<nobr>Aug 25, 2006</nobr>

ERIC Letter to the Wall Street Journal in Response to Cash Balance Article

ERIC submitted the following letter to the Wall Street Journal for inclusion on August 15. The Journal subsequently declined to publish the letter.

Ellen Schultz and Theo Francis’s article (“What You Need To Know About Pension Changes” 8/15/2006) characterizes the Seventh Circuit’s decision in Cooper v. IBM as a loss for employees. This characterization is not only inaccurate; it ignores the court’s finding that this kind of unwarranted pension litigation can make everyone—including employees—worse off.

In the face of employees’ increasing reliance on 401(k) plans for retirement income, cash balance pensions represent a major investment by the nation’s employers in their employees’ retirement security. Cash balance plans are funded by employer contributions, and typically shield participants from investment risks. They also are more portable than traditional pensions and accrue benefits evenly over a worker’s career, making them a sound retirement vehicle for employees who do not spend their entire career with a single employer.

Despite evidence to the contrary, Schultz and Francis wrongly attribute the growth of cash balance plans to an attempt by employers to cut their benefit costs and to increase executives’ incentive pay. The facts—well publicized—are otherwise. A 2004 Watson Wyatt study shows that retirement plan costs increased 2.2 percent after switching from a traditional plan to a cash balance plan—a figure that was even higher (5.9 percent) when companies with severe financial difficulties were excluded. A 2003 study by Federal Reserve Board researchers showed similar results and found that the primary reason for conversions to cash balance plans was employers’ need to respond to labor market conditions, including a younger, more mobile workforce. If an employer wants to cut its benefit costs, it would be far simpler for the employer to shift to a 401(k) plan.

A 2001 Urban Institute study, relying on a survey of large pension plans and a sample of workers approaching retirement, found that most workers would have fared better under a cash balance plan than under a traditional pension plan—especially the workers who follow the common pattern of holding a series of short-tenure jobs.

The GAO study relied on by Schultz and Francis has been refuted by the American Academy of Actuaries. The GAO study compared the benefits provided by a hypothetical scaled back cash balance plan to the benefits provided by an extremely generous traditional pension plan that is rare in the real world. Indeed, the GAO’s report admits that the illustrative traditional plan that it used was far more generous than most existing plans (providing almost a 50 percent greater benefit than the median plan), while the hypothetical cash balance plan that it used was less generous than the median cash balance plan actually offered by employers.

Most employers who convert from a traditional pension plan to a cash balance plan do so with transition protections in place to protect their long-tenured workers. Cash balance plans provide a secure, guaranteed retirement benefit for some 9 million Americans and their families. The Seventh Circuit decision in Cooper protects the retirement plans of those Americans.

Mark J. Ugoretz
President
The ERISA Industry Committee

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