If your employer decides to make fundamental changes in your pension--a pension that you perhaps had been planning your retirement around--should you be given enough information to understand those changes?
The question is now before Congress, and a number of big companies and trade groups that represent them are trying to convince the lawmakers that the answer is "no"--or at least "not exactly."
The debate has been prompted by the explosive growth in what are called "cash balance" plans, in which benefits are calculated quite differently from the system used in traditional pensions. Whereas traditional pensions are "back-loaded," meaning that benefits build up sharply toward the end of a worker's career, benefits in a cash-balance plan accrue uniformly over an employee's working life.
Thus, when a traditional plan is converted to a cash-balance plan, older workers find that the pension accruals of their final working years are much less than they would have been. Some employers try to sweeten the benefits of older workers in such cases.
There's nothing inherently wrong with cash-balance plans. Indeed, employers say younger workers in today's mobile work force find them more appealing than traditional plans.
Eastman Kodak Co., for example, converted its traditional pension to a cash-balance plan "to attract and retain the type of workers" it needs, according to Rita D. Metras, Kodak's director of compensation.
But as more companies convert, two types of problems have emerged. First, formulas under both traditional and cash-balance plans are complex, and few workers can really analyze how they would fare under them. This has allowed some companies to reduce benefits as they convert, relying on the complexity to mask the reductions.
"Many companies are changing to so-called cash-balance plans, which often save them millions of dollars in pension costs each year by taking a substantial cut out of employee pensions," Sen. Tom Harkin (D-Iowa) said at a recent Senate Finance Committee hearing on the issue. "This practice allows employers to unfairly profit at the expense of retirees."
A second problem involves the benefit accrual of older workers. Because workers earn benefits at different rates under traditional and cash-balance plans, it is possible after a conversion for some workers to have earned more benefits under the old plan than they would have under the new one at this point in their careers. This is especially true if the new plan is less generous than the old one.
In such cases the employer may simply let the worker run in place, earning no new benefits, until the new plan catches up. This means an employee may work for a number of years and earn no additional benefits.
This hiatus is called a "wear-away" period or "plateau" by many pensions experts. Harkin called it a scam.
There seems little doubt that some companies and their expert advisers have used cash-balance conversions as a way to cut pension benefits without triggering worker protests. William Carr, a Denver lawyer who represents a number of workers in lawsuits over pension conversions, has reviewed tapes and transcripts of professional meetings of pension experts and actuaries as they discussed cash-balance plans. Many of their remarks indicate that much of the plans' appeal to employers had nothing to do with finding and retaining the right workers.
"It is easy to install a cash-balance plan in place of a traditional [pension] plan and cover up cutbacks in future benefit accrual," one expert told an actuary conference.
"I've been involved in cash-balance plans five or six years down the road, and what I have found is that while employees understand it, it is not until they are actually ready to retire that they understand how little they are actually getting," said another.
Sen. Daniel Patrick Moynihan (D-N.Y.) has been pushing a bill that would require firms converting to cash-balance plans to spell out for each worker what benefits have accrued under the old plan, what benefits would be under the new plan, and how benefits would compare at retirement.
Harkin would like to see the plateau effect forbidden.
There is general support for workers' right to know.
"I think we all agree that employees are entitled to meaningful information," said Finance Committee Chairman William V. Roth Jr. (R-Del.).
But employers are not happy about the idea of their being required to do a detailed forecast for each worker under the old and new plans.
Kodak's Metras told the panel the computations would be burdensome on employers and risk overwhelming the worker with too much information.
Also, changes in interest rates would cause wide swings in the performance of a traditional plan, which typically relates benefits to years of service and the workers' pay in the last few years of work, relative to a cash-balance plan, which builds benefits based on a percentage of the workers' pay each year plus a predetermined rate of interest.
Testifying on behalf of the Association of Private Pension and Welfare Plans, a large employer group, Metras also said firms are concerned about the "draconian" penalties Moynihan's bill would impose on companies that fail to comply. These include potential loss of the plans' tax-deferred status.
The portion of the nation's work force covered by traditional pensions has been steadily shrinking at a time when policymakers are increasingly concerned about the adequacy of retirement income for many Americans.
Cash-balance plans have some of the advantages of traditional plans--the employer bares the investment risk and the benefits are government guaranteed--and they may be better for younger, short-tenure workers. But they have the potential to leave older, long-term workers with considerably less generous benefits at retirement.
Under current laws, employers are not required to provide detailed comparisons of benefits if they decide to switch to a cash-balance plan, nor is the information they are required to give likely to be understandable to anyone but an expert.
Until Moynihan's bill, or something like it, becomes law, older workers at firms proposing to switch from a traditional pension to a cash-balance plan will be forced to hire their own experts or trust the company not to deprive them of thousands of dollars of benefits in retirement.