[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





    EXAMINING CASH BALANCE PENSION PLANS: SEPARATING MYTH FROM FACT

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              July 7, 2004

                               __________

                           Serial No. 108-67

                               __________

  Printed for the use of the Committee on Education and the Workforce



 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house
                                   or
            Committee address: http://edworkforce.house.gov


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
94-751                      WASHINGTON : 2004
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice     George Miller, California
    Chairman                         Dale E. Kildee, Michigan
Cass Ballenger, North Carolina       Major R. Owens, New York
Peter Hoekstra, Michigan             Donald M. Payne, New Jersey
Howard P. ``Buck'' McKeon,           Robert E. Andrews, New Jersey
    California                       Lynn C. Woolsey, California
Michael N. Castle, Delaware          Ruben Hinojosa, Texas
Sam Johnson, Texas                   Carolyn McCarthy, New York
James C. Greenwood, Pennsylvania     John F. Tierney, Massachusetts
Charlie Norwood, Georgia             Ron Kind, Wisconsin
Fred Upton, Michigan                 Dennis J. Kucinich, Ohio
Vernon J. Ehlers, Michigan           David Wu, Oregon
Jim DeMint, South Carolina           Rush D. Holt, New Jersey
Johnny Isakson, Georgia              Susan A. Davis, California
Judy Biggert, Illinois               Betty McCollum, Minnesota
Todd Russell Platts, Pennsylvania    Danny K. Davis, Illinois
Patrick J. Tiberi, Ohio              Ed Case, Hawaii
Ric Keller, Florida                  Raul M. Grijalva, Arizona
Tom Osborne, Nebraska                Denise L. Majette, Georgia
Joe Wilson, South Carolina           Chris Van Hollen, Maryland
Tom Cole, Oklahoma                   Tim Ryan, Ohio
Jon C. Porter, Nevada                Timothy H. Bishop, New York
John Kline, Minnesota
John R. Carter, Texas
Marilyn N. Musgrave, Colorado
Marsha Blackburn, Tennessee
Phil Gingrey, Georgia
Max Burns, Georgia

                    Paula Nowakowski, Staff Director
                 John Lawrence, Minority Staff Director


                                 ------                                

                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on July 7, 2004.....................................

Statement of Members:
    Boehner, Hon. John A., Chairman, Committee on Education and 
      the Workforce..............................................     1
        Prepared statement of....................................     4
    Miller, Hon. George, Ranking Member, Committee on Education 
      and the Workforce..........................................     5
    Norwood, Hon. Charlie, a Representative in Congress from the 
      State of Georgia, statement submitted for the record.......    98
    Porter, Hon. Jon, a Representative in Congress from the State 
      of Nevada, statement submitted for the record..............    97

Statement of Witnesses:
    Clark, Dr. Robert, Professor, College of Management, North 
      Carolina State University, Raleigh, NC.....................    30
        Prepared statement of....................................    31
    Collier, Ellen, Director of Benefits, Eaton Corporation, 
      Cleveland, OH..............................................    20
        Prepared statement of....................................    22
    Delaplane, James, Jr., Esq., Attorney, American Benefits 
      Council, Washington, DC....................................     9
        Prepared statement of....................................    10
    Hill, Robert, Esq., Partner, Hill & Robbins, Denver, CO......    40
        Prepared statement of....................................    42
    Pfotenhauer, Nancy, President, Independent Women's Forum, 
      Washington, DC.............................................    47
        Prepared statement of....................................    49

Additional materials supplied:
    AARP, letter submitted for the record........................   117
    American Federation of Labor and Congress of Industrial 
      Organizations, statement submitted for the record..........   116
    Bureau of Labor Statistics, U.S. Department of Labor, table 
      submitted for the record...................................   147
    Committee on Education and the Workforce, fact sheets 
      submitted for the record...................................    73
    Committee on Education and the Workforce, Democratic Staff, 
      press release submitted for the record.....................   151
    Companies That Have Converted to Cash Balance Pension Plans, 
      submitted for the record...................................   140
    Cutrone, Larry, statement submitted for the record...........   119
    Employers Awaiting IRS Determination Letters Under the Cash 
      Balance Moratorium, submitted for the record...............   143
    ERISA Industry Committee, statement submitted for the record.    87
    Krueger, Janet, statement submitted for the record...........   120
    National Association of Manufacturers, statement submitted 
      for the record.............................................   104
    National Committee to Preserve Social Security and Medicare, 
      statement submitted for the record.........................   149
    Tarlau, Jimmy, statement submitted for the record............   122
    Tax Notes, statement submitted for the record................   124
    The Principal Financial Group, statement submitted for the 
      record.....................................................   105
    U.S. Chamber of Commerce, letter submitted for the record....    83
    U.S. Treasury Department, Office of Public Affairs, letter 
      submitted for the record...................................   132
    Watson Wyatt, press releases submitted for the record........   111
    Winston, Janice, statement submitted for the record..........   121

