pension Plans in a Changing Regulatory Environment, Washington: American Enterprise Institute. 

Clark, Robert and Fred Munzenmaier. 2000. ‘‘Impact of Replacing a Defined Benefit 

Plan with a Defined Contribution or a Cash Balance Plan.’’

Clark, Robert and Melinda Pitts. 1999. ‘‘Faculty Choice of a Pension Plan: Defined 

Benefit vs. Defined Contribution,’’ Industrial Relations 38:1, 18–45. 

Clark, Robert and Sylvester Schieber. 2000. ‘‘The Shifting Sands of Retirement 

Plans,’’ WorldatWork Journal, fourth quarter 9:4, 6–14. 

Clark, Robert and Sylvester Schieber. 2002. ‘‘Taking the Subsidy Out of Early Retirement: Converting to Hybrid Pensions,’’ in Olivia Mitchell, Zvi Bodie, Brett 

Hammond, and Steve Zeldes (eds.) Innovations in Retirement Financing, Philadelphia: University of Pennsylvania Press, 149–174. 

Clark, Robert and Sylvester Schieber. 2004 forthcoming. ‘‘An Empirical Analysis of 

the Transition to Hybrid Pension Plans in the United States,’’ in William Gale, 

John Shoven, and Mark Warshawsky (eds.), Public Policies and Private Pensions, Washington: The Brookings Institution. 

Kotlikoff, Laurence and David Wise. 1985. ‘‘Labor Compensation and the Structure 

of Private Pension Plans: Evidence for Contractual Versus Spot Labor Markets,’’ 

in David Wise (ed.), Pensions, Labor, and Individual Choice, Chicago: University of Chicago Press, 55–85. 

Kotlikoff, Laurence and David Wise. 1989. The Wage Carrot and the Pension Stick, 

Kalamazoo, MI: Upjohn Institute for Employment Research. 

Samwick, Andrew and Jonathan Skinner. 2003. ‘‘How Will 401(k) Pension Plans Affect Retirement Income?’’ Unpublished working paper. 

ENDNOTES 

1Some plans have benefit formulas that specify benefits as a dollar amount per year of service. These formulas are most commonly found in plans that are part of collectively bargained 

contracts. 2 Communications with workers concerning the reasons for plan changes and the impact of 

these changes on worker benefits is essential to plan terminations and conversions. Clark, 

40

Haley, and Schieber (2001) and Clark and Munzenmaier (2001) examine the important role of 

communications in plan conversions. 3Samwick and Skinner (2003) focus on the differences in financial market risks and earnings 

growth risks between defined benefit plans and 401(k) plans. They could that 401(k) plans are 

preferred to defined benefit plans by all workers, except those with the highest risk aversion.

Chairman BOEHNER. Mr. Hill. 

STATEMENT OF ROBERT F. HILL, ESQ., PARTNER, HILL & 

ROBBINS, DENVER, COLORADO 

Mr. HILL. Good morning, Mr. Chairman and distinguished Members of the Committee. Thank you for the invitation to share my 

views regarding cash balance plans. I am an attorney in private 

practice in Denver, Colorado, with the law firm of Hill & Robbins, 

and we represent employees in cases involving cash balance plans. 

The adverse impact that cash balance plans have had on older 

employees has been well documented. I won’t repeat that. But I 

will say that that only begins to tell the story of the hardship that 

cash balance plans have imposed on those older workers. All too 

often the cash balance plan arrives long after these employees have 

made employment retirement and saving decisions based on the 

promise of a traditional defined benefit plan, leaving them absolutely no practical ability to make that up in their remaining working years. 

Equally egregious, older workers often experience what is referred to as wear-away, which means that even though they continue working for their long established employer, they do not continue to generate additional retirement or pension benefits. 

The title of this session today I think is well chosen, separating 

myth from fact, and I have found that a challenge as I have approached this issue from the outside and tried to become acquainted with it. Cash balance advocates frequently suggest that 


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41

employers are motivated by the increased, quote, mobility, closed 

quote, in the workforce. But the facts indicate otherwise. All available studies indicate that baby boomers have been staying on the 

job as long as or longer than their parents and grandparents when 

you look at people in the same age. There is also, I have found, a 

public and a private face when you try to understand what the 

pension consultants have been recommending to employers in this 

arena, and this Committee to properly legislate needs to go behind 

the public veneer. 

Thus, while cash balance advocates publicly contend that cost 

savings is not a significant factor in the rise of cash balance plans, 

in private and professional society meetings and other organizational meetings such as this they acknowledge that cash balance 

plans would hardly exist at all if it weren’t for cost savings. While 

they also publicly cite the need for competitiveness in private they 

acknowledge that although combativeness sounds important, it is 

rarely an issue in the decisionmaking process. In private, these 

same cash balance advocates concede that conversions are often 

used to camouflage or mask, and those are quotes, a benefit cutback or to remove early retirement subsidies. 

Even the most aggressive of these proponents concede that in the 

early days many benefit consultants panned cash balance plans as 

a gimmick and contended that they couldn’t satisfy the rules. There 

has been talk about clarification. The law is as Congress has pronounced it, and the law is the same as it has been for a long time. 

For example, following a meeting of what later became known as 

the Cash Balance Practitioners Group, attendees, which included 

representatives from four large pension consulting firms and two 

major law firms, circulated a memorandum. I remind you this is 

in 1990. They circulated a memorandum acknowledging that, 

quote, it is well known that a cash balance plan is at risk under 

a little reading of the age discrimination laws. For that reason the 

group focused on the need for a, quote, legislative fix, closed quote, 

a prospect that the group did not view with optimism. 

In 1996 and in 1997 warning signs became dramatically clear regarding the age discrimination issues raised by cash balance plans. 

These came from the Treasury Department notice. They came from 

the filing of employee lawsuits. They came from a letter from an 

Internal Revenue district office indicating that a proposed cash balance plan was age discriminatory because the, quote, benefit accrual rate decreases as a participant attains each additional year 

of age, closed quote. 

Despite those warning signs, the number of employees covered by 

cash balance plans more than quintupled from 1997 to 2000, and 

I would suggest that against that background it is impossible to 

suggest that most employers entered into these conversions ignorant of the risks that cash balance plans violated the age discrimination laws. 

While I would suggest that in addition to the well-documented 

cost savings and the desire of many employers to use the conversions to mask benefit cutbacks, it now appears that many of the 

cash balance plans were motivated by accounting rules that allow 

publicly held companies to use cash balance plans to present a 

42

1Shapiro & Rachal, Litigation Issues in Cash Balance Plans, Benefits Link, (1999), http://

benefitslink.com/articles/cashbalance.html . 2 U.S. General Accounting Office, PRIVATE PENSIONS—Implications of Conversions to Cash 

Balance Plans, GAO/HEHS–00–185, at 24–25 (Sept. 2000) (hereinafter ‘‘GAO Report’’) http://

www.gao.gov/new.items/he00185.pdf 

more attractive financial picture to the investing public, something 

sometimes referred to as accounting gimmicks. 

I would comment that William Sweetnam, then a member of the 

Senate Finance Committee staff and now Treasury Department 

Tax Benefit Council, acknowledged in 1998 that, quote, the primary reason cash balance plans are financially advantageous is the 

accounting treatments of all cash balance plans versus final average earnings plans. The reason that cash balance plans are better 

is that they make the corporation’s financial statement look better 

since pension liabilities are less, closed quote. 

To understand and deal with cash pension plans you need to understand both the public and the private face. You need to separate 

myth from fact. I thank you for giving us an opportunity to share 

our views on that the subject. 

[The prepared statement of Mr. Hill follows:]

Statement of Robert F. Hill, Esq., Partner, Hill & Robbins, Denver, CO 

Mr. Chairman and distinguished Members of the Committee: 

I am an attorney in private practice in Denver, Colorado with the law firm of Hill 

& Robbins, P.C. Our law firm has represented employees in several law suits challenging the legality of conversions from traditional defined benefit plans to cash balance plans. These cases include the IBM Pension Litigation in the United States 

District Court for the Southern District of Illinois in which Chief Judge Murphy entered an order last year finding that IBM’s cash balance formula violated ERISA’s 

age discrimination rules. 

The adverse impact cash balance plans have on long-term older employees has 

been well documented. Even cash balance supporters have acknowledged that ‘‘it is 

not unusual in some cash balance conversions for the 40 to 50 year old employee 

to lose one-third to as much as one-half of his expected pension.’’ 1

The dramatic reduction in benefits for older workers created by the adoption of 

a cash balance plan was confirmed by a detailed report submitted to this Committee 

by the General Accounting Office in September 2002. Under the model of a typical 

conversion used for the GAO study, 

a 45-year old worker at the time of conversion receives an annual annuity 

of about $18,500 at retirement from the cash balance plan instead of the 

$39,800 annuity the worker could have received from the defined benefit 

plan with a final average pay formula. Likewise, a worker 50 years old at 

conversion receives an annual annuity of about $17,800 from the cash balance plan rather than the $35,100 annuity the final average pay formula 

would have provided.2

But that only begins to tell the story of the hardship that cash balance plans impose on older workers. These are employees who have labored long and hard for an 

employer based on the promise of benefits under a traditional defined benefit plan 

where the value of benefits increase significantly in the later years of their career. 

Suddenly, after decades on the job, the promise of increasing age 65 benefits based 

on years of service and final pay is withdrawn and replaced by a benefit formula 

that benefits younger workers at the expense of older workers. A chart included in 

the GAO report illustrates this phenomenon:

43

3 U.S. Dept. of Labor, Report of the Working Group Studying the Trend in the Defined Benefit 

Market to Hybrid Plans, Findings 3(a) and 3(c) (November 10, 1999, http://www.efast.dol.gov/

ebsa/publications/cbalinfo.htm ). (hereinafter ‘‘Working Group Study’’). 4 Arcady & Mellors, Cash Balance Conversions, JOURNAL OF ACCOUNTANCY, February 

2000, http://www.aicpa.org/pubs/jofa/feb2000/arcady.htm. 

As shown, due to the conversion, older workers, generally those over age 40, end 

up with the worst of both worlds. 

The findings in an ERISA Advisory Group study submitted to the Department of 

Labor in 1999 aptly describes this problem: 

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. 

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.3

As that same study recognized, all too often the cash balance plan comes at a time 

in the employees’’ lives when they have long ago made employment, retirement and 

savings decisions based on the promise of a traditional defined benefit plan only to 

find their reasonable expectations dashed with no practical ability to make up for 

that loss in their remaining working years. 

Some cash balance proponents point to ‘‘grandfathering’’ and other types of transition relief as a means to address this problem. However a study of actual cash balance conversions conducted by the actuarial firm Towers & Perrin determined that 

in over one-third of the conversions the employers provided no grandfathering or 

other form of transition benefit.4 And even when transition relief is provided for 

some workers, the vast bulk of conversions leave many adversely impacted workers 

unprotected. 

Equally egregious, in many conversions older workers experience what is referred 

to as ‘‘wearaway,’’ which means that even though they continue working they earn 

no additional pension benefits until the amount in their cash balance plan reaches 

the amount they had already earned under their traditional defined benefit plan. 

The GAO found that the amount of wearaway any employee experiences is tied directly to age, with older workers suffering the longest periods of wearaway, someVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 H:\DOCS\94751 EDUWK PsN: NNIXON

94751.002
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5GAO Report, at 28. 

6 Remarks of Eric Lofgren, Vol 12. No 1 Report of the Society of Actuaries, at 419 

(1986)(hereinafter ‘‘Lofgren 1986’’)(copy attached). 7 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for fiscal years 2000–

2004 p. 23, JCS–13–99, December 22, 1999) http://frwebgate.access.gpo.gov/cgi-bin/

getdoc.cgi?dbname=1999—joint—committee—on—taxation&docid=f:54622.pdf. 8 Remarks of Eric Lofgren, New York Annual Meeting of Society of Actuaries, October 18–21, 

1998, reported at p.14, Record of Society of Actuaries, Vol. 24, No. 3 (hereinafter ‘‘Lofgren 1998’’) 

(copy attached). 9Workforce Management: The Cultural Shift, Watson Wyatt Insider, Vol. 8, Issue 8, (August 

1998). 10Lofgren 1998 at 10—11. 11Lofgren 1986 at 419. 

time many years. For example, a typical conversion scenario ‘‘generated a 2-year 

lump sum wearaway for a 35-year old worker, a 4-year wearaway for a 45-year old 

worker, and an 11-year wearaway for a 55-year old worker at conversion.’’ 5 In such 

an instance, shockingly, the 55-year old would earn no additional pension benefit 

before reaching normal retirement age. 

During the past seven years, a significant number of employers have converted 

from traditional defined benefit plans to cash balance plans—thereby adversely impacting millions of older workers in the ways described by the GAO Report. We are 

before the Committee today because employers and employer related groups want 

Congress to provide exemptions for cash balance plans from the current law that 

applies to defined benefit plans, including the present prohibition against age discrimination. 

Cash balance plans have often been described as ‘‘a defined benefit plan 

masquerading as a defined contribution’’ plan.6 While no one disputes that cash balance plans are defined benefit plans, cash balance proponents essentially want the 

best of both worlds—they want to avoid the income and excise taxes that a change 

from a defined benefit plan to a defined contribution plan would entail and to retain 

the funding flexibility of the defined benefit plan, but they also want cash balance 

plans treated as defined contribution plans for purposes of the ERISA vesting and 

age discrimination rules. 

However Congress has enacted very specific and very different legal frameworks 

for defined benefit plans and defined contribution plans. These rules were designed 

with a recognition that taxpayers pay hundreds of millions of dollars to subsidize 

the private tax-qualified pension system—to assure that employees were treated 

fairly and to avoid abusive practices that undermine the promises made to employees and the employees’’ reasonable expectations. The Joint Committee on Taxation 

has estimated that in 2004 taxpayers will pay about $89 billion in foregone taxes 

to subsidize the private tax-qualified pension system.7 It is only right and proper 

that Congress assure that the taxpayers’’ monies provide a system that is fair to 

all workers, including older workers. 

Cash balance plans are the very creative invention of a handful of professional 

consultants who sell their services to employers. While these proponents have publicly advanced a number of lofty motivations for the conversion of traditional plans 

to cash balance plans, none of their claims justify the harm cash balance plans have 

imposed on older workers. 

Cash balance advocates frequently suggest that employers are motivated to adopt 

cash balance plans by the increased ‘‘mobility’’ in the workforce. The facts indicate 

otherwise. Indeed, a prominent cash balance proponent has acknowledged that baby 

boomers ‘‘have been staying on the job longer, actually, than their parents and 

grandparents.’’ 8 Similarly, a study conducted in 1998 by the Watson Wyatt actuarial firm concluded that this phenomenon applied as well to younger workers, age 

25 to 34, who in 1996 spent a considerably longer time, on average, with one employer than did workers in that same age group in the 1950’s.9

Some employers and actuaries also publicly cite the need for competitiveness as 

a reason for cash balance plans. However in private they acknowledge that although 

competitiveness sounds important, it is rarely a real issue in the decision making 

process.10

The more likely reason for many conversions, as many cash balance advocates 

concede, is that conversions are often used to disguise a cutback in benefits. In 

1986, when cash balance plans first began to receive attention, Eric Lofgren, an actuary with Watson Wyatt, outlined for a conference of actuaries that a primary objective of conversion to a cash balance plan was to ‘‘to camouflage a benefit cutback, 

or remove early retirement subsidies.’’ 11 Similarly, an actuary with Towers Perrin 

told a conference of actuaries that ‘‘the way the plan is presented to employees looks 

so dramatically different than the defined benefit plan that the employees are used 

45

12 Remarks of Gary Hallenback, 1986 Conference of Consulting Actuaries, quoted in Ward, 

Eating their Words, Plan Sponsor Magazine (March, 2000). http://www.plansponsor.com/magazine—type1/?RECORD—ID=13766 13 Remarks of William Torrie, 1998 Society of Actuaries Annual Meeting, quoted in Ward, Eating their Words, Plan Sponsor Magazine (March, 2000) 14Lofgren 1986 at 419. 15Lofgren 1998 at 10. 16 Niehaus & Yu, Cash Balance Conversions: Evidence of the Excise Tax Avoidance Hypothesis, (2002) http://www.cba.uri.edu/tong/cash-balance.pdf 17Working Group Study. 18 Comments of Richard Shea, 1999 Enrolled Actuaries Meeting, Session 605: Cash Balance 

Plans—Current Issues (March 14–17, 1999) (copy attached). 19October 23, ‘1990 Letter from Hugh Forcier regarding Cash Balance Memorandum, at p. 

