New Plan for Energy Department Contractors' Benefits

By Stephen Barr
Tuesday, May 9, 2006

A new policy at the Energy Department will shift contract employees to "market-based" retirement and health-care plans in an effort to reduce costs, officials said.

The policy change will not affect the pensions and medical benefits for about 200,000 current contract employees and contract retirees and dependents. It will apply to future Energy Department contract workers, changing reimbursement rules for their medical coverage no later than July 26 and for their retirement benefits by March 1.

Under the new policy, the department will reimburse contractors for only the costs of defined-contribution retirement plans, similar to 401(k)s. Future retirement and health-care plans provided by contractors cannot exceed industry benchmarks for value and cost by more than 5 percent, according to the policy.

Pension experts are calling for a repeal of the new policy, which they say will undermine the ability of Energy Department contractors to provide guaranteed pensions to their workers. The agency's decision also goes against long-standing efforts to hold the government up as a model employer that supports pension plans, they said.

"This is just bad policy," said Donald J. Segal , vice president of the Pension Practice Council at the American Academy of Actuaries.

Segal told the department in a letter that the new policy essentially denies an Energy Department contractor the ability to choose the type of retirement plan it wants to provide prospective employees and does not responsibly address the department's concerns about costs and cost volatility.

Sylvester J. Schieber , director of U.S. benefits consulting at Watson Wyatt Worldwide Inc., said the department's decision raises "a fundamental equity issue" -- contract employees being left with only 401(k)-type plans and civil service employees retaining a guaranteed pension and a voluntary savings plan with matching contributions from the department.

"To say we will reimburse one legitimate expense but not another . . . is saying to employers that you shouldn't be providing that form of a benefit," he said.

Traditionally, pension policy is made by the Treasury and Labor departments, Schieber said. "If the federal government wants to do this, we ought to have a deliberate policy discussion around it," he added.

Eight Senate Democrats, including party leader Harry Reid (Nev.), Edward M. Kennedy (Mass.) and Barbara A. Mikulski (Md.), have sent a letter to President Bush asking him to roll back the Energy Department's new policy. The senior Democrat on the House Education and Workforce Committee, George Miller (Calif.), also has criticized the policy.

Energy Department officials said they are not creating a two-tier system and are not interfering with contractors' rights to select retirement and health-care coverage for their next generation of employees. Officials hope to improve the predictability of contract costs for benefits and to ensure that taxpayer dollars are properly managed.

The department pays 100 percent of pension and health-care costs for its contract employees, through reimbursements to more than 30 contractors that manage and operate research labs and Cold War-era nuclear weapons sites.

As of fiscal 2005, the department had incurred $11.6 billion in unfunded liabilities for pensions and medical benefits, officials said.

Energy Department officials said they could not speculate about the impact of the policy change, in part because contractors offer a variety of benefit plans. They defended the new policy as fair, since it protects current contract workers and retirees, and in keeping with private-sector trends, which require employees to shoulder more risk through retirement accounts that hinge on how well Wall Street performs.

They suggested that new contractor hires who are young might be more interested in a portable retirement account, such as a 401(k), rather than a traditional pension, which can require vesting and many years of continuous employment to earn a decent benefit.

Energy Department officials said the policy change had been in the works for about a year. The policy change was not cleared at the White House budget office, an administration official said.

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