 
    EXAMINING CASH BALANCE PENSION PLANS: SEPARATING MYTH FROM FACT

                              ----------                              


                        Wednesday, July 7, 2004

                     U.S. House of Representatives

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The Committee met, pursuant to call, at 10:33 a.m., in room 
2175, Rayburn House Office Building, Hon. John A. Boehner 
(Chairman of the Committee) presiding.
    Present: Representatives Boehner, Johnson, Isakson, 
Osborne, Kline, Carter, Blackburn, Burns, Miller, Kildee, 
Payne, Andrews, Woolsey, Tierney, Kind, Wu, McCollum, Van 
Hollen, and Bishop.
    Staff Present: Stacey Dion, Professional Staff Member; 
Kevin Frank, Professional Staff Member; Ed Gilroy, Director of 
Workforce Policy; Richard Hoar, Staff Assistant; Donald 
McIntosh, Staff Assistant; Alexa Marrero, Press Secretary; Greg 
Maurer, Coalitions Director for Workforce Policy; Jim Paretti, 
Workforce Policy Counsel; Deborah L. Samantar, Committee Clerk/
Intern Coordinator; Kevin Smith, Communications Advisor; Jo-
Marie St. Martin, General Counsel; Jody Calemine, Minority 
Counsel Employer-Employee Relations; Margo Hennigan, Minority 
Legislative Assistant/Labor; Marsha Renwanz, Minority 
Legislative Associate/Labor; and Michele Varnhagen, Minority 
Labor Counsel/Coordinator.
    Chairman Boehner. A quorum being present, the Committee on 
Education and the Workforce will come to order.
    We are holding this hearing today to hear testimony on 
``Examining Cash Balance Pension Plans: Separating Myth from 
Fact.'' under the Committee rules, opening statements are 
limited to the Chairman and Ranking Member. Therefore, if other 
Members have opening statements, they will be included in the 
hearing record.
    With that, I ask unanimous consent that the hearing record 
remain open for 14 days to allow Members' statements and other 
extraneous material referenced during the hearing to be 
submitted in the official hearing record. Without objection, so 
ordered.

   STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    I want to thank everyone for coming to the eighth in our 
series of hearings on defined benefits pension plans, a topic 
that is fairly timely. Cash balance plans have received a lot 
of attention recently, producing rhetoric that has often been 
misleading, if not in fact false. Today we hope to separate 
myth from fact about cash balance plans.
    As we all know, the number of defined benefit plans has 
declined significantly over the last 20 years from 114,000 
plans in 1985 to 31,000 plans last year, and the entire defined 
benefit system, I believe, remains at risk. Some experts have 
suggested that cash balance plans, which are types of defined 
benefit plans, offer today's workers the type of secure and 
portable benefit that can help save and preserve the overall 
system. Unfortunately, fewer and fewer companies are offering 
cash balance plans because of a recent wave of litigation.
    Before I talk about this specifically, I would like to 
discuss some facts about how these plans work. Under cash 
balance plans, workers earn portable benefits through monthly 
pay and interest credits and benefits are earned more evenly 
over a career span, not just at the end of the worker's career. 
This can result in greater retirement savings for workers who 
do not remain with the same employer for their entire career. 
As a result, a broader group of employees, including lower 
income workers and women, earn greater benefits with shorter 
service under cash balance plans than traditional plans.
    According to a study published by Watson Wyatt in 2000, 
more than 80 percent of participants fare better with a cash 
balance plan. The value of the benefit in a traditional plan 
spikes for workers who qualify for an early retirement subsidy, 
typically in their mid-50's, but then declines if they fail to 
retire at a specific age and keep working. As a result, 
traditional plans are advantageous only for the small 
proportion of employees who work for the same employer for 20 
to 30 years and retire in their mid-50's.
    Conversely, traditional plans are disadvantageous for 
younger employees, for workers who change jobs or interrupt 
their careers, and for older workers who continue working after 
early and normal retirement age.
    The Employee Retirement Income Security Act, ERISA, 
prohibits employers from cutting back or reducing any pension 
benefits that have been earned by employees once they vest in 
their pension plan. Despite this current law protection, some 
critics have continued to express concern over cash balance 
conversions despite the fact that a large majority of them have 
been handled properly and legally.
    The real issue here is about a small number of prospective 
retirees' expectation of receiving the full value of early 
retirement subsidies that have not yet been earned. This is not 
about normal retirement benefits. Rather, I am concerned that 
cash balance critics are focused not on providing meaningful 
retirement benefits to our overall workforce, but solely on 
protecting a small fraction of employees who could afford to 
retire early.
    It is important to note that under the voluntary pension 
system, let me just repeat that one more time for everyone, 
under our voluntary pension system, all defined benefit plan 
sponsors may change benefit formulas prospectively to either 
enhance or reduce future benefits that have not yet been earned 
by an employee. All employers need the flexibility to determine 
what is appropriate for the needs of their workers and their 
business. If this flexibility is taken away or if Congress were 
to unilaterally mandate certain pension benefits, employers 
would leave the voluntary pension system altogether and the 
defined benefit system would all but disappear.
    The recent wave of litigation surrounding cash balance 
plans has raised concerns from employers, workers, and 
policymakers alike. One well-documented court case involves 
IBM, but the initial ruling runs counter to, in my opinion, 
existing law and a large body of other court decisions. In this 
case the judge found the cash balance plan design inherently 
age discriminatory because equal pay credits for younger 
workers have a longer period of time to earn interest and 
accrue benefits before retirement than the same pay credits for 
older workers. This interpretation essentially means it would 
be age discriminatory to make equal contributions on behalf of 
workers with different ages. This is inconsistent with every 
other pension design and this logic could make a basic savings 
account, 401(k) plans, and even Social Security benefits 
automatically age discriminatory. We are not here to debate the 
IBM case specifically, but we also need to make sure cash 
balance plans aren't forced into extinction at the expense of 
the interests of American workers.
    Most courts have ruled no age discrimination occurs with 
cash balance plans if the pay and interest credits given to 
older employee accounts are equal to or greater than those of 
younger employees. The most recent ruling on this topic, issued 
just last month in the Tootle case, agrees that cash balance 
plans are not inherently age discriminatory.
    I would like to dispel another myth about these plans. The 
switch to cash balance plans is not motivated by cost savings, 
but rather by pressures imposed by an increasingly mobile 
workforce as well as fierce competition. Under current law, 
employers can freeze or terminate their traditional plan 
without the complexity or expense of converting to a cash 
balance plan, and most actually spend more on retirement 
benefits after the conversion as they did before. In a world 
where most employees will not spend 20 to 30 years working for 
the same employer, the steady accrual of benefits under a cash 
balance plan provides greater retirement security than the 
distant accrual of back-loaded benefits under a traditional 
defined benefit plan.
    Our ultimate goal here is to ensure cash balance plans 
remain a viable option for employers who want to remain in the 
defined benefit system, and I think most of the Members here 
would agree that defined benefit systems, defined benefit plans 
are an important components of a solid retirement security for 
American workers.
    It is my hope that we can move forward with reforms to 
strengthen the cash balance plans for all workers as we craft a 
comprehensive proposal to reform and strengthen the defined 
benefit system.
    With that, I look forward to hearing from our witnesses and 
working with my colleagues on this issue as we move ahead. With 
that, I yield to my friend and colleague the Ranking Member, 
Mr. Miller.
    [The prepared statement of Chairman Boehner follows:]

 Statement of Hon. John Boehner, Chairman, Committee on Education and 
                             the Workforce