2(copy attached). 

to that, and the change can be used to mask a benefit cutback.’’ 12 This advantage 

was still being touted in 1998, when an actuary with PriceWaterhouse–Coopers 

noted to the annual meeting of the Society of Actuaries that ‘‘converting to a cash 

balance plan does have an advantage of it masks a lot of the changes.’’ 13

Mr. Lofgren candidly noted that a company converting to a cash balance plan 

could use two very different definitions to announce the same new cash balance 

plan. The upbeat version most commonly used to announce a conversion optimistically touts the purported virtues of a cash balance plan, describing it as ‘‘an exciting, modern, flexible new plan design with the advantages of both defined benefit 

and defined contribution.’’ He also proposed what he described as an equally accurate, but more candid, definition: 

‘‘Dear Employee: We’ve got for you a cash balance pension plan. It’s our 

way to disguise the cutbacks in your benefits. First we’re going to change 

it to career average. We’ll express the benefits as lump sum so we can highlight the use of the CPI, a sub-market interest rate. What money is left in 

the plan will be directed towards employees who leave after just a few 

years. Just to make sure, we’ll reduce early retirement subsidies.’’ 14

While cash balance advocates publicly contend that cost savings are not a significant factor in the rise of cash balance plans, in private they consistently acknowledge that ‘‘cash balance plans would hardly exist at all if it weren’t for cost.’’ 15 Most 

employers with an existing, overfunded, defined benefit plan who want to cut pension costs by moving to a defined contribution model are not willing to pay the cost 

of terminating the defined benefit plan, which arises primarily from the excise tax 

payable on the surplus, and then creating a defined contribution plan. A 2002 empirical study of cash balance conversions concluded that: 

If instead the firm converts to a cash balance plan, it can use all of the excess pension assets to fund future benefits. Therefore, among firms that 

plan to switch from a traditional defined benefit plan to a defined contribution-type plan, the likelihood of choosing a cash balance plan increases with 

the plan’s overfunding.16

Employers seek to avoid this tax by creating a cash balance plan instead, which 

has the advantage of both looking to employees like a defined contribution plan and 

at the same time allowing the employer to cut their benefit obligations and use the 

plan surplus to forestall the need to make future plan contributions.17

As an additional justification for asking Congress to exempt cash balance plans 

from defined benefit law, including the prohibition against age discrimination, proponents currently contend that hundreds of employers have adopted such plans, in 

the good-faith belief that they complied with existing law. According to this argument, ‘‘fairness’’ to the expectations of employers requires special treatment for cash 

balance plans, regardless of any resulting unfairness to older workers who expected 

to earn most of their benefits in their later years under the traditional plans in 

place for decades. 

No such unfairness to employers exists. Even the most aggressive cash balance 

proponents have conceded that in the early days of cash balance plans, many benefits consultants panned cash balance plans as a gimmick and argued that they 

couldn’t satisfy the rules.18

For example, following a 1990 meeting of what later became known as the Cash 

Balance Practitioner’s Group, attendees—which included representatives from four 

large pension consulting firms and two major law firms—circulated a memorandum 

acknowledging that ‘‘it is well known that a [cash balance] plan is at risk under a 

literal reading of’’ the age discrimination laws.19 The Practitioners Group memorandum acknowledged that the practitioners had ‘‘heard representatives of the [Internal Revenue] Service express concern that because the benefits under cash balance plans are frontloaded, such plans may violate a literal reading of’’ the age disVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 H:\DOCS\94751 EDUWK PsN: NNIXON
46

20Memorandum, Cash Balance Plans: Compliance with the ‘‘qualification’’ requirements of the 

Internal Revenue Code of 1986, as amended, at 24 (Oct. 23, 1990) (copy attached). 21 Id. 22 Id. 23 U.S. Bureau of Labor Statistics, Employee Benefits in Medium and Large Private Establishments in 1997, p. 103. http://www.bls.gov/ncs/ebs/sp/ebbl0017.pdf 24www.irs.ustreas.gov/pub/irs-irbs/irb96–06.pdf 25Letter from Andrew J. Fedders, IRS Cincinnati District Office, Government’s Position, No. 

1 (July 28, 1997) (‘‘The plan does not satisfy the clear and straightforward requirement of section 411(b)(1)(H) of the Code because the plan’s benefit accrual rate decreases as a participant 

attains each additional year of age.’’) (copy attached). 26 U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, 2000, p. 58. http://www.bls.gov/ncs/ebs/sp/ebbl0019.pdf 27Pesek, Hidden Asset: For Many Companies, Pension Plans Are Bolstering Profits, BARRON’S (May 27, 2000)(quoting Adam Reese, Towers Perrin). 28 Comments posted as ‘‘MGB’’ on Benefits Link Cash Balance Discussion Forum, May 13, 

2003. http://benefitslink.com/boards/index.php?act=Print&client=printer&f=22&t=19682

crimination laws.20 In addition, the Report noted that a ‘‘number of practitioners believe that there is a very significant risk that the Service will ultimately take the 

view that it cannot avoid a literal interpretation of the statute.’’ 21 For that reason, 

the group focused on the need for a ‘‘legislative fix a prospect that the group did 

not view with great optimism. Finally, the practitioners warned that, absent a legislative change, ‘‘the potential employer exposure is extremely high—potentially increasing the plan liabilities four or five times.’’ 22

Despite these legal concerns, and despite the failure of proponents to obtain legislation exempting cash balance plans from the age discrimination laws applicable to 

all defined benefit plans, a few employers went forward with conversions from traditional plans to cash balance plans in the early 1990’s. However, according to a Department of Labor survey, even by 1996–97 only 4% of U. S. workers covered by 

a defined benefit plan were participants in cash balance plans.23

It was only after 1997 that the dramatic increase in the adoption of cash balance 

plans took place—and the resulting adverse impact on millions of older workers. 

Employers, eager to exploit the pension fund surpluses created by the booming stock 

market, rushed to adopt them, despite both the much earlier recognition of their 

risk and further warning signs that arose in 1996 and 1997. On January 18, 1996, 

the Treasury Department issued Notice 96–8, which clearly indicated that cash balance plans were subject to the same benefit accrual rules applicable to all defined 

benefit plans.24 Also in 1996, the first employee lawsuit challenging age discrimination in cash balance plans was filed: a second was filed in May of 1997. In July of 

1997, an Internal Revenue District Office concluded that a proposed cash balance 

plan violated the age discrimination prohibitions of the Internal Revenue Code because the ‘‘benefit accrual rate decreases as a participant attains each additional 

year of age.’’ 25

In spite of all of these warning signs, the number of employees covered by cash 

balance plans more than quintupled between 1997 and 2000, from 4% to 23%.26

Against this background, it is impossible for the vast bulk of employers to credibly 

claim that they adopted cash balance plans ignorant of the risks that they violated 

the age discrimination laws. 

Clearly there had to be powerful factors motivating this dramatic increase in the 

adoption of cash balance plans in the late 1990’s. In addition to the well documented 

cost savings and the desire of many employers to use the conversions to mask benefits cutbacks to older workers, it now appears that many of these conversions were 

either primarily or incidentally motivated by accounting rules that allow publicly 

held corporations to use cash balance conversions to further inflate surpluses and 

generate ‘‘pension income,’’ thereby presenting a more attractive financial picture to 

the investing public. As one consulting actuary puts it: ‘‘Pension funds are becoming 

a major profit center.’’ 27

Because of the way opening account balances are determined in a conversion from 

a traditional defined benefit plan to a cash balance plan, the conversion typically 

reduces the plan’s Projected Benefit Obligation. Under the financial accounting 

standards in FASB Statement No. 87, the effect of this type of ‘‘negative amendment’’ can be spread out over several years, which reduces the plan’s annual benefit 

cost for financial statement purposes in those years. Thus, as Mark Beilke, the current Chairman of the Academy of Actuaries Pension Accounting Committee, recently 

observed, ‘‘gains [from cash balance conversions are] mostly derived from ‘‘accounting gimmicks.’’ 28

Employers and their advisors have long privately acknowledged the powerful motivation these accounting devices have provided to fuel the increased number of conversions. William Sweetnam, then a member of the Senate Finance Committee staff 

47

29 E-mail from ‘‘Bill’’ Sweetnam dated 12–22–98(copy attached); See also, Actuarial Aspects of 

Cash Balance Plans, Society of Actuaries Conference (July 07, 2000) http://www.soa.org/ccm/cmsservice/stream/asset?asset—id=1052150. 30Warren Buffet has described the growing practice by some companies of creating ‘‘phantom’’ 

pension income to inflate reported income as a misrepresentation that ‘‘dwarfs the lies of Enron 

and WorldCom.’’ Buffet, Who Really Cooks the Books?, New York Times, Section A, Page 19 

(July 24, 2002). 31Singh, Feathering the Nest Egg, CFO Magazine (October 1, 2000) http://www.cfo.com:8080/

article/1%2C5309%2C1006/8/A/7/7%2C00.html ; McGough & Schultz, How Pension Surpluses 

Lift Companies’ Profits, Wall Street Journal (September 21, 1999) http://acct.tamu.edu/loudder/

private/647—Readings/How%20Pension%20Surpluses.htm ; 

and now Treasury Department Tax Benefits Counsel, acknowledged in 1998 that 

the 

‘‘primary reason cash balance plans are financially advantageous is the accounting treatment of cash balance plans versus final average earnings 

plans . . . With final average earnings plan [sic], you must book as a liability on your financial statements the value of pension benefit assuming future earning growth for participant’s benefit. With a cash balance plan, you 

don’t have to include future earnings growth you only have to book your 

current liability for account balances. This reduces the liability in all circumstances—even if the plan grandfathers the old final average earnings 

benefit for older workers. So the reason that cash balance plans are better 

is that they make the corporations [sic] financial statement look better 

since pension liabilities are less.’’ 29

This accounting treatment of cash balance conversions can create substantial increases in a company’s reported income—increases that compound the already misleading impressions that can arise from the inclusion of ‘‘phantom’’ pension income 

as part of a company’s bottom line.30 In 1999, an accounting expert at Bear Stearns, 

conducted a study showing that 25% of the companies in the Standard & Poor’s 500-

stock index reported pension income in 1998, that overall pension income accounted 

for 3% of 1998 operating income of the companies overall, and that for 15 of those 

companies pension income represented 10% or more of their total operating income 

for the year.31

While the debate over the motivations of employers to implement cash balance 

plans in the absence of clear legal authorization will no doubt continue, there is no 

debate regarding the dramatic and adverse impact of these plans on older workers. 

It punishes—in some cases brutally and without the ability to recover older workers 

who have worked for a company for decades based on an unequivocal promise of an 

increasing age 65 retirement benefit determined by reference to years of service and 

higher income in their later years. 

Equally importantly, cash balance plans often come long after these employees 

made irreversible decisions regarding employment and savings based on their understandable reliance on their employers’’ promises only to have them suddenly 

dashed by the announcement of a change to a newly created pension scheme—the 

cash balance plan. 

That is precisely the kind of abuse of the American work force that our pension 

laws were intended to prohibit. And it is even more unacceptable when the adverse 

impacts are due to discrimination based on age. 

As the Committee considers any possible legislation addressing the legal issues 

raised by cash balance plans, I strongly encourage you to keep the need to protect 

these loyal, long-term older workers in the forefront. At their age and position these 

abrupt and unfair changes often dramatically and irreversibly adversely impact 

their remaining years. 

These employees are the backbone of our nation’s economic engine and they deserve far better and fairer treatment. Congress should continue to assure that if taxpayers are to subsidize the private pension system, employers must treat their 

workers fairly and without discrimination based on age. 

Chairman BOEHNER. Ms. Pfotenhauer. 

STATEMENT OF NANCY M. PFOTENHAUER, PRESIDENT, 

INDEPENDENT WOMEN’S FORUM, WASHINGTON, D.C. 

Ms. PFOTENHAUER. Thank you, Mr. Chairman and distinguished 

Members of the Committee. I am grateful to have the opportunity 

to appear here today. As the Chairman said, my name is Nancy 

48

Mitchell Pfotenhauer, and I am president of IWF. However, my 

background is in the field of economics. I have served as Economic 

Counsel to a former Member of the Senate Republican leadership 

who sat on the Budget and Banking and Finance Committees. I 

have also served as Chief Economist as the cabinet level regulatory 

review body. 

As you probably know, the labor force participation rates of 

women, unlike men, have been increasing across all age groups. 

This comes as no surprise to us and probably no surprise to the 

Committee. The Bureau of Census and the Bureau of Labor Statistics simply provide the quantitative evidence of what we have observed in American society. Simply put, more women are working 

more often while balancing the pressures of home and family, often 

taking time out of the workforce to care for children and for elderly 

parents. 

Why has IWF got even into this debate over pension policy? Because the national poverty rate for women 65 and older is almost 

twice that of men. The average age of widowhood in the United 

States is 56 years old. Fully 80 percent of widows now living in 

poverty weren’t poor when their husbands were alive. The likelihood of poverty increases with age, particularly for minority 

women. 

Right now several specific factors drive the discrepancy between 

men and women in their later years. First and perhaps most importantly, we live longer. To put it bluntly we may outlive our savings. The average life expectancy at 60 years of age for women is 

83 and for men it is 78. 

Perhaps most relevant for this discussion, however, is the fact 

that women change jobs more frequently than men. We average 4.8 

years with each employer and, therefore, may not stay on the job 

long enough to be vested in traditional retirement plans. Because 

women are more likely to leave the job market to handle family responsibilities, we average 11.5 years out of the workforce compared 

to 1.3 years for men. With our earning record interrupted we not 

only lose the opportunity to vest but we have fewer years in which 

to contribute to retirement plans. 

Traditional retirement and pension approaches simply fail to 

meet the needs of our changing society. Succinctly, they do not reflect the work patterns and demographics of American women. 

Luckily, pension innovations in the private sector hold promise. 

Cash balance pension equity and other hybrid pension plans combine attractive features of a traditional defined benefit plan with 

attractive features of a defined contribution plan. These modernized arrangements have evolved to suit today’s more mobile workforce and to respond to employee preferences for transparency, 

portability and accrual of a more meaningful benefit earlier in one’s 

career. 

We believe the emergence of hybrid plans is encouraging news 

for many, but is a cause for particular hope for women. In fact, one 

benchmark study done in 1998 by the Society of Actuaries found 

that an amazing 77 percent of women do better under a cash balance system. They are better off under the system because they 

move in and out of the workforce in order to balance family needs 

and because they cannot afford to retire early. 

49

Despite this promise it is clear that controversy exists about how 

firms should transition to hybrid plans, and many have questioned 

the fairness of changing pension approaches for employees over 40 

years of age. An alternative perspective, and one that we believe 

has credence, is that any adoption of restrictions that effectively 

limit the abilities of companies to transition to hybrid plans places 

the financial well-being of the relatively few employees who have 

the luxury of staying with one company for a long period of time, 

usually decades, have the luxury of taking early retirement, and 

have the luxury of taking their pension benefit in the form of an 

annuity rather than a lump sum, ahead of all the employees who 

do not have these options. 

So regardless of one’s perspective, any discussion about transition is appropriately done within the context of a clear understanding that these plans are voluntarily sponsored by employers. 

As such, an employer currently could decide to freeze benefit accruals or completely terminate plans altogether if costs become too 

burdensome, and experience has shown us that many more plans 

have fallen victim to this fate over the past decade than have 

transitioned to hybrid plans. 

The problem before this Committee is complex and worthy of an 

objective analysis that is focused on providing a solution that fits 

the changing nature of America’s economy and workforce. The 

Independent Women’s Forum believes that portability is a real and 

growing need as we look to the future of working women in this 

country. As such, we strongly urge Congress to act in the manner 

that recognizes the attributes of new approaches like the cash balance and other hybrid plans and keeps in mind that the one law 

that cannot be amended is the law of unintended consequences. 

Thank you. 

[The prepared statement of Ms. Pfotenhauer follows:]

Statement of Nancy M. Pfotenhauer, President, Independent Women’s 

Forum, Washington, DC 

Mr. Chairman and distinguished members of the Committee, thank you very 

much for the opportunity to be here today. My name is Nancy Mitchell Pfotenhauer 

and I am president of the Independent Women’s Forum. IWF is a non-profit, nonpartisan public policy organization that focuses on issues of importance to women. 

To give you some context, our organization was founded more than a decade ago, 

and counts among its National Advisory Board women who have served at the highest levels in federal office. In fact, Department of Labor Secretary Elaine Chao, Undersecretary of State Paula Dobriansky, and Assistant Attorney General for Tax 

Policy Eileen O Connor have all served on our National Advisory Board. Our Board 

of Directors and Advisors have run divisions of OMB, the Treasury Department, and 

chaired and served on several independent regulatory agencies. 

I personally have served as Economic Counsel to a member of the Senate Leadership who sat on the Budget, Banking and Finance Committees. Subsequent to that, 

I was the Chief Economist of a Cabinet-level regulatory review body. After serving 

time as Director of the Washington office of a $48 billion diversified energy company, I transitioned from IWF’s Board of Directors into my current position. 

Let me begin by explaining what IWF is not. It is not a grassroots organization 

focused on mobilizing large numbers of our fellow citizens. Rather we are a group 

whose members are legal scholars, economists, academicians, historians and foreign 

policy experts who hope to apply our professional experience to impact the formulation of public policy. As such, again let me thank you for the opportunity to appear 

before this committee and participate in a candid and constructive discussion concerning cash balance pension plans. 

As you probably know, the labor force participation rates of women—unlike men—

have been increasing across age groups. Women in the 45- to 54- age group saw the 

50

greatest jump in their participation during the 1980–90 timeframe, clocking in with 

an increase of almost 11 percent. This same cohort again saw the greatest increase 

in participation in the 1990–2000 (when they were aged 55–64). It is important to 

note, however, that for the 2000–2010 period, this group will lose their title to a 

group of younger women aged 25–34. 

