<nobr>Jul 25, 2005</nobr>

ERIC Urges Senate Finance Committee to Clarify Law on Hybrid Pension Plans

Washington, D.C., July 25, 2005 – The ERISA Industry Committee (ERIC) today urged the Senate Finance Committee to clarify the law on cash balance, pension equity, and other hybrid pension plans. About 1,700 employers, relying on government guidance, have created hybrid plans, which now are in a state of limbo as a result of a single court case. There are some 8.4 million hybrid plan participants. The Senate Finance Committee is expected to report legislation this week.

Hybrid pension plans, a cross between defined benefit and 401(k) plans, provide more portable pension benefits that, while they are designed to look like 401(k) plans, also are designed -- like defined benefit plans -- to minimize the investment risk to participants.

The letter specifically requests Congress to confirm that hybrid pension plans, such as cash balance and pension equity plans, are and always have been lawful, in response to a prospective-only position advocated by some senators for inclusion in legislation to be considered by the Senate Finance Committee July 26.

“A prospective-only clarification of the law, which some have proposed, significantly increases the risk that existing hybrid plans, covering some 8.4 million workers in about 1,700 plans, will be suspended or terminated,” stated Mark J. Ugoretz, president of ERIC.

Until recently, hybrid plans had been the favored option for employers who wanted to establish defined benefit plans, or to modify their existing plans, to address the 21st century needs of employers and employees, including many older employees, short-service employees, and employees, many of whom are women, who interrupt their careers to raise a family or assist an aging parent.

Hybrid plans provide more portable benefits that are earned automatically without employees having to make contributions. Employees are protected against investment risks since the employer bears the risk of investment. Hybrid plans also enjoy the strong support of an increasing number of employees. Importantly, they offer the option of receiving benefits as an annuity that protects the retiree against the threat of outliving his or her retirement benefits. Recently, however, such plans have been thrown into uncertainty due to litigation.

“A single district court has ruled hybrid plan designs were unlawful because it felt the time value of money is age-discriminatory,” Ugoretz said. "But if this were so, any indexed benefit such as Social Security benefits, any plan such as a 401(k) plan that provides benefits that grow with investment earnings, and even an interest-bearing savings account, could be considered age-discriminatory. While the trial court’s decision is inconsistent with the decisions of other courts, it has thrown a monkey wrench into the machinery of developing new and more responsive plans.”

“The time value of money argument simply is not credible and has never been the intent of Congress. Legislation confirming the lawfulness of hybrid plans -- prospectively and retroactively -- is urgently required in order to stem a retreat from more secure pension arrangements at the very moment that secure pension plans are needed more than ever,” Ugoretz added.

The ERIC letter to the Senate on Prospective Only Hybrid Clarification is available at the web site listed below.

For additional information please contact:
Brendan LaCivita, Director of Communications
blacivita@eric.org


ERIC is a non-profit association committed to and represents exclusively the advancement of the employee retirement, health, and compensation plans of America’s largest employers. ERIC’s members provide benchmark retirement, health care coverage, compensation and other economic security benefits directly to tens of millions of 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 their effectiveness, as well as the role of those benefits in the American economy.

Websites:

ERIC Letter to Senate on Prospective Only Hybrid Clarification

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