    I'd like to thank everyone for coming to the eighth in our series 
of hearings on defined benefit pension plans for a topic that is 
particularly timely. Cash balance plans have received a lot of 
attention recently, producing rhetoric that has often been misleading 
if not false. Today, we hope to separate myth from fact.
    As we all know the number of defined benefit plans has declined 
significantly over the last 20 years, from 114,000 in 1985 to 31,000 
last year, and the entire defined benefit system remains at risk. Some 
experts have suggested that cash balance plans, which are a type of 
defined benefit plan, offer today's workers the type of secure and 
portable benefit that can help save and preserve the overall system. 
Unfortunately, fewer and fewer companies are offering cash balance 
plans because of a recent wave of litigation.
    Before I talk about this specifically, I'd like to discuss some 
facts about how these plans work. Under cash balance plans, workers 
earn portable benefits through monthly pay and interest credits, and 
benefits are earned more evenly over a career span, not just at the end 
of a worker's career. This can result in greater retirement savings for 
workers who do not remain with the same employer for their entire 
career. As a result, a broader group of employees--including lower-
income workers and women--earn greater benefits with shorter service 
under cash balance plans than traditional plans. According to a study 
published by Watson Wyatt in 2000, more than 80 percent of participants 
fare better with a cash balance plan.
    The value of the benefit in a traditional plan spikes for workers 
who qualify for an early retirement subsidy, typically in their mid-
50s, but then declines if they fail to retire at a specific age and 
keep working. As a result, traditional plans are advantageous only for 
the small proportion of employees who work for the same employer for 20 
to 30 years AND retire in their mid-50s. Conversely, traditional plans 
are disadvantageous for younger employees, for workers who change jobs 
or interrupt their careers, and for older workers who continue working 
after early and normal retirement age.
    The Employee Retirement Income Security Act (ERISA) prohibits 
employers from cutting back or reducing any pension benefits that have 
been earned by employees once they vest in their pension plan. Despite 
this current law protection, some critics have continued to express 
concern over cash balance conversions despite the fact a large majority 
of them have been handled properly and legally.
    The real issue here is about a small number of prospective 
retirees'' expectation of receiving the full value of early retirement 
subsidies that have not yet been earned. This is not about normal 
retirement benefits. Rather, I'm concerned that cash balance critics 
are focused not on providing meaningful retirement benefits to our 
overall workforce, but solely on protecting a small fraction of 
employees who can afford to retire early. It is important to note that 
under the voluntary pension system all defined benefit plan sponsors 
may change benefit formulas prospectively to either enhance or reduce 
future benefits that have not yet been earned by an employee. All 
employers need the flexibility to determine what is appropriate for the 
needs of their workers and their business. If this flexibility is taken 
away or if Congress were to unilaterally mandate certain pension 
benefits, employers would leave the voluntary pension system altogether 
and the defined benefit system would all but disappear.
    The recent wave of litigation surrounding cash balance plans has 
raised concerns from employers, workers, and policymakers alike. One 
well-documented court case involves IBM, but the initial ruling runs 
counter to existing law and a large body of other court decisions. In 
this case, the judge found the cash balance plan design inherently age 
discriminatory because equal pay credits for younger workers have a 
longer period of time to earn interest and accrue benefits before 
retirement than the same pay credits for older workers. This 
interpretation essentially means it would be age discriminatory to make 
equal contributions on behalf of workers with different ages. This is 
inconsistent with every other pension design and this logic would make 
a basic savings account, 401(k) plans, and even Social Security 
benefits automatically age discriminatory. We're not here to debate the 
IBM case, but we also need to make sure cash balance plans aren't 
forced into extinction at the expense of the interests of workers.
    Most courts have ruled no age discrimination occurs with cash 
balance plans if the pay and interest credits given to older employee 
accounts are equal to or greater than those of younger employees. The 
most recent ruling on this topic, issued just last month in the Tootle 
case, agrees that cash balance plans are not inherently age 
discriminatory.
    I'd like to dispel another myth about these plans. The switch to 
cash balance plans is not motivated by cost savings, but rather 
pressures imposed by an increasingly mobile workforce as well as fierce 
competition. Under current law, employers can freeze or terminate their 
traditional plan without the complexity or expense of converting to a 
cash balance plan, and most actually spend more on retirement benefits 
after the conversion as before. In a world where most employees will 
not spend 20 to 30 years working for the same employer, the steady 
accrual of benefits under a cash balance plan provides greater 
retirement security than the distant accrual of back-loaded benefits 
under a traditional plan.
    Our ultimate goal is to ensure cash balance plans remain a viable 
option for employers who want to remain in the defined benefit system 
and workers who prefer the portable and secure benefit this option 
provides. It's my hope we can move forward with reforms to strengthen 
cash balance plans for all workers as we craft a comprehensive proposal 
to reform and strengthen the defined benefit pension system. With that, 
I look forward to hearing from our witnesses and working with my 
colleagues on this issue as we move ahead.
                                 ______
                                 