This comes as no surprise to the Independent Women’s Forum—and probably no 

surprise to this committee. The combined work of the Bureau of Census and the Bureau of Labor Statistics simply provides the quantitative evidence of what we have 

all observed in American society. Simply put, more women are working more often 

while still balancing the pressures of home and family. 

And, by and large, this is a truly positive indication of the tremendous progress 

women have made in our country. Presently, women earn the majority of the undergraduate degrees, the majority of master’s degrees and—within the next decade—

are expected to earn the majority of Ph.Ds. Right now, young women comprise 

roughly sixty percent of the students attending law school here in the United States. 

So, the upside of this story is that women are achieving educational and professional goals only dreamed of in other countries. The challenge from a retirement security standpoint, however, is that we refuse to compromise our roles as mothers 

and caregivers on the altar of professional accolades. Specifically, women still tend 

to take time out of the workforce in much greater numbers than men in order to 

care for young children or elderly members of our family. Having five children between the ages of 10 and 16, this particular point really strikes home with me. 

Why has IWF gotten involved in this debate over pension policy? Because the national poverty rate for women 65 and older is almost twice that of men. The average 

age of widowhood in the United States is 56; fully eighty percent (80%) of widows 

now living in poverty weren’t poor when their husbands were alive. The likelihood 

of poverty increases with age, particularly for minority women. The gap between Social Security benefits for women and men is slowly narrowing, but the difference 

between pension benefits is increasing rapidly. 

What is driving this phenomenon? We fundamentally reject the notion that our 

current systems were somehow designed to be biased against women. In fact, historical records reveal that the social security system was, if anything, originally designed to benefit women. Unfortunately, through no ill-intent, the framers of that 

system failed to accurately predict societal trends and future workforce demographics. 

Right now, several specific factors drive the discrepancy between men and women 

in their later years. First, and perhaps most importantly, women live longer then 

men. To put it bluntly, we may outlive our savings. The average life expectancy at 

60 years of age for women is 83 and for men is78. By 2050, five percent of the babyboomer population will be more than 100. 

Despite our relative longevity, or perhaps because of it, women tend to have more 

chronic health problems than men, resulting in higher health care costs during retirement. And, if a woman hasn’t seen her financial health plummet because her 

husband died, she’s likely to be hit hard through a divorce. Statistics have shown 

that immediately following divorce, women 50 and older experience a 39 percent decline in income, whereas men’s incomes fall only 14 percent. One year after divorce, 

fully 40 percent of men have regained their pre-divorce incomes; about half that percentage (21) of women have climbed back. 

Perhaps most relevant for this discussion, however, is the fact that women change 

jobs more often then men. We average 4.8 years with each employer and, therefore, 

may not stay at a job long enough to be vested in traditional retirement plans. Because women are more likely to leave the job market to handle family responsibilities, we average 11.5 years out of the workforce compared to 1.3 years for men. 

With our earning record interrupted, we not only lose the opportunity to vest, but 

we have fewer years in which to contribute to retirement plans. 

In the opinion of the Independent Women’s Forum, traditional retirement and 

pension approaches simply fail to meet the needs of our changing society. Succinctly, 

they do not reflect the work patterns and demographics of American women. Whether it’s the Wall Street Journal or Family Circle magazine, today’s commentators 

agree that movement in and out of the workforce for American mothers has become 

the ‘‘new normal.’’ In fact, many are noting a current trend of mothers going back 

home when their children become teenagers. In earlier times, moms simply stayed 

home when their children were young—now we’re worried about the lack of oversight of our teenage children in an increasingly complex culture. Regardless of the 

reason, this phenomenon, called ‘‘sequencing,’’ appears here to stay. 

Luckily, pension innovations in the private sector hold promise. Cash balance, 

pension equity and other hybrid pension plans combine attractive features of a traditional defined benefit plan (employer funding, employer assumption of risk of poor 

51

1Kopp and Scher. Society of Actuaries. ‘‘A Benefit Value Comparison of a Cash Balance Plan 

with a Traditional Average Pay Defined Benefit Plan.’’ October, 1998. 2Mitchell, Olivia S. and Janemarie Mulvey. Working paper/PRC WP 2003–25. ‘‘Possible Implications of Mandating Choice in Corporate Defined Benefit Plans.’’ Pension Research Council, 

The Wharton School, University of Pennsylvania: 17. 

investment, government insurance and spousal protections) with attractive features 

of a defined contribution plan (individual accounts, an easily understood benefit formula and portability). 

These modernized pension arrangements have evolved to suit today’s more mobile 

workforce and respond to employee preferences for transparency, portability and the 

accrual of more meaningful benefits earlier in a career. 

As you know, unlike traditional defined benefit plans where a significant portion 

of the benefits go to the relatively few workers with very long service, benefits in 

so-called hybrid plans grow more evenly over a worker’s career and are distributed 

more equitably across short-, medium-, and long-service workers. For the vast majority of employees who no longer spend a full career with one employer, a hybrid 

plan will produce higher benefit levels than a traditional benefit plan at equal cost. 

We believe the emergence of hybrid plans is encouraging news for many and a 

cause for particular hope among women. In fact, one benchmark study done in 1998 

by the Society of Actuaries found that an amazing 77% of women do better under 

a cash balance approach. They are better off under a cash balance system because 

they move in and out of the workforce in order to balance family needs and because 

they cannot afford to take early retirement 1. Despite this promise, it is clear that 

controversy exists about how firms should transition to hybrid plans. Many have 

questioned the fairness of changing pension approaches for employees over 40 years 

of age. 

An alternative perspective, and one that IWF believes has credence, is that any 

adoption of restrictions that effectively limit the ability of companies to transition 

to hybrid plans places the financial well-being of the relatively few employees who 

have had the luxury of staying with one company for a long period of time (decades), 

have the luxury of taking early retirement, and have the luxury of taking their pension benefit in the form of an annuity rather than as a lump sum, ahead of all of 

the employees who do not have these options. 

Regardless of one’s perspective, any discussion about transition is appropriately 

done within the context of a clear understanding that these plans are voluntarily 

sponsored by employers. As such, an employer currently could decide to freeze benefit accruals or completely terminate plans altogether if costs become too burdensome. Experience has shown us that many more plans have fallen victim to this fate 

over the past decade than have transitioned to hybrid plans. 

As such, an overarching concern we have in making these new approaches viable 

is that Congress avoid the seductive panacea of mandating choice between traditional defined benefit and cash balance plans. Unfortunately, some analysts believe 

that mandating choice in such a manner could result in employees being faced with 

a ‘‘worst of both worlds’’ situation. Specifically, employers could make changes to 

their traditional plans that remove aspects most valued by some of their employees, 

while ironically being constrained from offering the off-setting attributes of a cash 

balance plan. 

As pointed out by pension experts Olivia Mitchell and Janemarie Mulvey at the 

University of Pennsylvania’s Wharton School, under an approach that mandates 

choice in circumstances when an employer seeks to convert to a hybrid plan (but 

not other changes), an employer could eliminate early retirement subsidies without 

providing choice, but the employer ‘‘could not at the same time provide the more 

portable and more understandable cash balance benefit without offering employees 

a choice to keep early retirement subsidies.’’ 2

Obviously the solution does not rest in mandating choice for every plan change. 

To do so would only facilitate the death of the defined benefit system—a system 

which offers noted attributes in the form of employer contributions and employer 

assumption of risk. 

The problem before this committee is complex and worthy of objective analysis focused on providing a solution that fits the changing nature of America’s economy 

and workforce. The Independent Women’s Forum believes that portability is a real 

and growing need as we look to the future of working women in this country. As 

such, we strongly urge Congress to act in a manner that recognizes the attributes 

of new approaches like the cash balance and other hybrid plans, and keeps in mind 

that the one law that cannot be amended is the law of unintended consequences. 

Thank you again for your time and your attention to this very important matter. 

52

Chairman BOEHNER. Let me thank all of the witnesses for your 

excellent testimony. It is a very important subject, and having this 

hearing less than 5 months before a Presidential election and an 

election for all of the Members of the House and a third of the 

Members for the Senate probably poses some risk that politics may 

enter into the debate. 

But having said that, this is very important. The retirement security of American workers is at risk. We have seen the number 

of defined benefit plans, the decline that has occurred over the last 

20 years, we know the cost of operating the defined benefit plan 

is very expensive and we know that especially among younger 

workers they want more portability with their retirement benefits. 

While you see this explosive growth in 401(k) plans and, for that 

matter, the growth that we have seen in cash balance conversions, 

and for the Members on both sides of the aisle who are serious 

about our voluntary retirement system, we know that cash balance 

conversions are an important component to maintaining defined 

benefit plans, there is just no other way in my view that you can 

turn the clock back. And given the uncertainty that is out there, 

given the inability of the regulators to act, we have to open the 

door for those who want to come in and make some money. And 

I think we are causing more concern among employers, we are 

going to see less plans offered, and we are going to see more freezes 

in the future. 

It is pretty clear Congress must act, and I am here to say to all 

of you today that Congress will act. It is our responsibility as 

health legislators and public policymakers to make clear what the 

law is and what it isn’t, and too many times we turn over to the 

agencies the regulatory ability, which in many cases turns into a 

responsibility for them, to make serious policy decisions as well. 

But I believe that the Congress has sat back far too long on this 

cash balance issue and it is time for us to act. And as we look at 

a comprehensive reform of the defined benefit rules and regulations, the rules and regulations surrounding cash balance plans 

must be dealt with and will be dealt with. 

Having said that, Mr. Delaplane, Ms. Collier, Professor Clark, 

you heard Mr. Hill’s comments about why we have cash balance 

conversions, what they are intended or not intended to do. What 

do you think? 

Mr. DELAPLANE. Mr. Chairman, I would have to take a different 

perspective. My guess is that Mr. Hill has not actually been in too 

many of those employer meetings where the reasons for cash balance conversions have been discussed. If you look at objective studies from folks like the Federal Reserve, they have clearly said hybrid plans have been adopted in industries where labor mobility 

has increased, and so we are clearly seeing the evidence that tenures are shorter in the companies that have these plans, and these 

plans, as you highlighted clearly, deliver higher benefits to employees. 

So I disagree with that characterization. I also think you folks 

very appropriately in 2001 enacted some expanded disclosure requirements. The Treasury has issued very detailed regulations 

there under. It is not even possible if anybody even wanted to hide 

the ball to do so. Frankly, when Mr. Hill testified in 1999 that was 

53

his focus, that we should do more on the disclosure front. You have 

done that. The information that employees get is very explicit, very 

clear as to how they will be affected. 

So I think you have addressed the issues that have been out 

there. I take issue with the characterization. 

Chairman BOEHNER. Ms. Collier. 

Ms. COLLIER. Thank you, Mr. Chairman. In Eaton’s case also we 

are experiencing mobility, both internally and external to the company. We have some critical skill sets such as engineering that we 

want to maintain. We go to great lengths to recruit those individuals. We find that the cash balance plan has already begun to help 

us in that recruiting process and in retention of these employees. 

Similarly, we did not convert our plan in order to save money. 

I think that is another misconception, and I hope we can clear that 

up a little bit here today. 

Lastly, I think that employers go through extensive communication campaigns. As Mr. Delaplane said, you did revise those disclosure requirements in 2001 in order to prevent companies from camouflaging, as the term was used, any benefit changes and decreases 

in benefits. 

Mr. DELAPLANE. If I could also mention the issue of cost reduction. There have been instances where employers have decided they 

need to spend less resources on their pension plan overall. That is 

nothing we should run from. If companies decide their programs 

need to be reduced and that is how to stay competitive and grow 

their business and add jobs that may be a perfectly appropriate 

reason to make a pension change. Of course, pension costs can be 

reduced in many ways. I assume most members would prefer that 

a company remain in the defined benefit system and have a plan 

that better delivers benefits to their workforce as opposed to leave 

the system all together. 

So, again, I don’t want to act as if cost reduction on a prospective 

basis is some horrible thing that automatically dams the employer 

that has gone that route. 

Chairman BOEHNER. Professor Clark, how would you react to Mr. 

Hill’s testimony? 

Dr. CLARK. Thank you, Mr. Chairman. It is certainly clear that 

in an economy like ours companies have to respond both to their 

own interest and to workers’ interest in our labor force that has 

been changing both in terms of age structure and gender and minority status in lots of different ways, and that has encouraged 

companies to think about how they are going to offer their compensation and in what form. 

So companies are in the business of looking at their compensation and trying to determine what is it that their workers want because for every dollar a company spends, they want the worker to 

get the most value out of that worker wherever that level is. 

It is certainly true that companies must use their benefits as 

well as their cash compensation to help them attract, retain, and 

motivate workers. As the worker preferences change, as the worker 

composition changes, companies must change that as well. 

I would come back fundamentally to the issue of what is the relevant comparison. As Jamie just said, companies reducing one type 

of compensation happens all the time. Companies change their poliVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 H:\DOCS\94751 EDUWK PsN: NNIXON
54

cies, health care policies are changing all the time. You could go 

back and say are you going to hold constant health care plans over 

time or are you going to allow companies to restrict them and 

change them. Certainly the U.S. Congress changes Social Security 

and changes Medicare. We don’t give workers choices about which 

ones they are going to take in terms of whether they want to stay 

in the old Social Security system right now, could they still get full 

benefits at 65. Workers didn’t get that choice. Congress made it for 

them. 

So the government and the companies are in the business of trying to appeal to the workforce, trying to set their policies in such 

a way as to get the maximum value from hiring their workers, and 

wages go up and they go down. 

Chairman BOEHNER. Professor Clark, do you believe that the 

concept of compounding interest is inherently age discriminatory? 

Dr. CLARK. No. How it is specified in the law, I am not a lawyer, 

I do not come to talk with you about what is age discriminatory 

or not in terms of the legal approach to it, but certainly it seems 

to me that a dollar in a person’s pocket whether they be 25, 45 or 

65 is an equal treatment of that worker. Everybody gets the same 

dollar, everybody gets the same percentage of their compensation. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

New Jersey, Mr. Andrews. 

Mr. ANDREWS. Mr. Kildee was here first. 

Chairman BOEHNER. The Chair is happy to recognize Mr. Kildee. 

Mr. KILDEE. Thank you, Mr. Chairman. First of all, Mr. Chairman, since we were allowed to have only one witness, the minority 

had one witness, I would like unanimous consent to submit to the 

record some documentation to complete the record. 

Chairman BOEHNER. Without objection. 

Mr. KILDEE. I thank the Chairman. I would like to direct a question first of all to Mr. Hill and then the others may want to comment on that. There is a bill, Sanders-Miller bill, of which I am cosponsor, H.R. 1677, which would first of all give a choice to the 

employee between the traditional and the cash balance plan and 

also would ban the wear-away provision. 

Could you comment on that? 

Mr. HILL. Yes, I will be glad to comment on that. 

It is truly clear that some of the most virulent, if you will, or the 

most emotional reactions to cash balance plans have come in the 

conversion process, and two of the issues that have caused the 

most concern among older workers are addressed in that bill. One 

is, and Dr. Clark has written about it, the nature of the relationship between the employer and the employee. When an employer 

has essentially entered into what is perceived by them to be a longterm contract, they sacrifice current income in return for later increasing benefits. Having made that choice and having lived with 

that choice for a decade, two decades, in some cases three decades, 

only to find that bargain dramatically altered overnight, has been 

an enormous blow to them, particularly as it comes long after they 

have made decisions about savings and their future. 

That bill would address that very, very serious concern. 

Mr. KILDEE. On that point pensions really are an earned deferred 

income, are they not? They are not just a gift from the employer. 

55

Mr. HILL. I have never met an employee yet who didn’t consider 

it to be a part of their incomes. When you talk to employees who 

chose to forgo other kinds of plans, chose to forgo higher employment pay on a current basis, chose to forgo stock options during 

the late 1990’s, they certainly thought they made that choice. They 

lived with that employer and they benefited that employer, and the 

employer made those promises with that intention. 

I mean, those promises are made to attract the kind of workers 

those employers wish to attract. 

The second issue that has hit older workers so severely is also 

the wear-away which, as the GAO study acknowledged, could impact people to the point where at 55 when their charges occurred, 

they might go the rest of their professional career without changing 

their pension benefits, even though they might have been with that 

employer for 30 years. So that is clearly the case and that bill 

would address two of the most serious concerns that have arisen. 

There are employees—employers, excuse me—and Eaton, I know, 

only from what I have heard from Ms. Collier—that have taken 

what I would call a more appropriate response in making a conversion. But I would note that according to the recent study done by 

Mellon that I being Eaton would fall in a category of 6 percent who 

have made similar kinds of conversion opportunities available to 

their employees. 

So from the perspective of any one company, any one of these 

issues may be, I will say, slight or more serious or less serious. 

However, from the broad breadth of employees, the 7 million or so 

that have been impacted by this, clearly those two issues are at the 

forefront of their concerns. 

Mr. DELAPLANE. If I might just comment on that, Mr. Kildee. 

Mr. KILDEE. Surely. 

