<nobr>Apr 11, 2006</nobr>

Second District Court Contends Cash Balance Plan is Inherently Age-Discriminatory

A federal district court in Connecticut has held that participants in a cash balance plan may pursue their claim that the plan is inherently age-discriminatory (Richards v. FleetBoston Financial Corp.). Though only ruling that participants have plead a valid claim, the court offered an extensive analysis suggesting that the plan is age-discriminatory. On a related issue, the court preliminarily ruled that a wearaway period after the conversion to cash balance did not violate anti-backloading rules.

On the age discrimination issue, the court reasoned that the rate of benefit accrual in a cash balance plan must be determined in terms of the change in the annuity payable at normal retirement age. Measured this way, the rate of accrual in a typical cash balance plan often decreases with age. The court is only the second follow this reasoning, with the first being the district court in Cooper v. IBM (D. Ill. 2003). Since that decision, three other courts have reached the opposite conclusion. The Seventh Circuit heard the Cooper case on appeal in February, and a decision should come within the next few months.

The willingness of another district court judge to adopt the flawed reasoning of Cooper is disturbing and demonstrates the importance of a comprehensive clarification by Congress that hybrid plans are not age-discriminatory. It is of critical importance that any language addressing hybrid plan designs included in the final pension reform legislation not provide evidence that plans created in the past are flawed or inherently illegal.

Senators Bond (R-MO) and Talent (R-MO) have sent a letter to conferees urging that the conference report include clarification that hybrid plans are valid defined benefit plan designs. Sen. Burr (R-NC), joined by Senators Dole (R-NC), DeMint (R-SC), and Allard (R-SC), also sent a letter to conferees addressing several issues of concern to ERIC members with hybrid plans, including design clarification for existing plans, inclusion of pension equity plans, and opposition to plan design requirements in the Senate bill.

Text Files:

Richards v. FleetBoston Financial Corp.

Bond-Talent Letter

Burr Letter

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