 STATEMENT OF HON. GEORGE MILLER, RANKING MEMBER, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    Mr. Miller. Thank you, Mr. Chairman, and I want to thank 
you very much for holding this hearing. I think it is long 
overdue. In many ways today's economy is hard on American 
families. Blue collar and white collar employees alike are 
being fired, outsourced, and downsized. Their real wages are 
declining, and on top of that their health care and retirement 
benefits are being reduced while costs are going up.
    People who work hard every day year after year have dreams 
about their retirement. They plan for it. But then with little 
warning their employers tear up those retirement plans. That is 
the context in which this hearing takes place.
    For hard working middle-class families, our Nation's 
pension system is in crisis. We all know that an increasing 
number of employers are bailing out of the defined benefit 
plan. That is their decision. Companies used to believe it was 
the best way to attract and retain a qualified workforce. And 
while I personally believe that companies and workers alike 
benefit from a traditional benefit plan, Congress cannot 
require these companies to provide one. But Congress can and 
must require that companies abide by the law.
    The question for Congress now is what exactly is the law 
going to be when it comes to the new world of changing pension 
plans. After the Enron debacle, the stock market downturn of 
2000, 401(k) plans were no longer the golden child that we 
thought they were. With median account balances of 
approximately $13,000 it is highly unlikely that 401(k) plans 
will provide adequate retirement benefits for a majority of 
workers covered by them. But, then again, 401(k) plans were 
never originally designed as a retirement plan. They were 
designed to increase national savings.
    There are many in Congress and the pension community who 
argue that hybrid pension plans like the cash balance plans can 
be the future of the retirement system. Congress needs to have 
that debate. This debate must be fact based and honest and we 
should begin by acknowledging that there is a lot we do and a 
lot we do not know about cash balance pension plans. We know 
that during the 1990's hundreds of large companies amended 
their traditional defined benefit plans and adopted cash 
balance pension plans instead. We know that over 8 million 
workers and retirees were affected. We know that many workers 
lost pension benefits that they had every reason to expect to 
receive.
    The General Accounting Office found that without transition 
protection, older workers, workers over 45, can lose up to 50 
percent of their expected pension benefits. What we do not 
know, however, is whether all of these plans in these 
conversions comply with the laws protecting workers' pensions 
generally and are protecting them from age discrimination. 
ERISA, our governing Federal pension law, does not recognize 
cash balance plans since these plans did not exist when the law 
was enacted in 1974.
    During the time the cash balance plans were being created 
no one ever came to Congress and asked us to amend ERISA to 
include these plans. Congress was mostly unaware of how they 
worked. The consultants who created cash balance plans sought 
the approval of the Treasury Department and the IRS in 
particular. The IRS approved most of these plans, although only 
as far as their adherence to existing tax code. The IRS did not 
examine the plans to see whether or not they were fair to older 
workers or whether they violated provisions of law against age 
discrimination in employee benefits. There was disagreement 
within the IRS on the legality of these plans, and then along 
came IBM, as you have noted, Mr. Chairman.
    In 1999 IBM announced it intended to convert its 
traditional plan to cash balance. IBM only gave its workers a 
handful of weeks to prepare for that change. It only protected 
workers who were 5 years from retirement or with 25 years of 
service. IBM put a pension calculator on the company Web site 
and pulled it when workers started figuring out that they would 
lose benefits under the new plan.
    The computer savvy workers that worked at IBM quickly used 
the Internet to mobilize a grass roots army to express their 
concerns to Congress and we ended up with a moratorium. In a 
callous move, which many believe proposed serious dangers to 
the retirement security of millions of employees, the Bush 
administration in 2001 tried to overcome the controversy 
surrounding the cash balance plans by issuing draft regulations 
lifting the moratorium. Older workers can't earn enough under 
cash balance plans and they don't have time to go to another 
company and start again, particularly in an economy that is 
producing too few jobs. These are the workers that Congress 
needs to protect, and that was the concern that was raised when 
the Bush plan was announced, that people would not have the 
ability to protect the retirement that they had come to expect 
upon. But the Congress on a bipartisan basis voted to stop the 
regulations and require Treasury to propose legislation that 
would protect older workers.
    The administration finally relented to the congressional 
public opinion and withdrew the proposed regulations, and that 
is why we are here today. When the Treasury formally withdrew 
the rejected regulations in June, it announced it would work 
with Congress to achieve the legislation based upon the 
framework President Bush put forth in his 2005 budget. But the 
present proposal is still far off the mark when it comes to 
protecting older workers and their pensions. That is the 
challenge before us. How do we assure fair protection for older 
workers and pension plans while allowing companies the 
flexibility and employees the flexibility that they need?
    Most of these workers are too old to start over again. They 
may have given 20 or 30 years of their working life to the 
companies and they are stuck. I think that is the issue that we 
have tried to raise with Treasury, we tried to raise with the 
administration and found bipartisan support, and that really is 
