Cash balance pension plans shortchange workers, officials say

WASHINGTON -- Workers across the country could be shortchanged by almost $200 million a year because hundreds of companies have switched from traditional pension plans to arrangements targeted at a younger, more mobile work force, the Labor Department says.

Almost a quarter of the companies converting to the new cash balance plans were found to be underpaying people who left before normal retirement age. The Labor Department inspector general's office estimated that the amounts underpaid ranged up to $55,629.

The findings released Tuesday provided fresh grist for critics of cash balance plans, who contend they are unfair to older workers because retirement benefits are frequently less than had been promised under the traditional plans. The conversions affected 8 million workers and involve $334 billion in pension assets.

"The time has come for the feds to step up to the plate and start enforcing the age discrimination laws to protect the pensions of American workers," said Rep. Bernie Sanders, I-Vt. "Workers should not have their pensions reduced just because they are older."

Under a traditional defined benefit plan, workers accrue most of their benefits toward the end of their careers. Benefits are usually based on a worker's years with the company and on their average salaries in later years -- when they presumably make the most money.

Front-loaded plans

Cash balance plans are more front-loaded: the company pays a fixed percentage of the employee's annual salary into retirement each year and workers build up money evenly throughout their careers. These plans are also easily moved from one job to another.

The new plans drew heavy criticism in 1999 and 2000 when several major companies, notably IBM Corp., converted to them. Companies defended the moves as crucial to retaining any worker pensions and rejected claims of age discrimination; efforts failed in Congress to require detailed disclosure of the impact conversion has on individual workers.

The Labor Department inspector general's analysis of 60 companies that converted to cash balanced plans found that all of them adequately protected benefits from traditional plans. But in 13 cases, or 22 percent, workers who left before normal retirement age didn't get benefits to which they were legally entitled.