In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 05-3588

KATHI COOPER, et al.,

on behalf of a class,

Plaintiffs-Appellees,

v.

IBM PERSONAL PENSION PLAN

and IBM CORPORATION,

Defendants-Appellants.

____________

Appeal from the United States District Court

for the Southern District of Illinois.

No. 99-829-GPM—G. Patrick Murphy, Chief Judge.

____________

ARGUED FEBRUARY 16, 2006—DECIDED AUGUST 7, 2006

____________

Before BAUER, EASTERBROOK, and MANION, Circuit

Judges.

EASTERBROOK, Circuit Judge. The IBM Personal Pension

Plan is a cash-balance defined-benefit plan. It is almost, but

not quite, a defined-contribution plan. Although each

employee in a defined-contribution plan has a fully funded

individual account, the personal account in a cash-balance

plan is not separately funded. Instead IBM imputes value

to the account in the form of “credits”: there are pay credits

(set at 5% of the employee’s gross taxable income) and

interest credits (set at 100 basis points above the rate of

interest on one-year Treasury bills). A trust holds assets
2 No. 05-3588

that may (or may not) be enough to fund all of the individual accounts when workers quit or retire. IBM’s plan

permits an employee who quits or retires after working long

enough for pension benefits to vest (a maximum of five

years) to withdraw the balance in cash or roll it over into a

fully funded annuity. During the time before cash-out the

employee takes the risk that IBM will suffer business

reverses and be unable to pay the full stated value of the

account (if the amount already in trust for participants as

a group turns out to be insufficient); otherwise IBM’s plan

is economically identical to a defined-contribution plan

funded the same way and invested in a bond fund that

returns 1% above the Treasury rate.

Plaintiffs in this class-action litigation contend that IBM’s

plan violates a subsection of ERISA (the Employee Retirement Income Security Act) that prohibits age discrimination. The district court ruled in plaintiffs’ favor, see 274 F.

Supp. 2d 1010 (S.D. Ill. 2003), and proceedings continued as

the parties debated how much IBM owes (and how it must

change its plan in future years) as a remedy. That subject

has been resolved to mutual satisfaction—contingent on the

district judge being right on the merits—so this appeal is

limited to the question whether the plan is unlawfully

discriminatory.

All terms of IBM’s plan are age-neutral. Every covered

employee receives the same 5% pay credit and the same

interest credit per annum. The basis of the plaintiffs’

challenge—and the district court’s holding—is that younger

employees receive interest credits for more years. The

language on which plaintiffs rely was added to ERISA in

1986; Congress also enacted a parallel provision covering

defined-contribution plans. Pub. L. 99-509, 100 Stat. 1874,

1975, 1976 (1986). We set these out alongside to facilitate

comparison:
No. 05-3588 3

Defined-benefit plans:

ERISA §204(b)(1)(H)(i), 29

U.S.C. §1054(b)(1)(H)(i)

Defined-contribution

plans: ERISA

§204(b)(2)(A), 29 U.S.C.

§1054(b)(2)(A)

[A] defined benefit plan

shall be treated as not satisfying the requirements of

this paragraph if, under

the plan, an employee’s

benefit accrual is ceased, or

the rate of an employee’s

benefit accrual is reduced,

because of the attainment

of any age.

A defined contribution

plan satisfies the

requirements of this

paragraph if, under the

plan, allocations to the

employee’s account are

not ceased, and the rate

at which amounts are

allocated to the

employee’s account is not

reduced, because of the

attainment of any age.

These appear to say the same thing, except that the rule for

defined-benefit plans tells us what is not allowed, while the

rule for defined-contribution plans tells us what works.

Either way, the employer can’t stop making allocations (or

accruals) to the plan or change their rate on account of age.

The IBM plan does neither of these things and therefore,

one would suppose, complies with the statute. If this were

a real, rather than a phantom, defined-contribution plan,

that much would be taken for granted. Yet if the 5%-plusinterest formula is non-discriminatory when used in a

defined-contribution plan, why should it become unlawful

because the account balances are book entries rather than

cash?
4 No. 05-3588

Plaintiffs persuaded the district court, however, that the

two subsections are radically different. That difference is

attributable to the phrase “benefit accrual,” which appears

in the subsection for defined-benefit plans but not the one

for defined-contribution plans. Neither ERISA nor any

regulation defines this phrase, so the district judge went

looking for some equivalent elsewhere in the statute. It

found the phrase “accrued benefit,” which is defined in

§3(23)(A), 29 U.S.C. §1002(23)(A). An “accrued benefit” is an

amount “expressed in the form of an annual benefit commencing at normal retirement age.” Plug this back

into §204(b)(1)(H)(i), and the rule against discrimination

then refers not to what IBM puts into the plan, but what

the employee takes out on retirement. Someone who leaves

IBM at age 50, after 20 years of service, will have a larger

annual benefit at 65 than someone whose 20 years of

service conclude with retirement at age 65. The former

receives 15 years’ more interest than the latter—and the

judge assumed that this is not counterbalanced by the

fact that older workers generally draw higher salaries.