that we have got to allow workers to have a choice in this and 
to make a determination about their pension benefit that will 
allow the company to change plans but at the same time protect 
these individuals.
    In many instances these are not mom and pop low-profit 
margin companies when we discuss these issues. As you know, it 
is AT&T, American Express, Citicorp, Compaq, CSX, Georgia 
Pacific, Prudential and hundreds more. Congress needs to decide 
what the future of these cash balance plans should be.
    Representative Bernie Sanders and I and 134 other 
Republicans and Democrats introduced legislation to require 
workers at age 40 or older with 10 or more years of service to 
be provided a choice between the old and new plans. Treasury 
Secretary Snow readily admits this was very similar to what he 
did when he was chief executive at CSX. CSX gave its workers a 
choice between plans. I think I quote him correctly when he 
said, I believe he was the director of Verizon when Verizon 
made the decision to finally, after much turmoil, to give its 
employees the choice.
    It is what the Congress did when the Congress changed its 
pension plans for Members. Members went down, they sat down 
with an analyst, they decided which plan they thought would be 
better for them given their expectations of how long they would 
stay here, whether they would leave or what have you, and they 
made that choice. I think that that is the kind of fairness 
that we are seeking when we look forward to these changes in 
the pension plans.
    But it is important, Mr. Chairman, and I want to commend 
you for giving the time and attention and resources of this 
Committee to this issue, because it is absolutely fundamental 
to the economic well-being of our country and to our families.
    I would add one final note, that I think while we consider 
whether or not people are going to make this choice and they 
make the decisions whether they go into a 401(k) and how that 
401(k) is administered, we must also look at those components 
of it. We have seen too many headlines where there is a lack of 
transparency, there is a difference in practices on fees that 
are charged, the purpose of those fees. Again, this morning we 
see the SEC has renewed and asked additional questions about 
how 401(k) plans are put into different funds, to different 
investment instruments without transparency. What are the 
reasons for those fees they are paying? It adds up to about $10 
billion a year that people are paying. Does it really, in fact, 
benefit the investors?
    I think that as we think about the ability of employers and 
employees to utilize these other investment and retirement 
instruments we have got to make sure that there is transparency 
for the employer, for the employees, as they make those 
decisions. Because it appears that more and more families are 
going to be relying on their decisions about their retirement 
and even in the case where the employer helps them with, that 
we have got to make sure that they are not influenced, as was 
reported in the paper today where they said there was 
substantial evidence that certain mutual funds because of 
payments they received from fund companies or their investor 
advisers as part of sales agreements, that people were placed 
in those investments to get high cost and poorly performing 
funds into a 401(k) or similar retirement plans.
    I think we have got to question those activities, and 
employees and employers both have got to understand the risks 
that are involved here and insist upon that kind of 
transparency. Thank you.
    Chairman Boehner. It is my pleasure to introduce our 
distinguished panel of witnesses today. Our first witness is 
Mr. James Delaplane, Jr., or as most of us know him, Jamie 
Delaplane. He is a partner in the law firm of Davis & Harman, 
LLP, where he serves as special counsel to the American 
Benefits Council, which is the national association 
representing the employee benefits interest of major U.S. 
employers. Mr. Delaplane also represents financial 
institutions, employers and employer coalitions, trade 
associations, and public policy organizations on a full range 
of legislative regulatory matters affecting employee benefits.
    We will then hear from Ms. Ellen Collier. Ms. Collier is 
the Director of Benefits for Eaton Corporation. Eaton has 
51,000 employees worldwide and sells products to customers in 
more than 100 countries. Ms. Collier is responsible for the 
strategy, design, communication, legal compliance and delivery 
of the employee benefits program for Eaton's 27,000 North 
American employees.
    We will then hear from Dr. Robert Clark. Dr. Clark is a 
Professor of Economics and Business Management at North 
Carolina State University. Professor Clark has conducted 
research examining the retirement decisions, the choice between 
defined benefit and defined contribution plans, the impact of 
pension conversions to defined contribution and cash balance 
plans, the role of information and communications on 401(k) 
contributions, government regulation of pensions and Social 
Security.
    Then we will hear from Mr. Robert Hill. Mr. Hill is an 
attorney in private practice in the Denver, Colorado, law firm 
of Hill & Robbins. Mr. Hill has represented employees in 
several lawsuits challenging the legality of conversions from 
traditional defined benefit plans to cash balance plans, 
including being the lead counsel for the plaintiffs in Cooper 
vs. IBM.
    Then we will hear from Ms. Nancy Mitchell Pfotenhauer. Ms. 
Pfotenhauer joined the Independent Women's Forum as President 
in 2001 from her previous position at Cook Industries where she 
was Director of the Washington office. Ms. Pfotenhauer began 
her career in Washington, D.C., in 1987 as a Senior Economist 
at the Republican National Committee and was promoted to Chief 
Economist in 1988. She was also selected by the Bush transition 
team at age 24 where she served as the Economist for the 
Independent Agencies Task Force for President-Elect George 
Bush.
    I want to welcome all of you, and I am sure someone has 
explained to you how the lights work down there.
    With that, Mr. Delaplane, you may begin.