Mr. DELAPLANE. I want to reiterate something that Chairman 

Boehner said. We have a provision of law today which ensures and 

requires that no benefit earned for service today can be taken 

away. So promises made by employers are promises kept, and that 

provision of law ensures that. I want to be clear about that. 

In addition, let us recognize that when employees experience a 

significant wear-away, it tends to be because this early retirement 

benefit under the prior plan was very, very generous. These, again, 

are some of the richest benefit plans in the country. Many workers 

would be envious to have such a subsidy in their plan. So that is 

what really explains this wear-way, the very generosity of the plan 

prior. 

With respect to the legislation you referenced, here is why——

Mr. KILDEE. But their wages may have been generous too. You 

are not asking them to give some of the wages back through the 

years, are you? 

Mr. DELAPLANE. What I am saying is what Professor Clark has 

said. In the future for days not yet worked, conditions can change. 

So I think we go down a very slippery slope with a bill like 

H.R. 1677 which basically says we are going to guarantee employees future benefit expectations. We are going to turn them into 

legal rights. Because if I as an employee decide I do not like a pension change, I just choose my way out of it. The problem with that 

is a very slippery slope. Why are we singling out cash balance conVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 H:\DOCS\94751 EDUWK PsN: NNIXON
56

versions for these kinds of changes? And employers are very concerned that quickly we are going to say that you can’t change your 

traditional plan without a choice, you can’t change your health plan 

without a choice, you can’t change your 401(k) match without a 

choice. We are not clear where it ends and we worry that that creates very significant problems for employers, minimizes their ability to be flexible. That is our real policy concern with a bill like 

H.R. 1677. 

Mr. KILDEE. My time has expired. Let me say as one who recognizes the fact that you cannot have employees without employers, 

I want to have a balanced bill. And I think that H.R. 1677 tries 

to achieve that balance and give some protection to the employee, 

while recognizing some of the needs of the employers. 

We have tried to achieve that balance and I hope if we report a 

bill out of here, that some of the wisdom from this side of the aisle 

might be coupled with some of the ideas on your side of the aisle. 

Ms. PFOTENHAUER. Congressman Kildee, there is a very interesting working paper that is being authored by Olivia Mitchell and 

Janemarie Mulvey at the Wharton School, entitled ‘‘Possible Implications of Mandating Choice in Corporate Defined Benefit Plans.’’ 

it is just a working paper and does not speak directly to the legislation that you mentioned. But it heightens my concerns about unintended consequences of doing this type of thing, and I would highly 

recommend that your staff take a look at this and see whether they 

think those concerns are relevant. 

Mr. KILDEE. We will do that. Thank you very much. 

Ms. COLLIER. Mr. Kildee, I believe you asked me to comment on 

Mr. Hill’s testimony as well, and I would like to do that. Although 

it was, I think he used the word ‘‘appropriate,’’ that we had an appropriate conversion and that was appropriate, but it was appropriate for Eaton. I have also worked at a prior employer and been 

involved in two cash balance conversions at that employer and we 

also had conversion techniques but they did not involve choice. 

There are a lot of different techniques out there and a lot of valid 

techniques out there that should be appropriate for that company. 

Secondly, you asked me to speak—oh, and your study also, Mr. 

Hill, mentioned the 6 percent. I think that is specific just to choice. 

There are other conversion techniques out there that are either in 

the Mellon study or in the Watson Wyatt study. I think the number is larger than that when you include all techniques. 

And as far as wear-away, we did some have some wear-away in 

our plan but we took great steps to mitigate that. And also we had 

11 percent of our employees over 55 choose the cash balance plan 

because wear-away is often a temporary condition. And those employees who expect to work longer in their careers were actually 

better served choosing the cash balance plan. 

Mr. KILDEE. Thank you, Mr. Chairman. I thank the witnesses. 

Mr. JOHNSON. [Presiding] Thank you. And you know we will take 

your remarks into consideration in everything we do. Especially 

Rob down there. Mr. Delaplane, if certain mandates were required 

in the voluntary employer-sponsored system to mandate employees’ 

expectations of benefits, could these mandates affect employment 

practices and America’s overall competitiveness in the world economy? 

57

Mr. DELAPLANE. Mr. Chairman, I think you raise a very important caution about those sorts of proposals. As I mentioned in my 

earlier response, it is not clear where the line will be drawn and 

why all benefit changes would not be subject to this protection of 

expectations. Part of the reason that we have had robust employment in our country is that employers have had the flexibility, prospectively, to alter their benefit programs, alter their comp structure, and be nimble and move in the economy accordingly. 

If you contrast that with more of a European model where it is 

very, very difficult for employers ever to change the conditions of 

employment from the day the employee began, you see much less 

robust employment sort of systemically. And I think the concern is 

if we layer on these protections of expectations and we prevent employers from being able to make changes, that is the direction we 

are going to go. Employers are going to be much less willing to add 

people to the payroll, knowing that it would be virtually impossible 

to change their pay and benefits going forward. So I think it is a 

very significant risk to competitiveness. 

Mr. JOHNSON. Thank you. You all talk about lump sum payments. That seems to hurt more than helps. Would you all comment on that and can you tell us whether we should even address 

that issue or not? 

Mr. DELAPLANE. It has certainly been one of the attractive features of the hybrid design for most employees. They value the fact 

that the benefit can be taken as a lump sum. 

Mr. JOHNSON. But they do not have retirement for the long term. 

Mr. DELAPLANE. By law, luckily the hybrid plans, like the defined benefit plans, are required to offer the benefits also in the 

form of a joint and survivor annuity. So unlike the defined contribution 401(k) world where that is not a requirement, for hybrid 

plans it is a requirement to offer an annuity. Part of the reason 

here——

Mr. JOHNSON. But it is still the employee’s choice. 

Mr. DELAPLANE. Still the employee’s choice. One thing that may 

address your concern is that employees can take that lump sum 

from a hybrid, roll it over to an IRA and continue to invest it and 

have it build more in earnings today, before retirement. And that 

actually protects from the harms of inflation. In a lot of traditional 

plans where you can’t take a lump sum, your benefit is a fixed dollar amount over time and becomes less valuable over time. The hybrids help respond to that problem. At least the lump sums continue to be invested and rolled over and grow all the way to retirement age. 

Mr. JOHNSON. Yes, sir? 

Dr. CLARK. Thank you, Mr. Chairman. In comparing what companies might do, certainly many companies might, as has been suggested here, close their defined benefit plans and open a 401(k) 

plan as many companies have done over the last 30 years. And 

when you start thinking about are cash balance plans better than 

that alternative as opposed to are cash balance plans better than 

retaining the traditional plan, you have to consider, because clearly 

that is an option that many companies have followed. 

And the annuitization issue is certainly one that is very important in that choice, as is the investment risk. One thing about 

58

annuitization and lump sums, though, whether you are looking at 

the U.S. or Japan or anywhere around the world where lump sum 

options are offered, people take them. 

Mr. JOHNSON. Generally speaking, though, they spend it. It is 

not there for their long-term retirement. 

Mr. DELAPLANE. And one issue that you folks have addressed, recently the 30-year Treasury bonds, which you very helpfully provided a replacement rate for 2 years. A piece of that issue we have 

not yet confronted is the use of the 30-year Treasury rate in valuing lump sums from defined benefit plans. The fact that we still 

have to use this low 30-year Treasury rate means that the lump 

sums are artificially inflated and we are tipping the playing field 

toward employees taking the lump sums today. They are more valuable than the equivalent annuity. And obviously that is one of the 

issues you are hoping to address long term, but that contributes to 

the problem that you are raising. 

Mr. JOHNSON. That is a great point. Thank you. 

Mr. HILL. Could I respond to your question earlier about international competitiveness? I think employees and employers are 

mutually concerned about international competitiveness. And as 

with so many of the issues that you have addressed congressionally 

in terms of public policy, the question is striking the proper balance. 

We are, after all, sitting here talking about Congress having 

mandated a prohibition against age discrimination in context of 

certain tax-incentivized private pension plans. I think this year it 

is going to cost about $90 billion for the taxpayers to have this, 

quote, private retirement system we are talking about. We are all 

concerned about that and we are concerned about modifying a prohibition against age discrimination. 

If we were talking about modifying a prohibition against sexual 

discrimination or racial discrimination, I think we would not be 

talking about the cost of that in terms of international competitiveness. Each of those bears some cost arguably. But I think we as 

a country have decided those things are sufficiently important to 

us that we are going to value the prohibitions against sexual discrimination or racial discrimination or any other kind of discrimination that you have chosen as a public policy. 

So what we are really talking about is whether there is a modification of the current prohibition in the tax-incentivized private 

system for pensions. And that is all we are talking about here at 

the core. 

Mr. DELAPLANE. Mr. Chairman, if I might real quickly. As Mr. 

Hill knows, the legislative history of that pension age prohibition 

in 1986 was very clear that the practice Congress was focused on 

was employers who were ceasing continuing accruals when somebody hit normal retirement age at 65. That is in the title of the 

provision in the statute and in the legislative history. I do not 

think—I sort of challenge the idea that you are walking away from 

some commitment that you made. It was very clear that was the 

fact pattern that Congress was focused on, which wouldn’t even 

reach to the issue of what is happening to pre–65 employees. 

59

Mr. JOHNSON. Thank you. You know, this is an interesting discussion. I appreciate all of you participating. Did you want to make 

a comment? 

Ms. PFOTENHAUER. If I might. Since the Society of Actuaries has 

done the analysis in 1998 that showed that 77 percent of women 

are better off under cash balance plans, I don’t think it is outrageous to contemplate a scenario where people like me might feel 

that any action of Congress that made it less likely that a cash 

benefit plan was going to be available was actually gender discriminatory. 

Mr. JOHNSON. Thank you. Mr. Andrews, you are recognized for 

5 minutes. 

Mr. ANDREWS. Thank you, Mr. Chairman. I want to thank the 

witnesses for their very substantive additions to helping us solve 

this difficult problem. Thank you. I have enjoyed reading what you 

had to say and listening. Solving difficult problems almost always 

requires us to compromise and to find middle ground between two 

very defensible positions. The first is the fairness to employees who 

reasonably rely upon a set of expectations in their lives and in 

their family budgets, and the second is to make sure that employers who are voluntarily providing pensions can do so in a way that 

is consistent with the competitiveness and success of their business. I don’t think that those are mutually exclusive goals and we 

are trying to find the common ground between the two of them. 

Mr. Delaplane, I wanted to ask you on this question of choice 

prospectively. That is to say, where an employer is considering 

make conversion from a defined benefit plan to a cash balance 

plan. I think I heard you say that you oppose the idea that employees would be permitted to choose whether to go into the cash balance plan or keep the traditional plan. Is that your position? 

Mr. DELAPLANE. We would oppose that as a mandate; correct. 

Mr. ANDREWS. Under what circumstances would the employer be 

disadvantaged if an employee chose to stay in the traditional defined benefit plan? What is wrong with that from the employer’s 

point of view? 

Mr. DELAPLANE. There may be nothing wrong with that. It depends, obviously, on the demographics of your workforce. I think 

part of the problem is if that is a worker who will not be with the 

firm for an entire career, you are likely to see disappointing benefits under the traditional formula because it is so backloaded to the 

end of a career. If you are as an employer trying to say how can 

I most equitably use my benefits budget to deliver meaningful benefits to the people who work for me, the traditional plan for many 

employees is not the way to do that. 

Mr. ANDREWS. If I may, that is a disappointment for the employee and he or she has made that choice. People are sometimes 

a little irrational, but if you have chosen to stay in the defined benefit plan, you do not have a lot of grounds to complain that it is 

not as good for anything else you might have opted for. 

Mr. DELAPLANE. I understand. But employers are trying to do 

right by their folks. The traditional plan may have these very, very 

rich early retirement subsidies, and again a lot of employers have 

job shortages in certain categories. 

60

Mr. ANDREWS. But if I understand correctly, the legislation Mr. 

Kildee referred to would not prohibit the employer from modifying 

those retirement subsidies. If you kept your DB plan and chose to 

modify your early retirement subsidies, there is nothing in that legislation to preclude that. That is a separate question from choosing 

not to go into the cash balance. 

Mr. DELAPLANE. The bill has another provision on wear-away, 

which Mr. Kildee mentioned, which makes more complicated the effort to strip out the subsidies. So there is a piece to that issue. But 

I think the primary concern is that you are not—it is really the 

precedent. Why are we elevating this particular kind of benefit 

change above all others for this brand-new kind of——

Mr. ANDREWS. I think the answer would be because it is the only 

kind of benefit change I could think of where the employee might 

wind up poorer than he or she would otherwise be. I cannot think 

of any other conversion where that would be the case. 

Mr. DELAPLANE. What about the incidents that happened Mr. 

Andrews where employers have concluded they have to suspend 

their matching contributions to their 401(k) plan. And employers 

have had to do that. So that the only money going into the 401(k) 

at that time is the employee money. The employer contributions 

which would normally be triggered are not occurring. 

Mr. ANDREWS. But that is not a plan conversion. That presumably flows off of economic difficulties that the employer is having 

generally. 

Mr. DELAPLANE. I guess what I would say is that we do not see 

a principal distinction why, if Congress believes that protecting the 

expectations is right for the traditional plan, it is also right for 

the——

Mr. ANDREWS. Here is how I see the difference. I certainly do not 

support something where we require someone to keep a promise 

that they did not make. If we passed a law that said we have to 

keep the employer match under the 401(k) no matter what is happening to your business, that is a promise that the employer did 

not make. 

On the other hand, when an employer enrolls someone in a defined benefit plan and says if you work a certain number of years 

and make a certain amount of money and retire at a certain age, 

this is what you are going to get, I know the legality of that promise is subject to dispute but the morality is not, and it seems to me 

that it is important. 

Can I ask Mr. Hill a quick question? I know that you do not 

seem to like the cash balance plans at all. At least I derive that 

from your testimony. I do not agree with you on that. I don’t think 

there is anything inherently wrong with these plans. I would ask 

you to submit for the record your thoughts on what a fair conversion might look like. It is clear what you think an unfair conversion 

looks like. I would be interested in your thoughts as to what you 

think a fair conversion looks like. 

Mr. HILL. Would submit that. It is unfair to ask a lawyer to do 

that. We all the time take directions from you and then we argue 

about what you meant. 

Mr. ANDREWS. I know it is unfair. I am a lawyer; that is why I 

asked you the question. 

61

Mr. HILL. I respect that. I was going to suggest you were getting 

it back in kind. We normally can dump off and impose on you——

Mr. ANDREWS. It is a professional discourtesy, I guess. 

Chairman BOEHNER. [Presiding] Thank goodness I am not a lawyer. The gentleman’s time has expired. The Chair recognizes Mr. 

Burns. 

Mr. BURNS. Thank you, Mr. Chairman. I too share your challenge, not being a lawyer. So I will join this discussion a bit and 

seek to get more input. 

As an individual who worked for an organization for 20 years 

and enjoyed a defined benefit plan, and having a choice late in that 

career to change, chose not to because, as you suggest, maybe that 

would be to my personal best interest. 

The first question is if you look at defined contribution plans 

versus defined benefit plans, do we agree on which theoretically is 

better? Do we agree theoretically, Ms. Collier? 

Ms. COLLIER. I actually think they serve different purposes. 

Someone earlier stated that savings plans, the 401(k) plans were 

never intended to be one’s sole source of retirement. So in our case 

we use them to encourage employees to save and we do that by 

matching at one of the safe harbor generous employer match. 

Mr. BURNS. If you look at any growth curve—if I started at 25 

and stayed to 65, is a defined contribution plan a superior plan? 

Ms. COLLIER. No, not necessarily. The defined benefit plan offers 

security. It offers a guaranteed interest rate. The cash balance plan 

I am speaking of in this case. 

Mr. BURNS. Are we really arguing about conversion issues and 

about the early retirement boost that many—not many, but some 

plans offer? 

Ms. COLLIER. I think that is one aspect. But I think we are also 

concerned about the general legality of the age discrimination. 

Mr. BURNS. Age discrimination has come into the discussion and 

it has clouded and muddied the water fairly substantially. 

Dr. CLARK. Mr. Burns, if you look at the three types of plans and 

you line them up and you offer them to different workers, some 

workers would clearly prefer the traditional defined benefit plans, 

others would clearly prefer the cash balance plans, and others 

would clearly prefer the defined contribution plans. In my view, 

they are all relevant retirement plans that can provide an adequate 

retirement income, provided that the person follows through or the 

company follows through on particular decisions. 

The characteristics of those plans appeal to different people 

based on their risk aversion, their career paths, and all of these 

others, which is why I would say that it is important to have all 

types of plans out there. And the other thing we have to keep in 

mind is that the employer and the employee are both interested in 

the value that they get out of the plan for every dollar that is put 

into the plan. And that includes all of the costs of managing the 

plan and operating the plan as well as the net rate of return, then. 

And when there are events that happen that increase the costs 

to any one particular plan, workers and firms are likely to move 

from one plan to another. And that is basically what has happened 

with the defined benefit world, is that Congress raised the price of 

that plan relative to the other types of plans and companies and 

62

workers were choosing increasingly defined contribution plans. It 

does not make it inherently better; it just means that at the current prices, more people are choosing this plan versus the other. 

