Human Capital & Careers

Pension Plans

Watch Your Balance
Kris FrieswickSeptember 1, 2002

Are companies shortchanging pensioners? A recent study by the Department of Labor suggests that some employers that offer cash-balance plans might be. But critics of the study say the numbers just don’t add up.

The study, conducted by the DoL’s Office of Inspector General, claims that companies with cash-balance plans are underpaying employees who withdraw their pension plan balance before the traditional retirement age, to the tune of $85 million to $199 million a year.

At the heart of the controversy is IRS Notice 96-8, which requires employers to calculate future retirement benefits for a departing employee as if the employee had stayed until age 65. Companies must use the interest rate stipulated in their pension plan documents, but then compute back to net present value using the U.S. 30-year Treasury-bill rate. If the plan’s interest rate is higher than the T-bill rate, the present value of the benefits will be larger than the current balance held by the participant–a concept known as “whipsaw.” In 13 of the 60 companies it surveyed, the Inspector General’s office claims this was the case, but that companies paid out only the current plan balance, underpaying employees by a total of $17 million a year.

Some participants have sued employers, but the courts have come down on both sides of the issue, says James Delaplane, vice president of retirement policy at the American Benefits Council, a lobbying group for large firms. The problem is that Notice 96-8 was never finalized by the IRS. And with cases pending, relevant government agencies have declined to issue guidance. The IRS has a cash-balance project under way, but Delaplane says that to date it doesn’t address whipsaw.

To further cloud the issue, the DoL’s own assistant secretary for the Pension and Welfare Benefits Administration, Ann Combs, has questioned the study’s findings and has refused to commit additional resources to monitor the situation.

Meanwhile, the House has passed legislation that would bar the IRS from actions geared to change Notice 96-8, which in effect would codify the rule. The measure, proposed by Rep. Bernard Sanders (I­-Vt.), an opponent of cash-balance plans, must now make it through the Senate, where its chances of passing are less likely. –Kris Frieswick