Under the district court’s analysis, compound interest

becomes a scourge, for the younger the employee when any

given year’s salary is earned, the greater the payout

“expressed in the form of an annual benefit commencing

at normal retirement age.”

This approach treats the time value of money as age

discrimination. Yet the statute does not require that

equation. Interest is not treated as age discrimination for a

defined-contribution plan, and the fact that these subsections are so close in both function and expression implies

that it should not be treated as discriminatory for a definedbenefit plan either. The phrase “benefit accrual” reads most

naturally as a reference to what the employer puts in

(either in absolute terms or as a rate of change), while the

defined phrase “accrued benefit” refers to outputs after
No. 05-3588 5

compounding. That’s where this litigation went off the rails:

a phrase dealing with inputs was misunderstood to refer to

outputs. As long as we think of “benefit accrual” as referring to what the employer imputes to the account—an

understanding reinforced by the use of the word “allocation”

in the subsection addressing defined-contribution

plans—there is no statutory difference between the treatment of economically equivalent defined-benefit and

defined-contribution plans. For defined-benefit plans, where

the account is an accounting entry rather than cash,

“benefit accrual” matches the money “allocated” to a

defined-contribution plan.

Nothing in the language or background of §204(b)(1)(H)(i)

suggests that Congress set out to legislate against the fact

that younger workers have (statistically) more time left

before retirement, and thus a greater opportunity to earn

interest on each year’s retirement savings. Treating the

time value of money as a form of discrimination is not

sensible. Cf. Hazen Paper Co. v. Biggins, 507 U.S. 604, 611

(1993) (variables correlated with age must be kept “analytically distinct” from age when searching for discrimination).

The parallel between the subsections for defined-benefit

and defined-contribution plans shows as much. All sorts of

things go wrong unless we treat both §204(b)(1)(H)(i) and

§204(b)(2)(A) as addressing the rate at which value is added

(or imputed) to an account, rather than the annual pension

at retirement age. Consider a formula that adds $500 to

annual pension benefits for every year worked. This setup

economically favors older workers (as does a top-five-yearsalary multiplier) because it ignores the time value of

money and treats the last year of work as contributing

equally with the first. Yet on the plaintiffs’ understanding

it would be a form of discrimination against the old, because

the $500 is a smaller “rate of benefit accrual” as time

passes. Someone who worked two years would get a “100%

rate of increase” in his second year (his annual benefits on
6 No. 05-3588

retirement would jump from $500 to $1,000), while someone

who works 20 years receives only a 5% growth (from

$19,500 to $20,000) in Year 20.

Our conclusion that “benefit accrual” (for defined-benefit

plans) and “allocation” (for defined-contribution plans) both

refer to the employer’s contribution rather than the time

value of money between contribution and retirement has

the support of regulations that the Treasury Department

proposed. (Appropriations riders have prevented

the Treasury from taking final action on the draft regulations, but they still help to inform our understanding of the

statute.) The draft regulations treat the “rate of benefit

accrual” as “the increase in the participant’s accrued normal

retirement benefit for the year.’’ 67 Fed. Reg. 76123, 76125

(Dec. 11, 2002). For cash-balance plans in particular the

phrase would have been defined as “the additions to the

participant’s hypothetical account for the plan year.” 67

Fed. Reg. at 76126. The draft specifies that interest credits

must accrue “at a reasonable rate of interest that does not

decrease because of the attainment of age” and be provided

“for all future periods, including after normal retirement

age”. Ibid.

Thus the Treasury’s view, like our independent reading,

looks at the rate of contribution (what goes into the account) rather than the annual rate of withdrawal at

retirement. The Treasury asks: “if this employee were

younger, would the hypothetical balance have grown more

this year?” For IBM’s plan, the answer is no. When an

employee is 20, his account is increased monthly by 5% of

his salary plus credits based on the account’s balance

multiplied by a prescribed interest rate. The same is true

when the employee turns 50, 60, or 70. Neither the contribution rate nor the interest rate changes with age. (No one

contests the rate at which interest is credited—though 100

basis points over the Treasury rate looks low compared with
No. 05-3588 7

what investments could earn in the private market and

therefore could be understood to disfavor younger employees.)