  STATEMENT OF JAMES DELAPLANE, JR., ESQ., ATTORNEY, AMERICAN 
               BENEFITS COUNCIL, WASHINGTON, D.C.

    Mr. Delaplane. Thank you, Mr. Chairman, Ranking Member 
Miller, I appreciate the opportunity to appear today. The 
American Benefits Council is an organization representing 
Fortune 500 employers and other entities that assist employers 
in providing benefits to employees. Many of our members sponsor 
cash balance or other hybrid defined benefit plans.
    Rather than merely summarize my written statement, let me 
ask all of you to put yourselves in the shoes of a chief 
executive facing today's pension environment. Your firm 
voluntarily sponsors a defined benefit plan even though most 
competitors do not. You fund these benefits, bear the 
investment risk, and pay insurance premiums to PBGC. You have 
retooled your company to stay competitive and your workforce 
has likewise changed. You have fewer career-long employees, you 
make more mid-career hires and you face worker shortages in 
several job categories. You realize that the company's 
traditional pension was not delivering meaningful benefits to 
this new workforce. As much as 75 percent of total benefits 
were going to the small share of workers that stayed for a full 
career.
    In particular, you paid significant benefits to those who 
retired at 55 under the plan's rich early retirement subsidy. 
These subsidized benefits and the departures they encouraged 
aggravated your labor shortages. After much analysis you and 
your board decided to convert to cash balance and remove the 
early retirement subsidy from the plan.
    While earned benefits are protected absolutely, these 
changes allowed you to reallocate dollars so that future 
benefits were delivered more equitably to workers of all 
tenures. The new plan offered the portability and transparency 
that employees wanted and was more attractive to recruits. The 
removal of additional early retirement incentives encouraged 
skilled workers to stay. Following the conversion, some of your 
workers experienced a plateau in their benefit levels for a 
period. This plateau, which some call wear-away, is a natural 
outgrowth of removing the early retirement subsidy. Any subsidy 
employees have earned in your prior plan is legally protected 
but you need not and did not include it in their cash balance 
accounts. So for some period of time, the value of the 
subsidized prior plan benefit exceeded the value of the new 
account. Since these employees were entitled to this higher 
benefit if they left, they experienced a benefit plateau until 
their cash balance account caught up.
    You disclosed this plateau to employees as part of your 
comprehensive disclosure about the conversion. While they would 
have preferred their benefits to keep growing without 
interruption, they understood the plateau resulted from the 
rich subsidies in the prior plan and that continuing to pay 
productive workers to retire early made no sense.
    They also understood you could have removed the subsidy 
from the traditional plan and this too would have produced a 
plateau. With your conversion successfully accomplished you 
were eager to return your focus to growing your business, but 
pension developments intervened. Despite significant legal 
authority to the contrary, a single Federal judge rules that 
the basic cash balance design is age discriminatory. Under this 
theory, each of the 1,200 hybrid plans in the country is 
illegal. Your general counsel tells you that damages in this 
lawsuit are expected to run between $1 and $6 billion, and that 
a growing list of companies faces copycat suits. You learn that 
Congress has prevented the regulatory agencies from addressing 
the age discrimination issues and is now considering 
legislation that would for the first time grant employees a 
legal entitlement to future benefits not yet earned.
    Your company's board grows increasingly nervous. How can we 
risk so much liability on something unrelated to our core 
business, they ask. Why not have say a 401(k) plan only like 
many of our competitors? Will proposals guarantee employees 
pension expectations be extended to other benefit programs? You 
and the board feel you have little choice but to freeze the 
cash balance plan. New hires will get no pension benefits and 
current employees will earn no additional benefits.
    Mr. Chairman and Members of the Committee, as policymakers 
dedicated to the retirement security of American families, we 
cannot imagine this is the result you want. Yet this is 
reality. Several clients of our firm have already frozen their 
hybrid plans and 41 percent of hybrid sponsors say they will do 
so within a year absent legal certainty. It is within your 
power, however, to change this result.
    First, make clear that the basic hybrid designs do not 
violate age discrimination rules. Second, provide legal 
certainty for employers that convert hybrid plans in good 
faith. Third, avoid bans on benefit plateaus. And fourth, 
reject mandates for future conversions that will discourage 
employers from making new benefit commitments.
    Thank you for the opportunity to appear today. I would be 
please today answer your questions.
    [The prepared statement of Mr. Delaplane follows:]

Statement of James M. Delaplane, Jr.,Esq., Attorney, American Benefits 
                        Council, Washington, DC

