The Government Accountability Office has issued its report on Cash Balance Plans:
Concluding Remarks from the Report (“CB” stands for “cash balance, “DB” stands for “defined benefit” and “FAP” stands for “Final Average Pay”):
Our analysis illustrates one of the difficult choices facing the Congress in crafting comprehensive DB pension reform legislation, including the controversial issues surrounding the legal status of CB plans, and particularly CB conversions. The current confusion concerning CB plans is largely a consequence of the present mismatch between the ongoing developments in pension plan design and a regulatory framework that has failed to adapt to these designs. Although CB plans legally are DB plans, they do not fit neatly within the existing regulatory structure governing DB plans. This mismatch has resulted in considerable regulatory uncertainty for employers as well as litigation with potentially significant financial liabilities. For many workers, this mismatch has raised questions about the confidence they may have in the level of income they expect at retirement, confidence that has already been shaken by the termination of large pension plans by some bankrupt employers.CB plans may provide more understandable benefits and larger accruals to workers earlier in their careers, advantages that may be appealing to a mobile workforce. However, conversions of traditional FAP plans to CB plans redistribute benefits among groups of workers and can result in benefits for workers, particularly those who are longer tenured, that fall short of those anticipated under the prior FAP plan. Our simulations suggest that grandfathering plan participants who are being converted can protect those workers’ expected benefits, and, in fact, such protections, in some form, are fairly common in conversions. Our simulations also show that without such mitigation, many workers can receive less than their expected benefits when converted from a traditional FAP plan, even in cases where the CB plan is of equal cost to the FAP plan it is replacing. As a result, as we noted in our 2000 report, additional protections are needed to address the potential adverse outcomes stemming from the conversion to CB plans. For example, requirements for setting opening account balances could protect plan participants, especially older workers, from experiencing periods of no new pension accruals after conversion while other workers continue to earn benefits.
Our simulated comparison of CB plans with the termination of a FAP plan leads to several important observations. First, the immediate vesting of all unvested workers requirement in a plan termination actually leads to a greater number of workers getting some retirement benefits and highlights the portability limitation of DB plans. Workers in an ongoing DB plan only receive benefits if they are vested. Appealing to a mobile workforce would seem to place an even greater significance on pension portability. Yet even CB plans, which often feature lump sum provisions in their design, do not address this issue because they typically have similar vesting requirements as traditional FAPs.
In our simulations, vested workers under either a typical or equal cost CB plan still fare better than if the FAP plan is terminated. We note further that some sponsors of CB plans have already exited the DB system, a system that has been declining in sponsorship and participation for several decades now. There is a crucial balance between protecting workers’ benefit expectations with unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system. Congress, as it grapples with the broader components of pension reform, has the opportunity not only to protect the benefits promised to millions of workers and eliminate the legal uncertainty surrounding CB plans that employers face, but also to craft balanced reforms that could stabilize and possibly permit the long-term revival of the DB system.
It is interesting that the media is going crazy over this report, noting that “Democratic lawmakers, who last year asked the GAO to examine the matter, [have] seized on the report as fresh evidence that the so-called cash balance pension plans hurt workers.” See Pension Plan Switch Hurts Employees. In addition, the article reports:
The GAO study “is further proof of the need to stop companies from slashing the pension benefits of older workers through cash balance schemes,” Rep. Bernie Sanders, I-Vt., said Friday in a statement.
However, that is not the main message of the report at all. See bolded portion above which states that a CB plan is far better than a terminated FAP plan, and that Congress should “eliminate the legal uncertainty surrounding CB plans” and do everything possible to keep plan sponsors from exiting the DB system. In other words, employers are always free to terminate their DB plans (freezing accruals as of the date of termination) without adopting any plan to replace it. Such a scenario is far worse for the employee than replacing it with the “controversial” cash balance plan, “warts and all.”
See also this Plan Sponsor article here with some success stories involving cash balance plans. (One could hardly call them “schemes.”)