Mr. BURNS. I have an inherent problem with mandating volunteer participation. And one of the questions I have, if Congress was 

to mandate early retirement subsidies in a conversion program, 

what impact would that have on businesses? And really providing 

benefits to employees that maybe they were not entitled to? 

Dr. CLARK. I think that early retirement subsidies were put into 

the traditional defined benefit plans in an era when companies 

wanted to encourage older workers to leave. That was in the period 

of rapid labor force growth and a period of more homogeneous 

worker force. Lots of reasons why companies chose that as an optimal human resource policy. 

In today’s climate that is not happening. Instead, more and more 

companies are going to be looking at a slowly growing labor force. 

Valuable workers with good experience, these are productive senior 

workers. There is no reason to encourage them to leave. I believe 

that companies around the country will ultimately be moving more 

and more in the direction of looking at their entire human resource 

policies and trying to figure out how to keep older workers on rather than trying to push them out. And certainly the elimination of 

early retirement subsidies is consistent with that public policy and 

consistent with the objectives of Congress as we look at Social Security and other areas of fiscal certain. 

Mr. BURNS. Ms. Collier would you address that point? 

Ms. COLLIER. Yes. You mentioned specifically the mandate issue 

and that is what concerns me the most. While we were undergoing 

our conversion process, a lot of people would call me from around 

the country, different companies, and ask how we were doing and 

what the appropriate—how we were converting and what our communication strategy was, et cetera. 

Since 2003, even with the threat of mandates and the introduction of proposed legislation, those calls have changed dramatically 

in content. The employers are calling but they are not changing 

from one defined benefit plan to another. Rather, they are either 

freezing or terminating or converting their defined benefit plan and 

having a defined contribution plan only for the future. It is already 

starting to take effect in my personal experience. 

Chairman BOEHNER. The Chair recognizes the gentlewoman from 

California, Ms. Woolsey. 

Ms. WOOLSEY. Thank you, Mr. Chairman. And thank you to this 

panel. 

We were talking about conversions and that we can take care of 

the current older workers, and that is possible by letting them 

grandfather/grandmother and stay in their plans. But you know 

our responsibility up here is to all workers and all employers and 

looking at the longterm for retirement. And somebody, one of you, 

and it may have been you, Mr. Delaplane, said that employers are 

constantly changing their benefit plans because they are fluid. I am 

a human resources specialist professional for 20 years before getting here. And that is true. They are, and they have that right. 

But sitting up here, the Federal Government, I mean, what we 

do, if we change Medicare, if we change Social Security and drasVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 H:\DOCS\94751 EDUWK PsN: NNIXON
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tically pull the carpet out from what people know that they can 

count on, we get fired. The CEO does not get fired by the employees when they decide that the company wants to cut costs. We will 

get fired. 

And what we are counting on when we have Social Security is—

the minimum base of what a worker gets is that they are building 

on top of that. So when we talk about—and I have a question for 

you, Ms. Pfotenhauer, Nancy, I want to call you Nancy. When we 

talk about unintended consequences it is not just on the employer. 

We are looking at this long-term woman that worked. You said 

that she was lucky enough to be working longterm for the same 

employer. Wrong. The employer is lucky enough to have had an experienced, long-term, loyal employee. 

The unintended consequence is to even think about removing her 

benefits and pulling the rug out from under her. We need to protect 

those workers. We need to encourage long-term loyalty. So I want 

to ask you how you think that can happen. And at the same time, 

I want all of you, if you will, to answer me about more portability, 

mobility, with these cash balance plans 5 years to vest. How is that 

more mobile and more portable? 

So I will start with unintended consequences. 

Ms. PFOTENHAUER. Let me start with why someone is lucky if 

they are able to maintain employment for two decades. We are 

struggling right now. It takes two working parents to support a 

family. Many women are finding themselves in a position of being 

single parents where they are providing most of the financial support for themselves and their children. 

And frankly I think women, as well as the employers who employ 

them, are lucky if they find a job situation that works out for two 

decades. It is clearly not happening for the majority of women who 

stay on a job less than 5 years. And they do that for different reasons and the data does not allow us to imply why. But it seems 

to strongly support the contention that women tend to take more 

time out of the workforce as they try to do that balancing act to 

take care of children and elderly parents. 

So basically I think someone is very, very lucky, male or female, 

if they are able to find a workable employment situation. 

Ms. WOOLSEY. Absolutely. So I am going to take back my time 

a little bit and have a discussion with you. Therefore, we should 

be using that as the way we want to go, not to make it harder for 

them. Five years, if they are in and out of the workforce and 5 

years vesting? 

Ms. PFOTENHAUER. They are averaging 4.8 years. And what you 

find and what the data clearly shows is that this trend of women 

going in and out of the workforce is not going away. And I am not 

sure it is the job of this Committee to try to make it go away. Because what is happening is something called sequencing in labor 

patterns where women are not just taking time out when their children are first born, but are actually taking time out again when 

they are in high school, because there has been a resurgence of 

concerns. 

Ms. WOOLSEY. Actually, you are a great straight person for me, 

because I have legislation called The Balancing Act to Bridge Work 

and Family. Ms. Collier, did you want to respond to this? 

64

Ms. COLLIER. Yes, I want, thank you. In regards to mobility, I 

think I mentioned mobility is also an issue for us internally to the 

company with over 100 locations in 40 States. We have a lot of people that were transferring from one location to another. And in 

doing so, they were often turning us down perhaps because of the 

difference in pension plans. So we solved that problem internally 

as well by doing our choice program. 

In addition, as far as vesting, we voluntarily vest our 401(k) 

match immediately. And then we want to continue to have an incentive for some of these highly recruited employees, be it in engineering, HR—we have an H.R. developmental program—supply resource management, IT, what have you, we would like to have an 

incentive to keep them for 5 years. There is a considerable amount 

of training, as you know, that goes into building someone’s career 

skills in the first 5 years, and by doing so we hope to continue to 

entice them to remain with us by having a plan that is very visible 

and attractive to these employees. 

Ms. WOOLSEY. Just a minute Mr. Delaplane. I want to thank 

you. I really think we ought to use Eaton as one of our model companies unless there is something I am missing here. But you do 

know that not all employers are as responsible as you are. Mr. 

Delaplane. 

Mr. DELAPLANE. Just a couple of quick points about vesting when 

an employee stays with a company for 5 years or 6 years. Under 

a hybrid plan they will depart with a much higher benefit than 

they would have departed with under a traditional plan. So you 

have to make it to that vesting threshold, obviously. But the way 

the benefits accrue in a cash balance plan, you leave with a much 

more significant benefit. So that is the advantage. 

Ms. WOOLSEY. If you stay 5 years. 

Mr. DELAPLANE. If you stay 5 years. And Ms. Woolsey, as an employer organization, we want to emphasize a lot of common ground 

with you. We do want to see as many employees as possible enjoy 

those defined benefit plan benefits. They are employer funded, they 

are backed by Federal guarantees, they have spousal protections. 

And I think our perspective is that we do want employees to be 

able to remain in that system. A traditional plan or a hybrid. 

And to your point about conversions, I think Eaton has become 

close to the norm. If you look at the data we cite in our written 

statement, 9 out of 10 employers provide very significant conversion assistance of one sort or another to their older workers, whether that is choice, whether that is grandfathering. It is the unusual 

employer in financial distress who may not do those additional conversion benefits. Frankly, I think many of the key concerns many 

have had about conversion has been addressed in the marketplace. 

Ms. WOOLSEY. Dr. Clark? 

Dr. CLARK. I think the fundamental principle of a lot of the discussion that we are having today is the difference between the exit 

pension, or what has legally been earned, and the expectation of 

workers from their pension. And as Mr. Delaplane just said, if you 

are leaving from 5 years out to 20 years, you are typically going 

to leave with a much bigger benefit under a cash balance plan or 

a defined contribution plan than you would with a defined benefit 

plan. 

65

If you stay all the way to early retirement, if you stay all the 

way to early retirement, if the company keeps the pension plan, if 

the company does not convert to a defined benefit plan, if they do 

not do away with the early retirement subsidy, then you would get 

a bigger benefit. One of the problems that companies have with 

workers is trying to explain what the benefit that they do have 

under the defined benefit plan is. And the benefit calculators that 

were mentioned by Mr. Miller earlier is one way that they try to 

show that, but that is really based on all of these expectations that 

you might get there, and it certainly leads to the impression that 

it is a guaranteed benefit even when it is not. 

And so how do you explain this? Communication is a very important key for an ongoing plan, but it is essential when you are making a conversion. And those companies that have converted pension 

plans, that have had good communication strategy, have had the 

transitional benefits, have made these transitions with essentially 

no adverse reactions, no need for lots of lawyers involved, and the 

plan has gone forward. 

Those companies that had bad communication plans or did not 

have transitional benefits, or smaller ones, had more problems. 

That is the issue. What is the benefit that people have earned? 

What do they think they have earned? And what is the legal benefit that they actually have earned? 

Ms. WOOLSEY. In the long run, the more healthy our benefit 

plans are, the better the retirement benefits, the healthier this Nation is. Because somebody is going to be supporting older Americans. 

Chairman BOEHNER. The gentlewoman’s time has expired. The 

Chair recognizes the gentleman from Georgia, Mr. Isakson. 

Mr. ISAKSON. Thank you, Mr. Chairman. I want to congratulate 

Ms. Pfotenhauer on what I think may be the hearing quote of the 

decade when she admonished us that the only thing we cannot 

amend is the law of unintended consequences. I thought that was 

a great line and I would like to follow up on that line by asking 

you a question. 

It appears to me if the Cooper versus IBM decision stands 

unaddressed by Congress statutorily, that the unintended consequence vis-a-vis the age discrimination interpretation in that 

case would be that there are not going to be many defined benefit 

or cash balance plans and everything is going to be defined contribution. Would you comment on that? 

Ms. PFOTENHAUER. That is really why I am here today. That is 

our greatest concern. As I said, this is not a Republican or Democratic cut on the issue. It is just clearly there in the numbers, and 

that is that women benefit much more under a cash balance approach than they do under the traditional approaches. And it is not 

just because of their traffic in and out of the workforce. It is that 

other point. It is that we rarely can afford to take the option for 

early retirement. 

So we think that we are a relatively small organization. We 

choose our issues carefully. We think this is dramatically important 

to our constituency in term of what we work on for retirement security. 

66

Mr. ISAKSON. Mr. Hill, would you agree with my reasoning that 

if Cooper stands and Congress does not address the issue of age 

discrimination and the time value of money, that in the future for 

workers coming into the workplace there is a likelihood the only 

thing you are going to see is the defined contribution plan? 

Mr. HILL. I do not agree with it but I recognize it is speculation 

as we are all speculating about something that other people would 

do in the future. The point I would make, though, is that with far 

less expense than converting to a cash balance plan, if employers 

wish to address the women’s issues——

Mr. ISAKSON. I am letting you handle the men’s side. She is to 

address the women’s side. I want you to address the men’s side. We 

do not live as long and all of that stuff. But the absence or the unintended consequence of reducing the availability of defined benefit 

or cash option or hybrid plans seems to be inevitable if Cooper is 

not addressed by this Congress. My question to you is, does that 

not seem pretty apparent to you too? 

Mr. HILL. No, it does not. What Congress has done is define two 

different worlds, a defined benefit plan and a defined contribution 

plan at this time, and that is what you have done. And you have 

imposed uniform obligation in each of those categories that differ 

because of the different structure, the risk analysis, who is taking 

and making investment decisions, and all of those kinds of things. 

It seems to me that if we were properly presented with this 

issue, it would have been those who wish to see changes made that 

would be more receptive, for example, to some of the issues that 

are raised—and I do not disagree that those are valid policy issues 

for this Congress to address—would have come before Congress 

and asked for the creation of a third category where these kinds 

of public issues would have been debated, where the balancing that 

you are talking about—and I agree it is a proper balancing—would 

take place. 

That is not what happened. Rather, without that kind of consent 

in the face, I would say, of mandatory age discrimination language 

in the statute, they chose on their own to go off and come up with 

plans that have some of the aspects of both the defined benefit plan 

but also want to have some of the essentially legal defenses and 

legal authorizations of a defined contribution plan. And that is not 

the current law. 

But the way to come back with that would be for Congress to address this in the first instance with a policy balance that if you 

agreed, for example, with Dr. Clark that there should be a third 

type of plan in the marketplace, you would then do that and you 

would address it in that fashion. 

I would suggest also employers can address those same issues regarding women and deal with it in a far less expensive plan than 

cash plans if that is truly their motivation. 

Mr. ISAKSON. Your case, well stated, presumes your obvious 

agreement in Cooper in regards to age discrimination and the 

compounding of interest. My comment to you would be the following: Yesterday by happenstance, not by plan, I spoke to 80 employees of a major company in my district, but it is a national company whose company last year, 2003, adopted—gave them choice 

on defined benefit or to a hybrid cash balance plan. And the conVerDate 0ct 09 2002 18:57 Dec 05, 2004 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 H:\DOCS\94751 EDUWK PsN: NNIXON
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cerns expressed to me in that meeting about the uncertainty based 

in that case on failure of Congress to deal, puts in jeopardy those 

types of choices in the future and ends up having the unintended 

consequence—if you look at business and the environment we are 

in today—of employees really getting less options in the future 

than they have today. 

And I am making a statement here. I am really not asking a 

question, I apologize Mr. Chairman. But it seems—the argument to 

me on the comparison of the 25-year-old worker and the 55-yearold worker and the compounding of interest and that being age discrimination is to me ludicrous. But it is more ludicrous that we 

would sit here as a Congress do nothing and create an environment 

where the opportunity for benefits for employees, valuable employees working, just diminished because of the consequence of our inaction. Thanks for letting me make a statement. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

Oregon, Mr. Wu. 

Mr. WU. Thank you very much Mr. Chairman. 

This is a truly challenging issue, and one of the challenges of this 

job is trying to drill down deeply while covering the breadth that 

we need to do. My reading on this was done one or more years ago. 

My recollection from the CRS, the Congressional Research Service 

materials that I read at that time, is that if you look at graphs, 

if you change jobs a certain number of times, at some point based 

on job change and number of job changes or period between job 

changes, there is a crossover point between the traditional defined 

benefit plans and the cash balance plans. Do I recall that properly? 

Mr. DELAPLANE. Mr. Wu, we actually cite in our written statement an analysis that looks at a person who changed jobs three 

times in a career as opposed to a person whose changed none, no 

times. And for the person who changes over three times, which is 

less than a lot of people do, the hybrid plan would produce 17 percent higher benefits than the traditional plan. And for many employees just a single job change can yield the hybrid plan producing 

a higher benefit. 

Mr. WU. Conservatively speaking, if there are three to five job 

changes in a career in a working lifetime, your assertion would be 

that cash balance plans would better serve the financial needs of 

that particular employee. 

Mr. DELAPLANE. Absolutely. 

Mr. WU. OK. Having established that, it was my Republican law 

partner when we were looking at our benefits plans and I thought 

that we would have a vesting period of 1, 2, or 3 years, and it was 

my Republican law partner who said having an employee stick 

around just to vest is probably the worst idea there is and we 

ought to just vest people on Day One. 

If we do assume that people move around from job to job and if 

hanging on purely to vest is a bad idea, then what is the matter 

with pushing the vesting envelope so that instead of vesting at 5 

years—we had a discussion in this Committee of whether the vesting period should be 1 year or 3 years under different legislation. 

What would be any meaningful problem or any significant problem 

with vesting—with pushing that vesting envelope so that instead 

68

of 5 years it was 3 or 1, or even vesting as Eaton does with its defined contribution plan? 

Chairman BOEHNER. If the gentleman would yield, as you know 

under the defined contribution plans, the limit, the maximum limit 

is 3 years. It could be zero. For defined benefit plans, the maximum 

vesting period is 5 years. Could be far shorter than that at the election of the employer. 

Mr. WU. I understand, Mr. Chairman. And we have had discussions on this topic which I have enjoyed, and the question is whether that upper limit should be legitimately pushed down from 5 to 

3 to 1, perhaps approaching zero. Are there any problems with 

that? 

Ms. COLLIER. Well, someone mentioned earlier there are only so 

many benefit dollars a corporation has to spend. My fear is there 

is obviously a cost increase there. There is also employee retention. 

We do vest our defined contribution participants immediately, but 

we do have an interest in getting the most out of these new recruits. And 3 years does not even give enough return on our investment, if you will, for the new employees. It is both the cost of the 

benefits and the ability to retain people for those first 5 years, and 

hopefully then they will see that their career path is with Eaton 

and not another company. We do not want to train employees who 

then go on to other companies after a few years. 

Mr. DELAPLANE. Mr. Wu, as I think you know, many of the—as 

a matter of fact, the vast majority of employers who have adopted 

hybrid plans also offer a defined contribution plan, like Eaton does. 

So we have got a variety of techniques to use. And you are seeing, 

not just as a legislative matter but as a voluntary matter, that the 

vesting schedules in those defined contribution plans have been 

coming down. 

It is a balancing act. You do want to get benefits to people quickly, recognizing the patterns in the workplace today. But as Ms. Collier referenced, you want to have some incentive—not necessarily 

to be there for 30 years, but to stay to 5, to stay to 7, to stay to 

10. And it is a balancing act and Congress has obviously tried to 

set that balancing act appropriately, as employers do. 

