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Cash-Balance Pensions Criticized

Democrats cite a report that employees usually lose when switched out of defined-benefit plans.

November 05, 2005|From Associated Press

WASHINGTON — Employees whose companies switch from traditional pension plans to an increasingly common alternative generally lose benefits, congressional auditors said Friday.

The report by Congress' Government Accountability Office adds to the debate over the nation's private pension system. For months, lawmakers have been grappling with an overhaul of the rules governing company pension plans as big companies dump their troubled plans on the financially strapped federal agency that insures them.

Democratic lawmakers, who last year asked the GAO to examine the matter, seized on the report as fresh evidence that so-called cash-balance pension plans hurt workers. Under the plans, companies set aside money each year for employees with a guarantee that it will grow at a specific rate -- unlike traditional pension plans, which promise workers a specific monthly benefit.

With cash-balance plans, employees generally receive one lump-sum payment when they retire or leave the company.

The plans resemble 401(k) retirement plans in that they let workers track the growth of their money in a hypothetical individual account. Unlike 401(k) plans, however, employees in a cash-balance plan can't allot part of their salary toward the plan or decide how it is invested.

Traditional pension plans reward workers for staying with a company; often it is in their last years in a job that their pension benefits increase the most. The cash-balance plans usually save companies money because they can contribute less than they would under a traditional pension plan.

Critics of the plans maintain that they unfairly discriminate against older workers.

Many companies, including IBM and AT&T, have converted from traditional defined-benefit pension plans to cash-balance plans in the last 15 years, and employees have taken some of the companies to court over it.

The GAO auditors, who examined 31 large company pension plans and 102 smaller ones, found that when employers switch from defined-benefit to cash-balance plans, "most workers, regardless of age, would have received greater benefits under the (defined-benefit) plan."

Also, unless older employees are given the right to remain in the traditional plan, they "experience a greater loss of expected benefits than younger workers," the report says.

It estimates the median loss in retirement benefits each month for a 30-year-old employee to be $59, rising to $188 for a 40-year-old worker and $238 for a 50-year-old.

About half the companies converting to cash-balance plans allowed all employees or older ones to remain in the defined-benefit plan, the GAO found.

The agency said its analysis "illustrates one of the difficult choices facing the Congress in crafting comprehensive ... pension reform legislation."

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