Comments Submitted to the Senate Health, Education, Labor and Pensions Committee

Hearing on A Pension Double Header: Reforming Hybrid and Multi-Employer Pension Plans

June 7, 2005

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The American Society of Pension Professionals & Actuaries (ASPPA) appreciates the opportunity to submit our comments to the Senate Health, Education, Labor and Pensions (HELP) Committee on reforming cash balance or similar hybrid defined benefit pension plans.

ASPPA is a national organization of approximately 5,500 retirement plan professionals who provide consulting and administrative services for qualified retirement plans covering millions of American workers. ASPPA members are retirement professionals of all disciplines, including consultants, administrators, actuaries, accountants, and attorneys. Our large and broad-based membership gives it unusual insight into current practical problems with ERISA and qualified retirement plans, with a particular focus on the issues faced by small to medium-sized employers. ASPPA’s membership is diverse, but united by a common dedication to the private retirement plan system.

ASPPA commends the Senate HELP Committee for examining the issue of hybrid plans. These plans constitute vital and powerful tools for building a stronger and more effective national retirement system.

The Importance of a Defined Benefit Plan System

The importance of promoting defined benefit plan coverage for our nation’s workers cannot be overstated. There are approximately 80 million working Americans who are not covered by a defined benefit plan. This represents 75 percent of our private workforce not covered by a plan that provides guaranteed benefits. The lack of defined benefit plan coverage is even more acute among small business workers. Less than 2 percent of the 40 million workers who are employed at firms with less than 100 employees are covered by a defined benefit plan.

The Americans not covered by a defined benefit plan will not have their benefits affected by a cash balance “conversion” since they are not currently covered in a defined benefit plan to begin with. They work at companies that you have never heard of, companies that do not have commercials on TV, but companies that will lead our economic recovery. Don’t these workers at these companies deserve a chance at a more secure retirement?

Some of these workers, if they are fortunate enough, at least have been covered by a defined contribution plan, such as a 401(k) plan. However, 401(k) plan benefits, unlike defined benefit plans, are completely dependent on the amount contributed and are affected by investment income and expenses.

Due to recent declines in the stock market, millions of American workers relying solely on 401(k) plans have been forced to delay retirement or seriously reevaluate their retirement standard-of-living expectations. The effect is more than just not being able to buy that dream retirement home. It can be the difference between being able to afford adequate long-term care or needed, but expensive, prescription drugs. These unfortunate consequences would have been greatly diminished if these Americans had been covered by a defined benefit plan providing guaranteed retirement benefits not subject to the whims of investment markets.

Defined benefit pension plans provide a guaranteed monthly retirement benefit for employees. This annuity benefit continues for the life of the worker and cannot be exhausted. 401(k) plan benefits, on the other hand, are not guaranteed. Ultimately, the level of benefits from a 401(k) plan and the length of time they continue to be paid are unknown to the retiree. Without increased defined benefit plan coverage, as Americans live longer than ever before, there is a greater risk that many Americans will outlive their retirement savings.

Faced with defined contribution plan account losses, a cash balance plan funded with employer contributions and with a guaranteed rate of return is an attractive option in today’s market. Any worker covered only by a defined contribution plan would welcome the prospect of coverage under an employer-funded cash balance plan that provides more certainty.

Cash Balance Guidance Needed

For better or worse, the last and best hope for promoting new defined benefit plan coverage is cash balance or similar hybrid plans. The good news is that there are thousands of businesses throughout the country who, in light of current developments in the stock market, might be interested in adopting a defined benefit plan such as a cash balance plan for their workers. Such plans could potentially cover millions of American workers. However, there are a number of significant legal uncertainties associated with cash balance plans because of the way benefits are accrued and distributed when compared to traditional defined benefit pension plans. Employers face uncertainty over how age discrimination rules apply to cash balance plans. Although these issues are technical in nature, they are critical to the legal operation of the plan.

Unlike their larger counterparts, small and mid-sized businesses cannot afford high-priced lawyers to provide legal opinions to help sort through the various unanswered questions. Until all of the important legal uncertainties surrounding cash balance plans are resolved in a clear and unambiguous way, small and mid-sized companies will refrain from offering these valuable defined benefits to employees.

Ironically, according to a survey published in PLANSPONSOR magazine, interest in defined benefit plan coverage among employees has increased by 20 percent as employees find it difficult to manage their 401(k) plan accounts. However, small and mid-sized businesses are no longer interested in traditional defined benefit plans because of their inherent funding uncertainties and because employees simply do not understand them. Cash balance plans can provide employers with more predictable funding requirements and, because of their “account-based” nature, they are often more appreciated by employees.

ASPPA is focused on employees currently without a defined benefit plan. Faced with consistent 401(k) plan account losses, a cash balance plan funded with employer contributions and with a guaranteed rate of return looks pretty good right now. Any worker covered only by a 401(k) plan would welcome the prospect of coverage under a cash balance plan funded by the employer and certainty respecting investments. In fact, putting aside the issue of “conversions,” no rational or cogent policy argument can be made that workers without any preexisting defined benefit plan are also better off without a cash balance plan.

ASPPA understands, nevertheless, that there are important issues applicable to conversions that must be resolved. However, we believe that because of the important role cash balance or other hybrid plans will play in the creation of new defined benefit plans, Congress should separately address issues surrounding conversions from defined benefit to cash balance plans. The goal should be to provide the 80 million working Americans with no defined benefit plan the opportunity for a more secure retirement.

Given all of the competing interests striking the appropriate balance is not an easy task. We commend you for your efforts and urge you to stay the course.

Summary

Any legislative or regulatory policy must keep in mind the vital role defined benefit plans play in providing working Americans with a more secure retirement. Account-based defined benefit plans, like cash balance plans, constitute vital and powerful tools for building a stronger and more effective private retirement system. ASPPA believes that legislation clarifying the legal status of cash balance or other hybrid plans will most certainly lead to a significant number of new plans, particularly among small and mid-sized employers, providing defined benefits to employees who have never before had such benefits. ASPPA urges Congress to enact hybrid legislation as rapidly as possible so that millions of working Americans at small and mid-sized companies nationwide have the opportunity to achieve a secure retirement future.