Ms. COLLIER. And it is also something that I don’t hear about 

from my employees. They are not expressing an urgent need for it. 

Congresswoman Woolsey, you were an H.R. professional. You hear 

about aspects of a benefit plan that are not popular and we are not 

hearing it. 

Mr. WU. Mr. Chairman, since I yielded a part of my time, if I 

could finish this part of the analysis. It seems to me that most of 

the surveys show that pay is an important factor, but not the top 

factor, and probably benefits is behind pay in terms of retention 

and people’s decisions about where they choose to work. 

And that being the case, this being such an important policy 

arena to provide for secure retirement, you are probably not getting 

that good a leverage from the vesting efforts. At least the competitive philosophy that I have always used, that I picked up from our 

high-tech clientele that we used to serve before I came here, and 

the competitive philosophy that we still use on the congressional 

staff is that we want to provide the absolute most conducive working environment to give satisfaction to our employees in terms of 

69

what they want to do with their lives. And as long as they are adding value to the team and the team is adding value to them, then 

it makes sense for us to stick together. And that some of these 

other considerations get in the way of a secure retirement, but they 

may not be very effective in terms of retention policy. 

And I just want to submit that for your consideration and your 

written comment. And, Professor, if you have something to add, I 

am sure that the Chairman will indulge you. 

Dr. CLARK. Well, the only thing I would add out of that is I think 

that if you calculated the present value of a defined benefit plan 

from working 1 year, it would be infinitesimally small; so the value 

to the worker in a traditional defined benefit plan of working less 

than 5 years, like, say, 1 year or immediate, would not be that 

great. You are calculating the value way out and discounting it 

back. 

That is why you don’t hear about it from the younger workers. 

They look at it and say, even if I had this it wouldn’t be worth anything to me today. 

Mr. WU. I may change my mind as I get older also. 

Dr. CLARK. Value to you would be greater if you were older and 

closer to retirement and had more years of service. 

Mr. WU. Thank you, Mr. Chairman. Thank you to the panelists. 

Chairman BOEHNER. Mr. Payne. The Chair recognizes the gentleman from New Jersey. 

Mr. PAYNE. I am sorry that I missed—this is an area that I have 

had a lot of interest in over the years. Being older, I am more familiar with the defined benefit because many, many years ago, as 

all of you know, that was the type of thing that most workers had. 

You knew you were going to work 40 years at one place, retire, you 

were going to get X-amount of dollars and that was it. Of course 

the advent of the 401(k) and the change in the way that employers 

decided to provide for retirement security changed a bit. And of 

course this cash balance plan is something that I am less familiar 

with. 

But I might ask Mr. Hill, I know you are strongly opposed to it. 

And I wonder if you could—I am sure you did in your testimony, 

but in maybe a minute or two, tick off the two or three reasons 

why you feel that this would not be wise to advocate this type of 

plan. I know the discrimination between older workers and younger, but if you could just give me a thumbnail sketch. 

Mr. HILL. Certainly. One of the concerns at the forefront that I 

have, and it goes to the question of myth or fact: why these plans 

have become popular when they were popular, given the warning 

signs that were out there about the age discrimination issues. And 

I would respectfully submit that a significant motivating factor 

would be what I would call the financial accounting issues, the 

ability to present the company in a more attractive financial way 

as a result of these changes. 

If that is the case, then a lot of the things that we are talking 

about here today really become far less significant because they are 

not really what is motivating these changes in terms of the employer-employee relationship. 

A second concern I had—and there was a reference back to 5 

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rent disclosure requirements, what has happened is that the implementation or the conversion to a cash balance plan, which is the 

most controversial portion of them, has come in an environment 

where they are often masking other changes. 

For example, there has been suggestion that one of the impacts 

has been the elimination of early retirement subsidies and a suggestion that perhaps in the future companies will simply come out 

and announce: We are going to eliminate early retirement subsidies 

because we want to keep our older workers. 

I would be more comfortable from an employee’s perspective if 

the employer wishing to do that simply did that and said, to the 

extent you have protected rights in these early retirement subsidies, I am going to keep them, and to the extent that you do not 

have protected rights in them, I am abolishing them. The employees would understand that and understand what is being done to 

them and why it is being done and they could act accordingly and 

make their decisions. They may be disappointed, I do not disagree. 

But at least they would knowledgeably know and they can make 

decisions going forward. 

The same way with regard to more overall benefits levels. The 

fact that you can implement it through a cash balance plan and 

have this, I will say, very positive announcement of this wonderful 

new gadget that has been developed, as opposed to coming along 

and saying—and I have an example where one actuary talked 

about how you could announce these two different ways, one in 

very glowing terms and one in negative terms. Obviously the negative term is not used, even under the new disclosure requirements. 

It is still the optimistic terms. 

If we are going to have employers and employees working in a 

free market society making decisions based upon the information 

made available to them, the employees should be candidly told 

what is happening. And I would respectfully submit if you take 

away some of these other motivational factors, we wouldn’t be seeing the kind of movement to cash balance plans that we have seen 

in the past. And we will not see it in the future, no matter what, 

as the Financial Accounting Standards Boards and other entities 

move to require more appropriate accounting for these. 

I always figure I am in good stead when I have got Warren Buffet on my side, and it so happens on this issue he has sounded the 

early alarm about pension reporting of income. And that is a major 

issue and I would suggest that is a major factor in this issue. So 

to that extent, I do not disagree. That is, there are some employees 

who have chosen, either because of life’s necessities or chosen because of lifestyles, it might be preferable to have a cash balance 

plan. And I could imagine that Congress should fashion, just as you 

have fashioned to date a defined benefit plan and a defined contribution plan, there could be a fashioning of something similar to 

a hybrid or cash balance plan that would be appropriate to employees and to which I would not object to on a policy assistant point. 

I don’t know if that gives you a background from my perspective. 

Mr. DELAPLANE. In terms of the disclosure requirements that Mr. 

Hill would like to see with regard to early retirement subsidies, he 

is actually describing current law. When Congress in 2001 changed 

the disclosure requirements to require more specific and detailed 

71

disclosure, they added to the series of things that needed to be disclosed by employers any reductions in early retirement subsidies. 

So I think you folks have anticipated that concern and the current requirement and the current regulations actually require employers in that special notice in ERISA to discuss the early retirement subsidy issue and the wear-away issue. I think we have that 

issue behind it. 

Mr. HILL. I should add, that was implemented by Congress, I believe against Mr. Delaplane and his client’s objections. I recall testifying the last time on that issue. 

Mr. DELAPLANE. We certainly support disclosure. We had some 

specific challenges in the hearing that Mr. Hill is referencing with 

the particular bill. That was the not the bill that ultimately was 

enacted into law. We think the disclosure is an appropriate response to concerns that employees have been raising. 

Ms. COLLIER. I would like to comment on a couple of things Mr. 

Hill has brought on, that the employers went on despite warnings, 

and they went off on their own and designed these plans. Eaton 

had had some cash balance programs prior to this conversion and 

both of those plans did not receive IRS determination letters, as 

did our cash balance plan that we put in in 2002, and we received 

that prior to finalizing our choice process for our employees. Employers do not do this willy nilly. We have been seeking the best 

expert legal advice in this area that we could as we embarked on 

these plans. 

Mr. PAYNE. Let me thank you all for your—he is going to cut me 

off anyway. I would just like to say before he does cut me off that 

I have noticed that employers have, over the years, when you 

would think that benefits would be improved and that companies 

would become more—I do not want to say liberal, but more supportive of their employees, especially long-time employees, that we 

have seen sort of a lessening of employee benefits, it seems to me, 

whether it be protection in the workplace in some of our OSHA 

laws, we have seen a reduction in protection. We have certainly 

seen the stagnation of wages in a lot of instances. 

And so as I mentioned in my first remarks is that the defined 

benefit, when 75 years ago a person worked for Westinghouse or 

RCA or a refrigerator company, when the time came they knew 

that there was a defined benefit that they would get. And I think 

that we have actually seen an erosion in employers’ responsibility 

to employees over the years. And that is, I guess, because the world 

has become global—it has always been global, but business is global, and as we see jobs going offshore for companies to remain competitive here, I think this is a part of the whole almost ratcheting 

in the wrong direction the employees’ benefits. 

But thank you all. Thank you, Mr. Chairman, for allowing me 

the extra time. 

Chairman BOEHNER. I want to thank our witnesses for your excellent discipline, your willingness to shed some light on cash balance plans and what they do and do not do, and what they mean 

for workers today and tomorrow. And I can assure all of you that 

the Committee is going to continue to proceed with a comprehensive overhaul of our defined benefit rules and will act to make clear 

72

what the rules are for the cash balance plans and the conversions 

to cash balance plans. 

With that, this hearing is adjourned. 

[Whereupon, at 12:25 p.m., the Committee was adjourned.] 

[Additional material submitted for the record follows:]

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Committee on Education and the Workforce, Fact Sheets, Submitted for the 

Record


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Letter from U.S. Chamber of Commerce, Submitted for the Record


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Statement of the ERISA Industry Committee, Submitted for the Record 

Introduction 

The ERISA Industry Committee (‘‘ERIC’’) is pleased to submit this statement to 

the Committee on Education and the Workforce for the Committee’s consideration 

in connection with its hearing on cash balance pension plans. 

ERIC commends Chairman Boehner, Ranking Minority Member Miller, and all 

the members of the Committee for holding this hearing. This hearing is a welcome 

step toward developing an informed understanding of what cash balance and pension equity plans (‘‘hybrid plans’’) are, the benefits they provide, and the people who 

benefit from them. We strongly support the Committee’s effort to get at the facts 

and to distinguish myth from reality. 

The issues are vital. The future of the private defined benefit plan system is at 

stake. 

The defined benefit plan system is already in decline. Employers that have converted traditional defined benefit plans to hybrid plans have determined that a traditional defined benefit formula does not work for them or their employees. These 

employers are not likely to return to a traditional pension formula. If Congress errs 

in its treatment of hybrid plans, employers will have additional incentives to abandon defined benefit plans in greater numbers and at an accelerated rate, disrupting 

the lives and financial security of the millions of working Americans and their families who now rely on these plans and placing even greater strains on Social Security 

and other public programs. The consequences will be tragic and unnecessary—not 

only for the participants and beneficiaries involved but for the Nation as a whole. 

Only by carefully studying the issues can Congress avoid potentially irrevocable 

and calamitous results. We look forward to working with the Committee and its 

staff as they study these critical issues 

Executive Summary 

• When Congress considers legislation regarding hybrid plans, it has a responsibility to understand fully how the legislation will affect employers’’ willingness 

and ability to sponsor these plans and the benefits that employees will receive 

from them. We look forward to working with the Committee to expand the 

knowledge base regarding hybrid plans. 

• Voluntary defined benefit retirement plans meet critical retirement security and 

economic needs. 

• In recent years, federal law has not fostered the formation, continuation, and 

expansion of voluntary defined benefit retirement plans. Future legislation 

should insure that the formation, continuation, and expansion of voluntary defined benefit plans are viable options for employers. 

• It is imperative that an employer’s ability to make prospective changes in benefit plan design be preserved if defined benefit plans are to flourish in the future. If employers lose the ability to change their benefit plans in order to respond to changing business circumstances, they will have an even greater incentive to abandon their benefit plans. 

• Hybrid plans respond to the needs of a changing economy. They work well for 

many employers, employees, and the entire Nation. 

• Hybrid plans do not invariably reduce benefits. 

• Hybrid plans are not age discriminatory. 

• Treasury Department guidance has confirmed the lawfulness of hybrid plans. 

• ERIC looks forward to working with the Committee on proposals to ensure that 

defined benefit plans, including hybrid plans, remain a viable retirement security option for employees and retirees in the future. 

ERIC 

ERIC is a nonprofit association committed to the advancement of the employee 

retirement, health, welfare benefit, and incentive plans of America’s largest employers. ERIC’s members provide comprehensive retirement, health care coverage, incentive, and other economic security benefits directly to some 25 million active and 

retired workers and their families. ERIC has a strong interest in proposals affecting 

its members’’ ability to deliver those benefits, their cost and effectiveness, and the 

role of those benefits in the American economy. 

ERIC has played a leadership role in advocating responsible solutions to the critical retirement and health care coverage issues that face our Nation. ERIC has published policy papers and studies that have received wide acclaim and have been instrumental in the formulation of legislative and regulatory policy. These include, 

among others—

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1 As of December 31, 2001, private-sector defined benefit plans held assets valued at $1.81 trillion. Staff, Joint Committee on Taxation, Present Law and Background Relating to Employer–

Sponsored Defined Benefit Plans, at 33–34 (JCX–71–02) (June 18, 2002). 2 U.S. Dep’t of Labor, Pension & Welfare Benefits Administration, Private Pension Plan Bulletin: Abstract of 1998 Form 5500 Annual Reports No. 11, at Table E8 (Winter 2001–2002). 3Pension Benefit Guaranty Corporation, 2002 Annual Report, at 14 (‘‘The number of active 

workers PBGC insures actually fell from almost 27 million in 1985 to less than 23 million in 

2000. Meanwhile, the labor force has grown. Now only about 20 percent of private-sector wage 

and salaried workers are covered by PBGC-insured defined benefit pension plans, down from 

30 percent in 1985. If the trend continues, active participants will constitute less than half of 

PBGC-insured participants in 2003.’’). 

- The Vital Connection: An Analysis of the Impact of Social Security Reform on 

Employer–Sponsored Retirement Plans, 

- Getting the Job Done: A White Paper on Emerging Pension Issues, and 

- Policy Statement on Health Care Quality and Consumer Protection. 

ERIC and its members have worked for approximately 30 years to resolve important policy questions and to devise practical solutions to the often vexing problems 

facing the Committee and the country. 

Voluntary Defined Benefit Retirement Plans Meet Critical Retirement Security And 

Economic Needs. 

Before we address the specific subject of this hearing—cash balance and plans and 

pension equity plans—it is important to emphasize the important role of voluntary 

defined benefit retirement plans in our Nation’s economy. 

It is also important to emphasize that the strength of the employer-sponsored benefit plan system depends on the system remaining voluntary. Employers are not required to provide retirement plans for their employees. Employers provide retirement plans voluntarily because it is in both their employees’’ interest and their own 

interest to do so. 

Defined benefit retirement plans have played a critical role in helping to meet 

many employees’’ retirement security needs, a role that differentiates defined benefit plans from defined contribution plans: 

• They provide a reliable source of retirement income to plan participants and 

their beneficiaries. 

• They act as a form of automatic savings: benefits accrue automatically under 

most defined benefit plans. 

• Employees are sheltered from investment and other risks that can reduce individual retirement savings. 

• Once vested, the employee is virtually guaranteed whatever benefit he or she 

has earned under the plan. 

• The employer is responsible for funding the plan. If the employer becomes bankrupt, the Pension Benefit Guaranty Corporation (‘‘PBGC’’) guarantees payment 

of most benefits. 

• Defined benefit plans make benefits available as an annuity. If a retiree takes 

an annuity, the plan, not the retiree, bears the risk that the retiree will outlive 

his or her life expectancy. 

Defined benefit plans also help many employers to attract, retain, and motivate 

employees. In addition, defined benefit plans are major investors in the economy 

and make major contributions to national savings, investment, and economic 

growth.1

The Decline in Defined Benefit Plan Coverage. 

Although defined benefit plans provide valuable retirement security benefits to 

the millions of employees who participate in them, the coverage of these plans is 

declining: 

• Between 1979 and 1998, the number of defined benefit plan participants fell by 

over 22%, from 29.4 million to 22.9 million.2

• Between 1985 and 2000, the number of active participants in PBGC-insured defined benefit plans fell by about 15%, from almost 27 million to less than 23 

million—notwithstanding the expansion of the total workforce during this period.3

Why has this happened? From the early 1980s until 1994, Congress piled law on 

top of law in an effort to meet Congressional budgetary targets by squeezing as 

much ‘‘tax revenue’’ out of defined benefit plans as it could. Through these laws, 

Congress created a regulatory climate that not only micro-managed these plans, but 

also strangled employers’’ ability to fund these plans for the future. The result was 

to subject defined benefit plans to a bewildering array of complex, rigid, and inconsistent legal requirements. 

89

4 Address by Senator Jacob K. Javits, Briefing Conference on Pension and Employee Benefits, 

New York State School of Industrial and Labor Relations, Cornell University and Federal Bar 

Association, Washington, D.C. (Sept. 19, 1974). 

The resulting legal regime has been excessive, oppressive, and convoluted. Its primary effect has been a decline in retirement security, as employees have found the 

rules to be bewildering and as employers have found sponsoring a plan to be increasingly burdensome and unwieldy. It has discouraged employers from adopting 

new plans and encouraged many to terminate their existing plans. For example: 

• Restrictive, complex, and frequently amended legal requirements, including 

compensation and benefit limits and distribution rules have required plans to 

invest a substantial portion of their resources in legal compliance and plan administration, rather than in providing benefits to participants and beneficiaries. 

• New short-sighted funding rules have subjected employers to unrealistic funding assumptions, ignored the long-term nature of pension obligations, and limited employers’’ ability to fund their defined benefit plans until late in their employees’’ careers. 

