Ellen Schultz - Retirement Heist

In other words, after a company changed to a cash-balance plan, most employees were no better off than if they had changed jobs or been laid off (which would have stopped their old pension from growing) and now had only a 401(k) at their new job, growing at only 4 percent a year.

But it was even worse than that at Cigna and other companies: Older workers weren’t even getting the annual increase. That’s because at many companies the “opening account balance” was worth less than the value of the lump sum. For example, if at the time of the pension change someone had earned the equivalent of a $300,000 payout, the opening account balance might be only $250,000. Consequently, it could take years for the pay credits to build the “balance” back up to where it had been when the pension change was made. As a result, following the change to a cash-balance plan, the pensions of older workers were frozen—in some cases for the rest of their careers. Employees didn’t notice because the amounts on their “account statements” always appeared to be growing.

In the pension world, this period of zero pension growth is called “wear-away,” because a person has to wear away his old benefit before his benefit begins growing again. Creating a wear-away is an employer’s way of saying, “We should have had this less generous pension all along, and if we had, your pension would be smaller. Bottom line: You’ve been overpaid and won’t get any pension until you’ve worked off the debt.”

It was little different from an employer cutting someone’s pay, then telling him he wouldn’t get a paycheck for five years, because he should have been paid less all along. Employees would notice if their pay was frozen, but they didn’t notice that their pensions weren’t growing because the opening account balance had been lowballed. Amara’s opening balance was $91,124, instead of the $184,000 she had earned. Under the new formula, she wouldn’t begin to build a new benefit until 2008. Essentially, wear-away is like a retroactive pension cut.

Under pension law, it’s illegal to retroactively cut someone’s pension (though employers can slow the pension growth or end it altogether by freezing the pension plan). Cash-balance plans provide a way around this prohibition against retroactive pension cuts because if employees leave before their accounts have caught up to their old pensions, they always receive at least the value of the benefit they had when the pension was changed. In this case, Amara would receive the lump sum of $184,000 if she left; but if she didn’t, she could work another ten years with no increase in her pension.

Gerald Smit, a longtime AT&T employee, was forty-seven when AT&T changed its pension plan in 1998. At the time, his pension would have been worth $1,985 a month when he reached age fifty-five. Though he continued to work at AT&T for eight more years, when he left, his pension was still worth just $1,985 a month. For other employees, the waiting period could be longer. Minutes of a 1997 meeting of AT&T’s pension consultants noted that “employees in their 40s could lose, [and] have to wait 10 years for benefits. By contrast, the benefit would build “immediately for younger employees.” (The benefits for younger employees and new hires would grow immediately, because they had accumulated little or nothing under the old pension.)

From the beginning, the cash-balance plan’s ability to disguise the pension cuts was one of its selling points with employers. In 1986, Eric Lofgren, an actuary and principal with Mercer-Meidinger (later called Mercer), discussed the newfangled cash-balance plans on a panel discussing new kinds of pension plans at an actuaries conference. The cash-balance plan, he explained, was a pension plan “masquerading as a defined contribution” savings plan, like a 401(k). It was, he commented, “a very worthy concept.”

Lofgren went on to provide two definitions of the cash-balance plan. “Both definitions are true, but they slant in different directions,” he said. “The first definition is the upbeat definition: ‘Dear employee: A cash-balance plan is an exciting, modern, flexible new plan designed with the advantages of both defined benefit and defined contribution. Easy to understand, each employee quickly vests in a portable lump sum account which is guaranteed to increase at the CPI [consumer price index] for inflation protection. There are many benefit options at retirement.’ ”

He continued: “The second definition goes like this: ‘Dear employee: We’ve got for you a cash-balance pension plan. It’s our way to disguise the cutbacks in your benefits. First we’re going to change it to career average [meaning that the benefit would be based on an average of one’s salary, not the highest amount, as in a traditional pension]. We’ll express the benefits as a lump sum so we can highlight the use of the CPI, a submarket interest rate. What money is left in the plan will be directed towards employees who leave after just a few years. Just to make sure, we’ll reduce early-retirement subsidies.’ ” These subsidies allow a person to retire at age fifty-five or sixty with roughly the same pension as if they’d stayed to age sixty-five. Taking away the subsidy could reduce a pension by 20 percent or more.

The desired effect of the pension change, from the employer’s point of view, was not just that it froze the pensions of older employees, but redirected some of the savings to younger workers. Publicly, employers emphasized that the new pension was better for “young, mobile workers” (a phrase that appeared in virtually every piece of marketing material issued by a company to help explain why it had changed the plan). In fact, two-thirds of young workers leave their jobs without vesting in their pensions, meaning that they got nothing. The forfeited amounts remained in the plan.

Initially, other consulting firms were skeptical of this radical design. But as Kwasha Lipton converted pension plans at Hershey, Dana, Cabot, and other companies, competing consulting firms saw a lucrative opportunity. Soon Mercer, Towers Perrin, and Watson Wyatt developed their own hybrid plans, and they too emphasized the ability of the plans to mask pension cuts.

Not everyone was fooled when their employers changed to a cash-balance plan. Jim Bruggeman was forty-nine when his employer, Central and South West, a Dallas-based electric utility, took this step in 1997. “The changes being made are good for both you and the company,” the brochure noted. Bruggeman, an engineer in Tulsa, was eager to find out how, and was uniquely qualified to do so. He also had a background in finance, his hobby was actuarial science, he had taken graduate-level courses in statistics and probability, and he knew CSW’s old pension plan inside and out. After considerable tinkering with spreadsheets, he was able to finally figure out that the supposedly “better” pension would reduce the pensions of many employees by 30 percent.

He wasn’t about to keep this finding to himself. At a question-andanswer session on the new plan, Bruggeman spoke up and told co-workers how their pensions were being reduced. He had a sheaf of spreadsheets to prove it. The next day, his supervisor went to his office with a message from CSW management in Dallas. They were concerned that his remarks would cause an “uprising” and warned him that if he continued to talk to other employees about the pension change, they’d think he wasn’t a team player and his job could be in jeopardy. In his next performance evaluation, his supervisor’s only criticism was that he “spends too much time thinking about the pension plan.” CSW saved $20 million in the first year it made the change. Bruggeman was fired in 2000.

Another engineer one thousand miles away was equally perplexed. Steven Langlie had spent three decades designing military engines, but he couldn’t figure out how the cash-balance plan his employer changed to in 1989 worked. The skeptical engineer relentlessly pestered his employer, Onan Corp., a unit of Cummins Engine in Minneapolis, for answers. When they refused to spill the beans, the increasingly apoplectic Langlie wrote to local lawmakers, complained to the Minnesota Department of Human Rights and the IRS, and traveled to Washington, D.C., to deliver a petition signed by 460 fellow workers to the Department of Labor.