Benefits administrators and lawyers awaiting clearer guidance on cash balance pension plans will have to continue to be patient. For the second time in two years, the U.S. Supreme Court has refused to take up the issue of whether these plans are age-biased.
To date, five federal appeals courts have ruled that the plans are not discriminatory. Those courts are the 2nd, 3rd, 6th, 7th and 9th circuits. Still, many employers are reluctant to embrace the money-saving arrangement or convert their existing defined benefit plan to cash balance plans, at least in part because of bipartisan political opposition. On the other hand, the instability plaguing the market is prompting some private employers to look behind the two prevailing retirement designs: traditional defined benefit pensions and defined contribution plans such as 401(k)s.
A 2005 Government Accountability Office analysis found that most workers see their retirement benefits reduced when their employers switch to a cash balance plan, but the losses for older workers were much higher. The median reduction in monthly benefits for a 30-year-old employee is $59, vs. $238 for a 50-year-old employee, the GAO estimated.
A cash balance pension plan combines the benefit formula of a defined contribution plan with the investment security of a defined benefit plan. Under the arrangement, the plan administrator establishes a hypothetical “account” for each employee and credits the account with hypothetical “pay credits” and “interest credits.” While this type of plan, which is portable, can be attractive for employees in their 20s and 30s, older workers might fare worse because cash balance accounts don’t reward workers for time on the job. This concern has led to a number of age discrimination lawsuits against companies that converted their plans and to threats by some lawmakers to ban plan conversions.
DOL’s Frequently Asked Questions about Cash Balance Pension Plans