• Rigid restrictions on the use of pension assets have converted a defined benefit 

plan into a ‘‘black hole’’ from which contributions cannot emerge—even if the 

plan’s assets vastly exceed the amount required to fund the plan’s benefits. 

This regime has weakened retirement security by restricting funding opportunities when employers are most able to fund, by increasing funding requirements 

when employers are least able to fund, by subjecting employers to highly volatile 

funding requirements that are difficult, if not impossible, for employers to predict, 

by subjecting plans to excessive administrative costs, by confusing employees, and, 

in the aggregate, by making it less attractive for employers to maintain and contribute to defined benefit plans. It is difficult to imagine a regime less likely to encourage the establishment and continuation of defined benefit plans. 

The decline in defined benefit plan coverage has substantially weakened the retirement security of our Nation’s workforce. 

Federal Law Should Ensure That The Formation, Continuation, And Expansion Of 

Voluntary Defined Benefit Retirement Plans Are Viable Options For Employers. 

Federal law must create an environment that is conducive to plan formation, continuation, and expansion. If federal law makes it too costly or impractical to maintain a plan, or subjects plans to irrational or counterproductive rules, employers will 

refrain from creating new plans and will be encouraged to terminate or curtail the 

growth of existing plans. If federal law makes it difficult or impossible for an employer to modify an existing plan—if adopting a voluntary plan locks an employer 

into a permanent commitment to maintain the plan without change—employers will 

be loathe to adopt these plans. If an employee benefit plan becomes a straight jacket 

from which there is no escape, employers will respond by not adopting plans. The 

drafters of ERISA understood this well. As the late Senator Jacob Javits (R–N.Y.) 

observed: 

‘‘The problem, as perceived by those who were with me on this issue in the 

Congress, was how to maintain the voluntary growth of private plans while 

at the same time making needed structural reforms in such areas as vesting, funding, termination, etc., so as to safeguard workers . . . [T]he new 

law represents an overall effort to strike a balance between the clearly-demonstrated needs of workers for greater protection and the desirability of 

avoiding the homogenization of pension plans into a federally-dictated 

structure that would discourage voluntary initiatives for further expansion 

and improvement.’’ 4

The Employer’s Ability To Change The Design Of Its Retirement Plan Must Be Preserved. 

One of the great strengths of our Nation’s retirement security system is the flexibility it currently provides to an employer to design and adjust its plans to respond 

to changing business circumstances and to the changing needs of the employer and 

its employees. 

The rapid emergence of new technologies and the obsolescence of old products and 

services are reshaping many industries, forcing companies in those industries to 

adapt quickly or—like buggy whip manufacturers in the age of internal combustion 

engines—die. Businesses change their ways of doing business, move into new businesses, merge, form joint ventures, acquire other companies or are themselves acquired, and divest old lines of business or are themselves divested as they adjust 

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5 ‘‘Overall, defined benefit pension wealth—the present value of the expected future stream 

of [traditional] pension benefits—grows slowly early on in an individual’s career, increases rapidly near the end, and then declines at older ages.’’ Johnson & Uccello, Urban Institute, Can 

Cash Balance Plans Improve Retirement Security for Today’s Workers?, at 2 (2002). 

‘‘[T]raditional DB pensions have imposed large benefit cuts on employees who left the firm prior 

to retirement age. This is because most traditional DB formulas usually link retirement payments to final pay at the company . . . .’’ Mitchell & Mulvey, Pension Research Council, Wharton 

School, University of Pennsylvania, Possible Implications of Mandating Choice in Corporate Defined Benefit Plans, at 3 (2003). ‘‘[P]ension accruals in traditional DB plans are minimal at 

younger ages, grow rapidly in the later 40s and 50s as workers approach retirement age, and 

then become negative as workers lose pension wealth when they remain at work past the plan’s 

retirement age. For workers in their early 60s who have participated in the DB plan since age 

25, for example, pension wealth declines on average by about 14 percent of annual salary each 

year.’’ Johnson & Steurle, Pension Research Council, Wharton School, University of Pennsylvania, Promoting Work at Older Ages: The Role of Hybrid Pension Plans in an Aging Population, at 21 & Fig. 12 (2003). 

place. New global competition and competition from emerging companies have made 

it essential for employers to change their employee rewards programs. 

If employers lose the right to change their retirement plans to respond to changing business conditions, the consequences will be disastrous for employers, employees, and the U.S. economy. 

Employees And The Economy As A Whole Will Be Harmed If Employers Are Prevented From Changing Their Plans To Respond To Changing Business Circumstances. 

Under current law, employers may not amend their plans to reduce benefits that 

have already accrued. But employers have always had the right to change their 

plans prospectively—to change the terms governing benefits that have not yet been 

earned. 

The employer’s right to make prospective changes in benefits is essential to the 

vitality of the U.S. economy and to new and expanded employment opportunities. 

It is also essential to our voluntary benefit system. As we have explained, elimination of the right to make prospective benefit changes will deter employers from 

adopting benefit plans. If the right to make prospective changes is eliminated, the 

principal victims will be employees and their families—who will no longer receive 

the critical benefits that these plans provide. The harmful consequences are predictable: less retirement savings, less retirement security, greater poverty among the 

elderly, greater pressure on older employees to continue working, increased financial 

catastrophes for workers of all ages, greater demands on public assistance programs, greater demands on Social Security, and less investment capital for the economy. 

Moreover, if employers lose the right to change the terms on which benefits will 

be earned in the future, employers that have benefit plans will have their options 

severely limited. When subject to financial pressures, employers will not be able to 

reduce costs by reducing future benefit levels and will be forced to adopt alternative 

measures such as reductions in pay levels, cutbacks in health benefits, layoffs, and 

outsourcing. Under these conditions, employers with retirement plans will be at a 

severe competitive disadvantage vis a vis employers that do not have them. The impact on these employers, their employees and retirees, and the economy as a whole 

will be devastating. Many employers will decide to terminate their plans rather 

than allow themselves to be in this position. 

Most Traditional Defined Benefit Plans Focus Most Of Their Benefits On A Small 

Group Of Employees. 

Under most traditional defined benefit plans, employees earn most of their benefits only after completing 20 to 30 years of service with the same employer. The 

value of their benefits spikes after they qualify for subsidized early retirement benefits, typically in their mid–50’s or later, but then declines if they choose not to retire 

and keep working. Although the dollar amount of the plan’s monthly retirement 

benefit typically does not decline, the economic value of the retirement benefit does 

decline if the employee delays retirement; this is because the value of the plan’s 

early retirement subsidy declines as the employee approaches the plan’s normal retirement age. 

As a result, traditional defined benefit plans are most advantageous to the relatively small group of employees who work for the same employer for 20 to 30 years 

and retire at the plan’s early retirement age. They are far less beneficial for others—for employees who change jobs or interrupt their careers and for older employees who continue to work after early or normal retirement age.5 Indeed, this has 

been a major criticism of defined benefit plans for many years. 

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6 ‘‘During the middle and late 1990s, hybrid plans, primarily cash balance plans, became a 

growing percentage of the plans PBGC insures. . . . In 2000, hybrid plans contained an estimated 20 percent of all PBGC-insured single-employer plan participants.’’ Pension Benefit Guaranty Corporation, 2002 Annual Report, at 14. 7 Yakoboski, Employee Benefits Research Institute, Debunking the Retirement Policy Myth: 

Lifetime Jobs Never Existed for Most Workers, at 1 (1998). 8General Accounting Office, Cash Balance Plans: Implications for Retirement Income, at 26–

27 (2000). 9 Johnson & Uccello, Urban Institute, Can Cash Balance Pension Plans Improve Retirement 

Security for Today’s Workers?, at 3 (2002). 

Although traditional defined benefit plans are appropriate for some employers and 

some work forces, they do not meet the needs of many employers and employees. 

Hybrid Plans Respond To A Changing Economy. 

Many workers in changing industries no longer look forward to a lifetime career 

with one employer. They expect to change employers more frequently than their 

parents and grandparents did. A retirement plan that requires workers to stay with 

the same company and wait for a big bump-up in the value of their pension benefits 

in the last few years of employment penalizes workers who, for one reason or another, leave an employer early or in mid-career and offers little incentive to join an 

employer recruiting for top talent. 

Recently, new hybrid plan designs, such as cash balance defined benefit plans and 

pension equity plans, have been embraced by employers and employees alike who 

need benefit plans that match the new environment in which they work. In contrast 

to traditional defined benefit plans, hybrid plan designs have stimulated great interest in retaining and expanding defined benefit plans.6

The growth and popularity of these new defined benefit arrangements is supported by the findings of numerous independent analysts, as illustrated by the following conclusions: 

‘‘[G]iven the emergence of vehicles such as 401(k) plans and hybrid plans, 

retirement plans today match the reality of the work experience for most 

Americans better than at any time in the past.’’ 7

***

‘‘[W]orkers employed by more than one employer during their career can receive more retirement income under multiple cash balance plans than 

under multiple traditional defined benefit plans. . . . [In one example, the] 

benefit earned by the worker who changed employment under multiple cash 

balance plans will accrue a retirement benefit that is almost 22 percent 

larger than the benefit received by the workers under multiple [final average pay] plans.’’ 8

***

‘‘Median lifetime pension wealth would increase under cash balance plans 

because these new plans distribute pension wealth more equally across the 

covered population.’’ 9

See also Appendix. 

Hybrid Plans Meet Employee Needs. 

Benefits Are Understandable: Unlike traditional defined benefit plans, cash balance plans provide an easily understood account balance for each participant. Employees—who are accustomed to dealing with bank account balances, § 401(k) account balances, and IRA balances—are comfortable with a retirement plan that provides a benefit in the form of an account balance. 

Savings Accrue Automatically: Unlike § 401(k) plans, amounts are added automatically to the accounts of all employees eligible to participate in a hybrid plan. 

The employee does not have to make an affirmative choice to participate or make 

often difficult decisions about how much of his or her current income to defer. 

The Employer Bears The Risk: Like traditional defined benefit plans, but unlike 

defined contribution plans (e.g., § 401(k), money purchase plans, or profit sharing 

plans), investment risks are borne by the employer. Sudden or even prolonged 

downturns in the equity or bond markets do not affect the defined benefit promised 

to the participant. 

Benefits Are Guaranteed: Like traditional defined benefit plans, but unlike defined contribution plans, benefits are insured by the PBGC, a government agency. 

Greater Benefits For Short–Service Employees: An employee typically earns most 

of his or her benefit under a traditional defined benefit plan in the last few years 

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10 ‘‘Compared with traditional pensions, cash balance plans generate retirement wealth more 

evenly over time for a couple of reasons: Contributions made early on earn interest for many 

years, and lifetime earnings rather than final earnings determine benefits. Consequently, a 

worker changing jobs incurs only a small penalty. For women, who tend to have higher turnover 

rates than men, the ability to change jobs without jeopardizing pension wealth may be particularly important.’’ Johnson & Uccello, Urban Institute, Can Cash Balance Pension Plans Improve 

Retirement Security for Today’s Workers?, at 2 (2002). 11 ‘‘[P]ension accruals in traditional DB plans are minimal at young ages, grow rapidly in the 

late 40s and 50s as workers approach retirement age, and then become negative as workers lose 

pension wealth when they remain at work past the plan’s retirement age. For workers in their 

early 60s who have participated in the DB plan since age 25, for example, pension wealth declines on average about 14 percent of annual salary each year. . . . In effect, DB plans favor 

a select group of longer-term employees, often in late middle-age, but disfavor both younger and 

older workers. Unlike traditional DB plans, hybrid pension plans, such as cash balance plans 

and pension equity plans, often reward work at older ages at least as much as work at younger 

ages, because workers in hybrid plans do not forgo a year of benefits for every year they remain 

on the job past the retirement age.’’ Johnson & Steurle, Pension Research Council, Wharton 

School, University of Pennsylvania, Promoting Work at Older Ages: The Role of Hybrid Pension 

Plans in an Aging Population, at 21, 24 & Fig. 12 (2003). 12Mitchell & Mulvey, Pension Research Council, Wharton School, University of Pennsylvania, 

Possible Implications of Mandating Choice in Corporate Defined Benefit Pension Plans, at 4 

(2003) (citation omitted). 

before retirement. By contrast, a hybrid plan delivers benefits more evenly over the 

employee’s career, and an employee who leaves before retirement can roll over his 

or her benefit, on a tax-deferred basis, to an IRA or a new employer’s plan. Thus, 

hybrid plans are especially attractive in new industries that tend to attract highly 

talented, mobile workers as well as in industries that are undergoing significant 

changes. 

Women Benefit: Hybrid plan designs offer significant advantages to women (who 

are most threatened by impoverishment in old age) and others who tend to move 

in and out of the workforce. In fact, all mobile workers—not just women—are more 

likely to accrue a significant and secure retirement benefit under cash balance plans 

than under many other plan designs.10

Older Workers Benefit: The advantages of a hybrid balance plan design are not 

limited to mobile workers, however. For example, the value of the benefit for an 

older worker participating in a hybrid plan increases at the same rate both before 

and after normal retirement age (and , in some plans, increases at a higher rate 

as the employee accrues additional years of age or service). By contrast, under a traditional defined benefit plan, particularly those that offer subsidized early retirement benefits, the economic value of an employee’s benefit actually declines when 

an employee works past the plan’s early or normal retirement age.11

Portability: Hybrid plans provide portable benefits that can be rolled over to another employer’s plan or an IRA, on a tax-deferred basis, for continued retirement 

savings. In addition, when companies are merged, acquired, or form joint ventures, 

the benefits are easily transferred to a new plan, making continuity more attractive 

to the new employer and making it more likely that affected employees will achieve 

retirement security. 

Employee Control: Since the amounts payable under hybrid plan benefits are 

more easily understood by employees than are the benefits under many traditional 

defined benefit plans, employees are more likely to take responsibility for their retirement and their future, resulting in greater personal and national savings. 

No Penalties: Unlike many traditional defined benefit plans, hybrid plans do not 

penalize employees who wish to move on to other jobs before reaching retirement 

eligibility: 

‘‘Traditional DB plans generally encourage early retirement, by offering 

early retirement subsidies and delayed retirement penalties. As a result, 

DB plan sponsors seeking to keep their older workers on the job found that 

their traditional plans did not serve business objectives. By contrast, hybrid 

plans eliminate early retirement incentives and do not have a ‘‘spike’’ in accrual rates shortly before normal retirement age. Thus workers who leave 

early are not penalized as was the case of most DB plans, which provided 

larger accruals for longer tenured employees close to retirement.’’ 12

Annuities Are Available: Since annuities must be offered by a hybrid pension 

plan, participants who want to receive their retirement benefit as a stream of income avoid the increased cost and difficulty of purchasing annuities in the individual market. By contrast, if an employee who participates in a defined contribution plan wishes to receive the balance in his or her defined contribution account 

as an annuity, the employee must approach one or more insurance companies and 

93

purchase an annuity on whatever terms are then available to an individual purchaser in the annuity market. 

Hybrid Plans Meet Employer Needs. 

Appropriate Employment And Retirement Incentives: Because hybrid plans deliver benefits evenly throughout an employee’s career, they do not provide undue incentives for employees to keep working for the same employer until reaching retirement age or to retire immediately when they do qualify for retirement. 

Improved Employee Communication: Because benefits in hybrid designs are more 

understandable, retirement benefits and the need to save are more easily and effectively communicated to all employees, including those who ordinarily do not pay 

much attention to retirement issues. 

Improved Employee Recruitment and Retention: Hybrid plans are an effective tool 

for attracting new employees and retaining and rewarding current employees. 

Enhanced Benefit Coordination: Hybrid plans are easily coordinated with the employer’s savings or profit-sharing plan. 

Neutral Impact On Enterprise Decisions: Because cash balance and hybrid plan 

designs of different companies can be coordinated relatively easily, they offer a stable ‘‘platform’’ to retain employees for companies engaged in mergers and acquisitions. 

Hybrid Plans Benefit The Nation. 

Capital Accumulation: Defined benefit plans—which include hybrid designs—have 

for decades been an engine of capital accumulation, making available secure sources 

of capital for business start-ups and economic expansion that have been responsible 

for the outstanding success of the American economy. 

More Efficient Retirement Savings: Because of the longer investment horizon 

available under a defined benefit plan, a hybrid plan can invest its assets more aggressively and can better withstand market downturns while still providing a full 

benefit than can an individual participating in a defined contribution plan, who 

must bear all of the investment risk under the plan. 

Increased Retirement Savings: Under hybrid plans, more workers build larger 

savings earlier in their careers, increasing their opportunity to accumulate significant retirement savings and reducing the pressure on government programs in their 

retirement years. 

Increased Pension Participation: All eligible employees automatically accrue benefits under hybrid defined benefit plans. Because benefit accrual does not depend on 

an employee’s election to participate, more employees whose employers provide a defined benefit pension plan will actually benefit from the plan. 

More Compatible Workplace For Women: The design of a hybrid plan can enable 

an employer to offer a total compensation package that allocates value more equitably between long-service employees and women and others who tend to move in 

and out of the workforce. Hybrid plans will help to address the phenomena of the 

considerable number of elderly poor women with insufficient pension resources and 

the resulting pressure to increase targeted entitlements. 

