Cash Balance Conversion Proposed Legislation

[Will Durant]

Preserving Cash Balance Plans for Workers: Treasury Proposes Legislation to Protect Defined Benefit Plans and Ensure Fair Treatment of Older Workers in Cash Balance Conversions
http://www.ustreas.gov/press/releases/js1132.htm

The two goals (Protect Defined Benefit Plans and Ensure Fair Treatment of Older Workers) sound mutually exclusive to me given the financial constraints of most companies sponsoring DB plans.

[exactuary]

Eliminating the whipsaw and wearaway and uncertainty about age discrimination are probably all good. This may be that rarest of governmental actions, good for plans and participants.

[Traci]

I've been involved with several cash balance conversions - all would have more than complied with the proposed regs.

Contrary to what we see in the media, I still believe that the average employer is not out to screw its employees. The clients I have worked with have all been well aware of the effects of the conversion and have been eager to take steps to prevent hurting their older workers.

I guess regs like this are necessary for the few and not the many.

I also don't see DB plans going away any time soon. At least I believe I will have a job in the pension industry as long as I want one. Which won't be more than another 25 years at the outside.

[justice]

technically, a Treasury regulation is not the final word. The federal courts may still reverse because a reg is only a department's gloss on what Congress meant when it enacted US Code.

Granted that the courts are supposed to give federal agencies like DoL, IRS, NLRB etc. considerable deference on interpretation, but if the Code is unambiguous the courts could reverse the IRS reg. :horse:

[wonderer]

This is consistent with the long term goal of pension portability.

It appears to address the 411(d)6 thorny problem raised because of the conflicting definitely determinable benefit rules out there. By using an "equivalent rate" concept, it appears Treasury is mandating conversion factors into a benefit at retirement age to be based on current market conditions and possibly that early retirement factors be based on the same market conditions.

This makes the retirement age benefit variable from year to year. A plan that uses a fixed actuarial conversion factor may not be complying with the proposal in years where the factor results in an equivalent rate higher than current market. Therefore, the whipsaw may be put back into play. I wonder where the final rules will come down. Obviously, the timing of this proposal is such that it will be a hot topic at the Wyndham-Mariott.

I like the destruction of the wear-away and I think it only fair to get rid of the silly "age 40 and above" conversion machinations in the market place. However, to bypass the 5 year rule, it seems a sponsor would only need to "freeze" plan accruals for a nominal period of time before converting to a cash balance. I am sure this will also be addressed.

[Malik Shabazz]

I've been involved with several cash balance conversions - all would have more than complied with the proposed regs.

Contrary to what we see in the media, I still believe that the average employer is not out to screw its employees. The clients I have worked with have all been well aware of the effects of the conversion and have been eager to take steps to prevent hurting their older workers.

My experience with cash balance conversions has been similar: plan sponsors usually go out of their way to protect older, long-service participants.

On the other hand, I have never seen a conversion that would provide continued accruals under the old formula for employees under 40. (They may be out there, I just haven't seen them.)

This may be the most radical of the proposed budget provisions -- the idea that the participant who joined the plan (i.e., was hired) weeks or months before the conversion gets the same protection as the older, long-service participant.

[Traci]

On the other hand, I have never seen a conversion that would provide continued accruals under the old formula for employees under 40.

yes - I guess that's true - the ones I've worked on did not provide them either for those under 40-45. But the proposal only provides them for 5 years - which for young, short-service employees, would not cost very much in most cases.