Critics say retirement legislation could endanger certain kinds of pension plans

Monday, July 31st 2000, 12:00 am
By: News On 6

By Pamela Yip / The Dallas Morning News

Retirement legislation that's now making its way through Congress contains many features that will encourage American workers to save more for their golden years.
But critics of the Comprehensive Retirement Security and Pension Reform Act say the bill also has provisions that could actually hurt employees covered by traditional pension plans.

Opponents say parts of the legislation, which recently passed the House of Representatives, are vague and "would give the green light to companies to further erode the retirement security of American workers."

The bill by U.S. Reps. Rob Portman, R-Ohio, and Benjamin Cardin, D-Md., would raise the current annual contribution limits for traditional and Roth Individual Retirement Accounts. It also would increase the limit on contributions to employer-sponsored 401(k) retirement savings plans, create a 401(k) plan similar to the popular Roth IRA (in which withdrawals are tax-free if certain conditions are met), and make it easier for workers to roll over their 401(k) money to a new plan when they change jobs.

Supporters of the legislation contend it will raise the retirement savings of workers, many of whom are way behind in saving for their golden years.

But critics argue that, like a rose, the legislation carries some sharp thorns that could impale key pension protections.

Too much power

For example, employee groups said the bill could head off efforts to protect the pensions of older workers from the impact of controversial cash-balance pension plans and other hybrid plans, which many corporations have adopted and which tend to benefit younger workers.

Critics also said the bill would benefit only higher-paid employees, who can afford to save more for retirement.

But the key rallying point among opponents of the legislation centers on subsidized early-retirement benefits.

How would that happen? Critics point to a provision that would give the government the power to reduce or eliminate subsidized early-retirement benefits.

"It does away with the early-retirement provision, so that what you earned under your old retirement plan could be taken away from you," said Lynda French of Austin, a board member of the IBM Employees Benefits Action Coalition, formed last year to protest IBM's conversion to a cash-balance pension plan. "You've earned early-retirement benefits, and it's very wrong to take them away from any employee who has earned them."


Early-retirement subsidies are pension sweeteners that corporations began adding to their pension plans in the early1970s to accommodate the influx of baby boomer workers entering the workforce.

"Employers were trying to make room for these new workers by giving incentives for older workers to leave," said Sylvester Schieber, vice president of research and information at Watson Wyatt Worldwide in Bethesda, Md., a managing consulting firm.

Employees could receive a nice chunk of money from early-retirement perks. The benefit is typically paid through an annuity payment made over a worker's lifetime.

"The value of this subsidy can be quite substantive," Mr. Schieber said. "It's not uncommon for the value of this subsidy to be equal to a year or even two years' pay."

Which is why employee groups are really worried about language in the retirement bill, which they said could be interpreted as a license to wipe out early retirement subsidies.

"For 25 years, pension plan participants have been protected by an ERISA [the federal Employee Retirement Income Security Act] provision that basically states, 'Once a benefit is earned, that benefit cannot be reduced by an amendment to the plan,'" Ms. French said. "It appears to us that 25 years of ERISA protection may be eliminated. ..."

But the problem with the so-called anti-cutback ERISA rule is that it makes it hard to get rid of unimportant and unnecessary pension plan provisions that may be outdated, said Brian Besanceney, a spokesman for Mr. Portman.

"Essentially, once something gets put into the structure of a pension plan, it can never come out, even if it doesn't serve a real purpose," he said. "The result is that plans are more difficult and costly for employers to administer and for participants to understand."

Creating loopholes

What the legislation proposes to do is keep the anti-cutback rules and their protections in place, but at the same time authorize the Treasury Department to issue regulations that would allow pension plans to be amended in order to reduce or eliminate cumbersome, outdated provisions, Mr. Besanceney said.

But the plan changes could take place only if they wouldn't hurt the rights or benefits of pension plan participants, he said.

Still, the bill could create a "big loophole if this proposed change will allow an employer to take away an employee's earned, accrued benefit and replace it with something else and claim that the change is not material," Ms. French said.

Employer groups supporting the legislation adamantly deny that it threatens subsidized early-retirement benefits.

"There's no such provision in the bill – period," said Janice Gregory, vice president of The ERISA Industry Committee in Washington, D.C., which represents companies. "There just isn't."

It's understandable that IBM employees and others whose companies have switched to controversial retirement plans would fear that the legislation could actually harm them, said James Delaplane, vice president of retirement policy at the Association of Private Pension and Welfare Plans in Washington, D.C., another employers' group.

"The concern has led to some misplaced fears," he said. "There is nothing in the bill that would give an employer new tools to eliminate early retirement subsidies."

'License to steal'

That remains to be seen, employee advocates said. They worry that the law will, in effect, allow companies to cut back on their pension obligations, provided only a small number of workers are affected.

"It would be a license to steal, so long as you're only stealing from a few people on a large-employer context," said Norman Stein, a pension law expert at the University of Alabama School of Law in Tuscaloosa.

The Clinton administration also opposes the legislation.

"It contains provisions that may lead to reduced retirement security for rank-and-file workers," the Office of Management and Budget said in a statement.

In some respects, the concern about subsidized early retirement benefits is out of sync with today's tight labor market because employers are trying to keep older workers, not force them out the door, Mr. Schieber said. "They're contrary now to the labor market situation they're facing," he said. "They simply can't afford to let them leave."

As a result, employers are already doing away with subsidized early retirement incentives, Mr. Schieber said.

"They're trying to restructure the plans to encourage workers to stick around longer by taking out the early-retirement incentive," he said. "They're doing it now."

Pamela Yip covers personal finance for The Dallas Morning News. If you have a story idea, e-mail her at