Less Pressure On Government Programs: By providing a reliable source of retirement income, defined benefit plans, including hybrid plans, reduce pressure on government entitlement programs for the elderly. 

Employers Have Always Reserved The Right To Revise Their Benefit Plans. 

Employers have always had the right to change the retirement plans they provide 

to their employees. It is a fundamental principle of ERISA. Although current law 

protects an employee’s accrued benefit (including early retirement rights related to 

the employee’s accrued benefit), the law has always allowed an employer to change 

the terms on which retirement benefits will be earned in the future. As we have 

explained, if an employer did not have the right to make such changes, employers 

would be deterred from voluntarily adopting retirement plans in the first place. 

Employers frequently make changes in their retirement plans—both major and 

minor—to accommodate changing employee preferences, to respond to changing 

competitive, financial, and other conditions, and to achieve specific business objectives. Employees are well aware of the employer’s right to change the plan, and 

have frequently benefited from those changes. 

Employees are adequately protected by current law. The law not only prohibits 

an employer from amending a plan to reduce the pension benefits that employees 

have already earned, but also requires the plan, after it has been amended, to continue to give employees credit for their service for purposes of qualifying for any 

early retirement subsidy that applies to the pension benefits that the employees had 

earned at the time of the plan amendment. For example, if an employer amends 

a pension plan to provide that pension benefits earned in the future will not include 

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13 Coronado & Copeland, Pension Research Council, Wharton School, The University of Pennsylvania, Cash Balance Pension Plan Conversions and the New Economy, at 23 (2003). 14 Johnson & Uccello, Urban Institute, The Potential Effects of Cash Balance Plans on the 

Distribution of Pension Wealth at Midlife, at 29 (2001). 15 Compare Tootle v. ARINC, INC., Civ. Act. No. CCB–03–1086 (D.Md. June 10, 2004) (rejecting age discrimination claim), Engers v. AT&T, Civ. Act. No. 98–CV–3660 (NHP) (D.N.J. June 

6, 2001) (same), and Eaton v. Onan Corp., 117 F. Supp. 2d 812 (S.D. Ind. 2000) (same), with 

Cooper v. IBM, 274 F. Supp. 2d 1010 (S.D. Ill. 2003) (accepting age discrimination claim). See 

also Campbell v. BankBoston, N.A., 327 F.3d 1, 10 (1st Cir. 2003) (recognizing problems with 

age discrimination theory) (dictum). 16 ‘‘By contrast, many employers today prefer hybrid plans because they smooth compensation 

differentials by age and soften the incentives for early retirement. As a consequence of the new 

plan elements, hybrid plans are in fact less age discriminatory than many traditional DB plans.’’ 

Mitchell & Mulvey, Pension Research Council, Wharton School, University of Pennsylvania, Possible Implications of Mandating Choice in Corporate Defined Benefit Plans, at 18 (2003) (emphasis original). 

an early retirement subsidy, employees are still entitled, after the amendment, to 

continue to earn service credit for purposes of qualifying for any early retirement 

subsidy that applies to the pension benefits they have already earned. 

Hybrid Plans Do Not Inherently Reduce Benefits. 

Some critics of hybrid plans have claimed that employees will earn retirement 

benefits under these plans that are less than the benefits that those employees 

would have earned if the prior plan formula had remained in effect without change. 

However, independent studies debunk this claim: 

‘‘. . . [I]t does not appear that most firms are seeking to reduce benefit generosity. . . . Cash balance conversions appear to be largely driven by labor 

market conditions. . . . [T]he move toward DC-like pensions is likely the result of increased worker mobility.’’ 13

Ultimately, any comparison between the benefits provided by a hybrid plan and 

the benefits provided by a traditional defined benefit plan depends on the terms of 

the plans. Hybrid plans do not inherently provide benefits that are greater or less 

than the benefits provided by traditional plans. Also, as explained earlier, current 

law prevents a plan amendment from causing an employee to lose any part of the 

accrued benefit that he or she has already earned. 

In addition, hybrid plans tend to distribute the benefits accrued by plan participants more evenly among employees than do traditional defined benefit retirement 

plans: 

‘‘By distributing pension wealth more equally across the population than 

[traditional defined benefit] plans, cash balance plans would increase median lifetime pension wealth in the total covered population and more people would gain pension wealth than lose.’’ 14

Hybrid Plans Are Not Age Discriminatory. 

Claims have been made that hybrid plans invariably violate the Age Discrimination in Employment Act (‘‘ADEA’’). These claims lack merit. 

Of the four federal district courts that have considered the issue, three have rejected the claim that hybrid plans are age discriminatory. Although one court 

reached a contrary conclusion, that court’s conclusion was subsequently rejected by 

another federal district court last month.15

On its face, a cash balance plan is not age-discriminatory. Each participant, regardless of age, receives the same percentage-of-compensation pay credit—except for 

the many plans that provide higher pay credits to older workers. The rate at which 

interest credits are calculated on the participant’s cash balance account is age-neutral.16 Under a pension equity plan, an employee’s rate of benefit accrual commonly 

increases with additional years of age or service. 

Claims that hybrid plans are age-discriminatory are based on the theory that because a younger employee will benefit, when the employee reaches retirement age, 

from a longer period of interest-compounding on his or her account balance than will 

an older employee, the plan discriminates in favor of the younger employee. What 

these claims gloss over is that the younger employee must wait longer in order to 

receive the benefit of the longer period of interest-compounding. The accumulation 

of interest credits for a longer period of time merely compensates the employee for 

having to wait longer to collect a benefit from the plan at retirement age. 

Cash balance plans are not age-discriminatory for the same reason that Social Security is not age-discriminatory. Both plans index employees’’ pension benefits prior 

to retirement: cash balance plan benefits are indexed with interest, while Social Security benefits are indexed for increases in average national wages and the cost of 

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17See, e.g., Tax Reform Act of 1986, Pub. L. No. 99–514, § 1106(i)(3), 100 Stat. 2085, 2425–

26 (1986); Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97–248, § 235(g)(4), 96 

Stat. 324, 508–09 (1982); ERISA, Pub. L. No. 93–406, § 2004(d)(2), 88 Stat. 829, 987 (1974); S. 

Rep. No. 575, 98th Cong., 2d Sess. 29 (1984) (a participant who meets the criteria for an early 

retirement subsidy that was previously eliminated by a plan amendment is entitled to the greater of the portion of the subsidy attributable to service before the plan amendment or the retirement benefit provided under the plan as amended); Treas. Reg. §§ 1.401(a)(4)–13(c)(4) (listing 

permissible ‘‘fresh-start’’ formulas), 1.401(a)(17)–1(e) (applying ‘‘fresh-start’’ formulas where 

Code § 401(a)(17) limits were reduced); Notice 88–131, 1988–2 C.B. 546 (Alternative IID) (providing that certain participants may be entitled to the greater of the benefit accrued under preexisting plan provisions or benefits accrued under amendments adopted to comply with the Tax 

Reform Act of 1986); Rev. Rul. 81–12, 1981–1 C.B. 228 (addressing changes in actuarial assumptions). 18 56 Fed. Reg. 47,528 (Sept. 19, 1991). 19See Treas. Reg. § 1.401(a)(4)–8(c)(3). 20 1996–1 C.B. 359. 

living. These pre-retirement indexing features protect employees against inflation; 

they are not age-discriminatory. 

Some have claimed that when a traditional defined benefit retirement plan is converted to a hybrid plan design, the ‘‘wear-away’’ feature used to transition from the 

old formula to the hybrid plan formula discriminates against older workers. Where 

wear-away occurs, an employee who participates in the plan at the time of conversion typically receives the greater of two benefits: (1) the employee’s accrued benefit 

under the old formula at the time of conversion or (2) a benefit based solely on the 

plan’s new hybrid plan formula plus interest. 

Depending on the details of the two formulas, an employee with a very substantial accrued benefit under the plan’s old formula might find that he or she has no 

increase in benefits, especially early retirement benefits, for some period of time, 

while a more recently-hired employee might begin to accrue additional benefits immediately. However, this is not the result of age discrimination. If neither the plan’s 

old formula nor the plan’s new formula is age-discriminatory, there is no basis for 

claiming that a plan that provides an employee with the greater of the benefits provided by the two formulas is age-discriminatory. Indeed, in the past, Congress and 

the Treasury Department have both required and permitted plans to provide participants with the greater of their previously accrued benefits under the old plan formula or the benefits they accrued under a new plan formula.17

Treasury Department Guidance Has Confirmed The Lawfulness of Cash Balance 

Plans. 

Hybrid plans have been on the scene for nearly 20 years, and the Government 

has indicated on numerous occasions that hybrid plans are lawful. Employers have 

reasonably relied on Government guidance in adopting hybrid plans: 

Preamble to the Final § 401(a)(4) Regulations: In the preamble to the final regulations creating a safe harbor for cash balance plans from the restrictions on discrimination in favor of highly compensated employees, the Internal Revenue Service stated unequivocally that cash balance plans were not age-discriminatory: 

‘‘The fact that interest adjustments through normal retirement age are accrued in the year of the related hypothetical allocation [i.e., the pay credit] 

will not cause a cash balance plan to fail to satisfy the requirements of 

[Code] section 411(b)(1)(H), relating to age-based reductions in the rate at 

which benefits accrue under a plan.’’ 18

Regulatory Safe Harbor for Cash Balance Plans: The IRS safe harbor for cash balance plans strongly implied that such plans were lawful. Surely, the IRS would not 

have created a safe harbor for cash balance plans unless it believed that these plans 

were lawful.19 In fact, as the preamble explained, the IRS had concluded that cash 

balance plans were lawful. 

Notice 96–8: The Internal Revenue Service announced its intention to propose regulations regarding lump-sum distributions from cash balance plans.20 Because it 

contemplated the issuance of guidance on how lump-sum benefits from cash balance 

plans should be calculated, Notice 96–8 gave employers every reason to believe that 

cash balance plans were lawful. 

Determination Letters: The Internal Revenue Service has issued favorable determination letters to many hybrid plans, including both cash balance plans and pension equity plans. Indeed, the Service today continues to issue favorable determination letters to cash balance plans that were not the subjects of conversions. Surely, 

the Service would not have done this in the past or be doing this today if it believed 

that these plans violate the Internal Revenue Code’s age discrimination provisions.

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We are currently working on the development of a legislative proposal that will 

address the issues relating to hybrid plans. We will be pleased to share our proposal 

with the Committee when our work on the proposal is completed. 

We very much appreciate the opportunity to submit this statement, and hope that 

it will be helpful to the Committee. We look forward to working with the Chairman, 

the members of the Committee, and the Committee staff on the issues addressed 

at this hearing. 

For more information on cash balance plans and pension equity plans, we invite 

you to visit ERIC’s web site at www.eric.org. 

APPENDIX 

‘‘To show how DB and cash balance pension wealth would be influenced by job 

changing, we posit two hypothetical workers, one of whom holds three jobs over his 

career, and another who remains with an employer for his entire career. . . . [In 

our hypothetical example, the] DB normal retirement benefit, payable as an annuity 

from age 65, is worth 1.1 percent of his final five-year average salary, times his 

years of service at termination (retirement). If the worker were to retire early, the 

benefit would be reduced by 2 percent per year between ages 62 and 65, 4 percent 

from 60 to 62, and 5 percent for retirement from age 55 to 60. Since this formula 

embodies an early retirement reduction rate that is smaller than the actuarially fair 

rate (which would be around 6–8 percent per year) , the DB plan embodies an early 

retirement subsidy. By contrast, the cash balance plan [in our hypothetical example] 

has a much smoother accrual rate, with pay credits of 4 percent per year during 

the worker’s first decade of service, 5 percent for the next ten years, and 5.75 percent for service of 20 years or more. There were no early retirement reductions, and 

contributions are credited with a 7 percent interest credit per year. 

****

‘‘. . . . . If a young worker knew that he would remain with a single employer 

his entire career and retire at age 65, his anticipated accumulation in the DB plan 

would be one-third higher than the cash balance plan. But certainty regarding the 

mobility prospects is unlikely since the average American holds several jobs over his 

career. In fact, using data from personnel files from 65 large companies we found 

that only 7 percent of workers were likely to stay with one employer for their entire 

career. Thus, when we compute the expected value of the two plans based on the 

likelihood of a worker actually staying to full retirement and receiving the full defined benefit plan[,] the expected value of the benefit from the hybrid plan is 11 percent higher than the expected value of the defined benefit plan. Beyond the expected 

value of the benefit, for those employees who changed jobs three times over their 

work life, their pension wealth from the hybrid plan would be nearly 18 percent 

higher than what they would have received from three different DB plans.’’

Mitchell & Mulvey, Pension Research Council, Wharton School, University of 

Pennsylvania, Possible Implications of Mandating Choice in Corporate Defined Benefit Plans, at 5–6 (2003) (citations omitted & emphasis added). 

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Statement of Hon. Jon Porter, a Representative in Congress from the State 

of Nevada


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Statement of Hon. Charlie Norwood, a Representative in Congress from the 

State of Georgia


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Statement of the National Association of Manufacturers, Submitted for the 

Record


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Statement of The Principal Financial Group, Submitted for the Record


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Watson Wyatt, Press Releases, Submitted for the Record


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Statement of the American Federation of Labor and Congress of Industrial 

Organizations, Submitted for the Record


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Letter from AARP, Submitted for the Record


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Statement of Larry Cutrone, Submitted for the Record


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Statement of Janet Krueger, Submitted for the Record


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Statement of Janice Winston, Submitted for the Record


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Statement of Jimmy Tarlau, Submitted for the Record


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Tax Notes, Submitted for the Record


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U.S. Treasury Department, Office of Public Affairs, Submitted for the 

Record


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Companies That Have Converted to Cash Balance Pension Plans, 

Submitted for the Record


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Employers Awaiting IRS Determination Letters Under the Cash Balance 

Moratorium, Submitted for the Record


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Bureau of Labor Statistics, U.S. Department of Labor, Table Submitted for 

the Record


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Statement of the National Committee to Preserve Social Security and 

Medicare, Submitted for the Record


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Committee on Education and the Workforce, Democratic Staff, Press 

Release, Submitted for the Record


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The Following Items Have Been Placed in the Permanent Archive Files: 

1. Hewitt, Survey Findings, Current Retirement Plan Challenges: Employer Perspectives, 2003

2. Possible Implications of Mandating Choice in Corporate Defined Benefit Plans, 

Olivia S. Mitchell and Janemarie Mulvey, Pension Research Council Working 

Paper, The Wharton School, University of Pennsylvania, PRC WP 2003–25

3. An Empirical Analysis of the Transitions to Hybrid Pension Plans in the 

United States, Robert L. Clark North Carolina State University, and Sylvester 

J. Schieber, Watson Wyatt Worldwide, Sponsored by The Brookings Institution, 

Stanford Institute for Economic Policy Research and TIAA–CREF Institute, 

Washington, D.C., 9/21/00

4. Dan C. Tootle v. ARINC, Inc. et al., Civil Action No. CCB–03–1086, In The 

United States District Court For The District of Maryland, 6/10/04

5. Eaton v. Onan Corporation, Cause No. IP97–0814–C–H/G, United States District Court Southern District of Indiana, Indianapolis Division, 9/29/00

6. E-mail from Jane Banfield, 7/6/04, with newspaper clipping from The Reporter 

7. E-mail from Brian D. McCarthy, 2/26/04

8. GAO Report, September 2000, GAO/HEHS–00–185, Private Pensions, Implications of Conversions to Cash Balance Plans 

9. U.S. Department of Labor, Office of Inspector General, PWBA Needs to Improve Oversight of Cash Balance Plan Lump Sum Distribution, Report No. 09–

02–001–12–121, 3/29/02

10. Congressional Research Service, Memorandum to Hon. Bernie Sanders, Estimated Benefit Under A Cash Balance Plan, 2/11/03

11. Testimony of J. Mark Iwry, Subcommittee on Employer–Employee Relations, 

Committee on Education and the Workforce, 7/1/03

12. H.R. 1677, 108th Congress, lst Session 

13. Cooper, Harrington and Hillesheim, et al. v. The IBM Personal Pension Plan 

and IBM Corporation, Civil No. 99–829–GPM, U.S. District Court for the 

Southern District of Illinois, 7/31/03

14. The Wall Street Journal, Ellen Schultz with permission, (1) Ins and Outs of 

Cash–Balance Plan–Employees will need to Know What Effects the New 

Setup Could Have on their Pensions, 12/4/98, (2) Some Workers Facing Pension Hit–Longtime Employees May Find Themselves on Long ‘‘Plateau’’ As 

Companies Make Switch, 12/18/98, (3) Older Workers Fight ‘‘Cash Balance’’ 

Plans, 2/11/99, (4) Your Pension May Be Changing; Go Figure How If You 

Can, 3/3/99, (5) New Pensions May Hurt Young Professionals, 12/16/99, 

(6)Pension Paternity: How A Single Sentence By IRS Paved the Way To 

Cash–Balance Plans–Age Bias Was No Concern, It Said, Offering Comfort To 

Firms and Consultants–Treasury Official’s Key Role, 12/28/99

Æ


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