Plaintiffs proposes a different definition of “benefit

accrual”: annual pension (at retirement age) divided by

salary. Contributions at age 25 produce an annual pension

benefit that equals about 3% of each year’s income in

nominal dollars, while contributions at 65 produce annual

benefits only 0.4% of the year’s income. Not surprising, and

hardly illuminating; this is just another illustration of the

power of compound interest. The example depends on (a)

allowing the pension to be increased by compounding, while

(b) failing to discount the pension to present value. Stated

another way, this example compares 1966 dollars (when the

25-year-old earned the salary) with 2006 dollars (when that

person turns 65 and starts to draw a pension); of course the

return on investment looks good, but much of it is inflation

and the rest is real interest rates. The person who earns a

salary in 2005 and retires in 2006 is (materially) unaffected

by both inflation and compound interest. Nothing depends

on age. Someone who earns a salary at age 65 and waits 40

years to start drawing a pension would receive the same

3%-of-salary-per-retirement-year as the illustrative 25-yearold who retires at 65; and someone who earns wages at 25

and retires the next year gets the same 0.4%-of-salary

annual pension, if not less (because of discounting).

Much of the plaintiffs’ argument rests on the idea that the

account of a 25-year-old worker does not get 5% plus

periodic interest, but instead is immediately credited

with 5% of salary plus 40 years’ interest. That makes the

contributions look discriminatory: the 25-year-old worker’s

account receives 40 times as much interest credit in the

year the contributions accrue as a 65-year-old worker’s

account. Once again, however, this perspective misunderstands both the statute and the time value of money.
8 No. 05-3588

Nothing in either ERISA or the IBM plan requires 40 years

of interest to be credited to the account as soon as the young

worker earns wages. What plaintiffs have in mind is the

rule that, when any beneficiary (young or old) elects to take

a cash distribution or roll the account into an annuity

before reaching age 65, the plan must distribute a lump

sum calculated to be the “actuarial equivalent” of the

annuity that would be available at normal retirement age.

ERISA §204(c)(3), 29 U.S.C. §1054(c)(3). To derive the

“actuarial equivalent” of a pension at age 65, a plan must

(a) add all interest that would accrue through age 65, then

(b) discount the resulting sum to its present value. Berger

v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d

755, 762-63 (7th Cir. 2003). Plaintiffs characterize step (a)

as extra interest credits for the young, but they ignore step

(b). The discount rate may be close to (if it does not exceed)

the rate at which interest is imputed, so the amount paid

out in cash may be close to if not below the nominal balance

in the account. Berger did not consider §204(b)(1)(H)(i) and

does not hold that the process of grossing up the balance

and then discounting is a form of age discrimination. To the

contrary: Berger described this process as the means to

avoid age discrimination.

As far as we can see, ours is the first appellate decision to

address the status of cash-balance plans under

§204(b)(1)(H)(i). The class directs our attention to two

decisions from other circuits that it says supply helpful

analysis. Miller v. Xerox Corp. Retirement Income Guarantee Plan, 447 F.3d 728 (9th Cir. 2006); Esden v. Bank of

Boston, 229 F.3d 154 (2d Cir. 2000). As the class reads

them, these opinions stand for two important propositions. First, that an “accrued benefit” in a cash-balance plan

is an annuity at normal retirement age. Second, that there

is a “fundamental” distinction between defined-contribution

and defined-benefit plans. Both of these propositions are

correct, and both of them are irrelevant.
No. 05-3588 9

Start with the first proposition. What the true meaning of

“accrued benefit” may be is not controlling; §204(b)(1)(H)(i)

does not use that phrase, and we have explained why

“benefit accrual” means something other than “accrued

benefit.” Once we start to calculate accrued benefits for

people who quit or retire early, it is necessary to impute

extra interest and discount. Berger describes how this is

done. But “benefit accrual” refers to the annual addition to

the pot, not to the final payout. The holding of Esden, see

229 F.3d at 168, mirrors that of Berger and requires no

further comment. Miller extends the framework of Esden

and Berger to evaluate reductions in notional account

balances caused by previous lump-sum distributions. 447

F.3d at 733-34. See 26 C.F.R. §1.411(a)-7(d)(6) (offset may

equal the “accrued benefit attributable to the distribution”).

As for the second proposition, plaintiffs cite language

describing the regulatory framework as “rigidly binary”

(Esden, 229 F.3d 154, 159 n.6). True enough. A definedcontribution plan entails fully funded individual accounts;

everything else is a defined-benefit plan. 29 U.S.C.

