<nobr>Dec 10, 2002</nobr>

ERIC Leery of Treasury’s New Cash Balance Regulations

The ERISA Industry Committee (ERIC) today praised the Department of Treasury for issuing proposed regulations that address age discrimination rules for cash balance pension plans. However, while the newly proposed regulations have broken the regulatory logjam that has enveloped hybrid plans, they appear to have done so in a way that would have severe adverse impacts on many forms of retirement plans.

According to a Department of Treasury press release, the proposed regulations would “apply to cash balance plans the same rule that applies to defined contribution plans.” Thus, the plans would “generally satisfy the age discrimination rules if the pay credits to an employee’s account are not less that the pay credits that would be made if the employee were younger.” In addition, the regulations would require that conversions from traditional plans be age neutral before, during and after a conversion to protect plan participants.

The emergence and growth of cash balance and other “hybrid” pension plans represents a wholesome advance in providing retirement income security for American workers. Like defined benefits (DB) plans, cash balance plans use a set formula to arrive at a worker’s benefit and are typically funded entirely by employers. The retirement benefit provided by a cash balance plan does not depend on investment earnings or losses, and workers are insulated from the risk of market fluctuations.

Unlike traditional DB plans, workers under a cash balance plan accrue benefits more evenly throughout their career, provide a greater early career benefit and break down the barriers to job mobility of many traditional DB plans. Cash balance plans are also easily understood by workers, and provide similar opportunities for pension portability. Because cash balance plans do not encourage employees to remain employed merely to qualify for early retirement, they increase labor mobility.

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