<nobr>Aug 8, 2006</nobr>

Pension Decision Increases Employer Confidence

The ERISA Industry Committee (ERIC), the Washington, D.C. trade association that represents major employers, today applauded the Seventh Circuit Court of Appeals ruling affirming the lawfulness of cash balance pension plans under age discrimination standards. The case, Cooper v. IBM, will increase employers' confidence in their ability to offer their employees valuable retirement benefits, according to the association.

“The three-judge panel correctly affirmed what employers have argued for years, that cash balance plans do not inherently discriminate against older workers,” said ERIC President Mark Ugoretz. “The millions of workers whose retirements are backed by these plans and their employers who sponsor the plans can be confident that their plans are legal.”

ERIC, which filed an amicus brief urging the court to overturn a lower court decision that declared cash balance plans violate federal law, commended the court for recognizing that these plans are not discriminatory. According to the group, the logic adopted by the lower court would have invalidated any plan that allowed interest to compound over time. According to Ugoretz, “the appeals court took the common sense position that the fact that a younger worker has more time to accrue a pension benefit than an older worker does not mean the plan discriminates between age groups.”

Ugoretz said that “the swarm of litigation has cause many employers to throw up their hands in frustration at the prospect of years of litigation engineered by plaintiffs lawyers. As a result, employers are becoming exceedingly cautious about putting in new plans and benefits and retreating from anything that might attract the plaintiffs bar.” He commended the court for it’s warning that while “litigation cannot compel an employer to make plans more attractive . . . it is possible . . . for litigation to make everyone worse off.”

“As the court recognized, it is not sensible to consider the time value of money as age discriminatory. This is a significant victory for workers” said Janice Gregory, ERIC’s Senior Vice President for Retirement Policy.

Cash balance pension plans offer the retirement security of traditional defined benefit pension plans, but look like defined contribution accounts. Employees in a cash balance plan earn a salary credit (such as five percent of salary) each year and an interest credit that may be fixed or tied to an index like a Treasury rate. These credits accumulate in a hypothetical account that the employee can take either as a lump sum upon reaching retirement age or as a lifetime annuity providing income security throughout retirement.

While traditional defined benefit plans which backload benefits at the end of a worker’s career, cash balance plans provide benefits evenly throughout a worker’s tenure, providing workers a more meaningful benefit earlier in their worklives. The benefits also are portable, and like a 401(k) plan, an employee in a cash balance plan does not lose the value of his retirement savings if he changes jobs during his career.

According to Gregory, “studies have consistently shown that employees are failing to contribute adequately to, diversify, and manage their 401(k) accounts, leaving many of them susceptible to shortfalls in retirement. Cash balance plans provide an important retirement vehicle that is funded by an employer to help workers be better prepared for their retirement.”

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ERIC is a non-profit association committed to representing 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.


PRESS CONTACT

S. Michael Chittenden
Director, Communications
The ERISA Industry Committee
1400 L Street, N.W., Suite 350
Washington, DC 20005-3509
(202) 789-1400 Fax (202) 789-1120
www.eric.org

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