May 8, 2002 4 min read

WASHINGTON (AP) – Workers across the country could be shortchanged by almost $200 million a year because hundreds of companies have switched from traditional pension plans to arrangements targeted at a younger, more mobile work force, the Labor Department says. Almost a quarter of the companies converting to the new cash balance plans were found to be underpaying people who left before normal retirement age. The Labor Department inspector general’s office estimated that the amounts underpaid ranged up to $55,629.

The findings released Tuesday provided fresh grist for critics of cash balance plans, who contend they are unfair to older workers because retirement benefits are frequently less than had been promised under the traditional plans. The conversions have affected an estimated 8 million workers and involve $334 billion in pension assets.

“The time has come for the feds to step up to the plate and start enforcing the age discrimination laws to protect the pensions of American workers,” said Rep. Bernie Sanders, I-Vt. “Workers should not have their pensions reduced just because they are older.”

Under a traditional defined benefit plan, workers accrue most of their benefits toward the end of their careers. Benefits are usually based on a worker’s years with the company and on their average salaries in later years – when they presumably make the most money.

Cash balance plans are more front-loaded: the company pays a fixed percentage of the employee’s annual salary into retirement each year and workers build up money evenly throughout their careers. These plans are also easily moved from one job to another.

The new plans drew heavy criticism in 1999 and 2000 when several major companies, notably IBM Corp., converted to them. Companies defended the moves as crucial to retaining any worker pensions and rejected claims of age discrimination; efforts failed in Congress to require detailed disclosure of the impact conversion has on individual workers.

The Labor Department inspector general’s analysis of 60 companies that converted to cash balanced plans found that all of them adequately protected benefits from traditional plans. But in 13 cases, or 22 percent, workers who left before normal retirement age didn’t get benefits to which they were legally entitled.

Assuming that between 300 and 700 traditional plans have been converted, the analysis estimated that these workers are being underpaid between $85 million and $199 million each year – a violation of federal retirement laws.

“Under any sampling or targeting method, statistical or judgmental, this is a disturbing finding,” the inspector general analysis said.

These underpayments are occurring most often because cash balance plan administrators make errors in projecting participant benefits – specifically, they fail to compute the present value of the retirement benefit at normal retirement age as required by the law.

Others incorrectly figure cost-of-living allowances and wrongly calculate the opening amounts in the plans.

To address the problem, the analysis recommended that the Labor Department agency tasked with enforcing pension law for 200 million participants – the Pension and Welfare Benefits Administration – beef up its enforcement regarding cash balance plans and take specific actions against the 13 companies identified by the inspector general. Names of those firms were not publicly released.

Ann Combs, the assistant labor secretary for pensions, said in a letter to the inspector general that her office would take “an appropriate course of enforcement action” against the 13 specific companies. But she raised questions about the methods used to arrive that the $199 million figure after analyzing only 60 cash balance conversions.

“Unless you were able to undertake a broader survey of the problem … we cannot commit to redirecting our enforcement resources” to this issue, Combs wrote.

Sanders, who represents hundreds of IBM employees, said he would introduce legislation soon to require that the federal government do a better job of enforcing pension laws. Combs added that the Labor Department would work with the IRS and Treasury Department to determine if “additional guidance” is needed to help cash balance administrators make more accurate calculations. —

On the Net:

Labor department inspector general: http://www.oig.dol.gov/public

eports

Rep. Bernie Sanders: http://bernie.house.gov