§1002(25). Miller adds that “interest credits are defined

benefit entitlements . . . and are not analogous to the

investment growth of a defined contribution plan”. 447 F.3d

at 735. Maybe so; that depends on what the court meant by

“analogous.” Interest in a defined-contribution plan is real,

while interest credits in a defined-benefit plan are bookkeeping entries (effectively debt obligations of the employer

to the extent that the pension trust fund does not cover

them). But so what? IBM does not contend that its plan is

governed by §204(b)(2)(A), just that §204(b)(1)(H)(i) does not

whimsically require a court to find age discrimination for a

defined-benefit plan when materially identical statutory

language allows functionally identical defined-contribution

plans to operate without any taint of discrimination. To say

that defined-benefit and defined-contribution plans are

governed by different subsections of ERISA is not to say that
10 No. 05-3588

what is lawful for one must be forbidden to the other. We

conclude that §204(b)(1)(H)(i) and §204(b)(2)(A) indeed

provide similar treatment with respect to claims of age

discrimination.

Only a brief mention of Arizona v. Norris, 463 U.S. 1073

(1983), another mainstay of the class’s briefs, is called for.

In Norris women making the same pension contributions as

men, all else held equal, had lower annual pension benefits.

Id. at 1082. Under IBM’s plan any differences in pension

benefits are a function of differing years of service, salary

history, or the years the balance has been allowed to

compound; age is not a factor.

Here, as so often, it is essential to separate age discrimination from other characteristics that may be correlated

with age. That was the Supreme Court’s point in Hazen

Paper: wages rise with seniority (and thus with age) at

many employers, but distinctions based on wage levels (in

order to reduce a payroll) do not “discriminate” by age. See

also, e.g., Achor v. Riverside Golf Club, 117 F.3d 339, 341

(7th Cir. 1997) (need to show “the effect of age, isolated

from other influences”); Sheehan v. Daily Racing Form, Inc.,

104 F.3d 940, 942 (7th Cir. 1997) (expert should correct for

“potentially explanatory variables other than age” when

determining whether discrimination was because of age).

While those decisions involved different statutory regimes,

the objective is general: a plaintiff alleging age discrimination must demonstrate that the complained-of effect is

actually on account of age. One need only look at IBM’s

formula to rule out a violation. It is age-neutral.

Now this may give a clue about why plaintiffs (a class

of older workers) have sued. The cash-balance plan replaced

a more traditional arrangement under which the annual

pension on retirement was a function of closing salary (say,

an average of the last five years before retirement) multi-
No. 05-3588 11

plied by the number of years of service. Because wages rise

with seniority, such a formula favors older workers. Workers who quit or retire early not only miss out on the rising

wages that accompany seniority but also don’t receive credit

for the time value of money: years of service at age 30 and

at age 70 count equally in the traditional formula. Many

employers design such back-loaded systems to give the

most-experienced members of the labor force a reason (even

beyond rising salary) to stay on the job. Like a definedcontribution plan, a cash-balance plan removes the backloading of the pension formula; older workers (accurately)

perceive that they are worse off under a cash-balance

approach than under a traditional years-of-service-timesfinal-salary plan. But removing a feature that gave extra

benefits to the old differs from discriminating against them.

Replacing a plan that discriminates against the young with

one that is age-neutral does not discriminate against the

old.

There is a transition issue. When IBM moved employees

from a more traditional plan to a cash-balance system, it

gave them the greater of the present value of their pension

entitlements as of the transition date or the account

balance that they would have had if IBM had a cashbalance plan in effect since the employee came to work.

Plaintiffs complain that this gives the younger workers too

much credit for interest (because more time passes between

their work and retirement dates), but that rehashes

arguments that we’ve already rejected. Every employee

with the same salary and service record receives the same

opening account balance under the new plan. That the

change disappointed expectations is not material. An

employer is free to move from one legal plan to another

legal plan, provided that it does not diminish vested

interests—and this transition did not. Cf. Lockheed Corp. v.

Spink, 517 U.S. 882 (1996) (employers are not fiduciaries

under ERISA when they create or amend pension plans).
12 No. 05-3588

Litigation cannot compel an employer to make plans more

attractive (employers can achieve equality more cheaply by

reducing the highest benefits than by increasing the lower

ones). It is possible, though, for litigation about pension

plans to make everyone worse off. After the district court’s

decision IBM eliminated the cash-balance option for new

workers and confined them to pure defined-contribution

plans. See Ellen E. Schultz & Theo Francis, How Safe Is

Your Pension?—Freeze of IBM Plan Leaves Workers Worrying If Their Employer Is Next, Wall St. J., Jan. 12, 2006, at

D1; Ellen E. Schultz, IBM to Exclude New Workers From Its

Cash-Balance Pension—Move to Only 401(k) Plans Follows

Legal Questions, Wall St. J., Dec. 9, 2004, at A2. Whether

that is good or bad (for employees or society as a whole) is

not for us to say. What we can and do conclude, however, is

that the decision may again be made freely, governed by

private choice rather than legal constraint.

The judgment of the district court is reversed, and the

case is remanded with directions to enter judgment in

IBM’s favor.
No. 05-3588 13

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—8-7-06