    Chairman Boehner, Ranking Member Miller, thank you very much for 
the opportunity to appear before you today. My name is James Delaplane 
and I am a partner with the Benefits Group of Davis and Harman LLP. I 
serve as Special Counsel to the American Benefits Council (Council), 
and I am appearing today on the Council's behalf. The Council is a 
public policy organization representing principally Fortune 500 
companies and other organizations that assist employers of all sizes in 
providing benefits to employees. Collectively, the Council's members 
either sponsor directly or provide services to retirement and health 
plans covering more than 100 million Americans.
    The Council is very pleased, Mr. Chairman, that you have called 
this hearing to examine the important policy issues involving hybrid 
defined benefit plans. Many of our members sponsor cash balance and 
pension equity plans and the Council believes that the legal 
uncertainty currently enveloping these hybrid defined benefit plans is 
the most significant and pressing retirement policy issue presently 
before Congress. Congressional action to provide legislative clarity 
and certainty for hybrid plans is urgently needed to prevent (1) the 
demise of these plans, (2) the resulting exit from the defined benefit 
system by a large number of American employers, and (3) the harm to the 
retirement income prospects of millions of American families that will 
unquestionably result.
    Mr. Chairman, we believe it is absolutely critical that the effort 
to craft hybrid legislation be led by the congressional committees of 
jurisdiction and we thank you for spearheading this effort. As you are 
well aware, pension policy is a notoriously complex and technical area, 
one in which it is easy to produce unintended results, such as 
disincentives for employers to remain in our voluntary pension system. 
The legislative process works best when those who are most 
knowledgeable about an area are the ones to tackle the complex issues. 
We applaud your commitment to avoid what has sometimes occurred in the 
past with respect to hybrid plans--a haphazard and incomplete debate 
pursued outside of the committees of jurisdiction and as part of the 
appropriations process.
    In my testimony today, I hope to convey the value of the defined 
benefit system and hybrid plans specifically for millions of Americans 
and their families. I will describe the current legal and regulatory 
landscape that is endangering the continued existence of hybrid plans, 
and set forth why the Council and its members believe congressional 
action is urgently needed to prevent the extinction of these retirement 
programs. Lastly, I will describe the Council's recommendations for 
resolving this pension crisis.
The Value of the Defined Benefit System
    The defined benefit pension system helps millions of Americans 
achieve retirement security. It does this by providing employer-funded 
retirement income that is guaranteed to last a lifetime. Employees are 
not typically required to make any contributions toward their benefits 
in these plans and the assets of the plan are managed by investment 
professionals. Employers, rather than employees, bear the investment 
risk of ensuring that plan assets are sufficient to pay promised 
benefits. And insurance from the Pension Benefit Guaranty Corporation 
means employees'' retirement benefits are guaranteed even if the plan 
or the employer's business experiences financial trouble.
    As of 1998 (the most recent year for which official Department of 
Labor statistics have been published), more than 18 million retirees 
were receiving benefits from defined benefit plans, with over $111 
billion in benefits paid out in that year alone.\1\ Given that 
America's personal savings rate remains one of the lowest among 
industrialized nations \2\ and that average balances in 401(k) plans 
are quite modest, \3\ there is no doubt that in the absence of defined 
benefit pensions fewer Americans would be financially prepared for 
retirement. Furthermore, the absence of defined benefit pensions would 
result in increased strain on federal entitlement and income support 
programs, not to mention an increase in the number of American seniors 
living in poverty.
---------------------------------------------------------------------------
    \1\ U.S. Census Bureau, Statistical Abstract of the United States: 
2002, No. 524 (Source: U.S. Department of Labor, Pension and Welfare 
Benefits Administration, Private Pension Plan Bulletin, Number 10 
winter 2001, and unpublished data).
    \2\ The Organization for Economic Cooperation and Development, Main 
Economic Indicators (Paris: OECD, January 2004).
    \3\ In fact, data from the Employee Benefit Research Institute 
shows that in 2001 the average 401(k) account balance (net of all plan 
loans) was only $43,215 and the median (mid-point) 401(k) account 
balance was a mere $12,810. Facts from EBRI, 401(k) Plan Account 
Balances, Asset Allocation, and Loan Activity in 2001 (June 2003). Even 
when looking at 401(k) plan participants in their 60s who had been at 
their job for at least 30 years, the average account balance was only 
$162,042. This would translate into a relatively meager monthly 
lifetime annuity payment at retirement.
---------------------------------------------------------------------------
    Given these statistics, the value of defined benefit plans to many 
American families is undeniable. Yet we have seen an alarming decline 
in defined benefit plan sponsorship \4\ and today is a particularly 
precarious time for the defined benefit system. Employers are 
increasingly exiting the defined benefit system for a variety of 
reasons, including uncertainty about how future pension liabilities 
will be measured, a flawed pension funding regime marked by complexity 
and volatility, potential changes to the rules governing pension 
accounting, and, most relevant for our discussion today, legal 
uncertainty surrounding hybrid defined benefit plans.\5\ Objective 
observers agree that policymakers must take action to address these 
threats or defined benefit plans and the income they provide to 
American retirees will become increasingly scarce.\6\
---------------------------------------------------------------------------
    \4\ The total number of PBGC-insured defined benefit plans has 
decreased from a high of more than 114,000 in 1985 to 32,321 in 2002. 
PBGC Pension Insurance Data Book 2002, 44 & 72. This downward trend 
becomes even more sobering if you look at just the past several years. 
Not taking into account pension plan freezes (which are also on the 
rise but not officially tracked by the government), the PBGC reported 
that the number of defined benefit plans it insures has decreased by 
7,000 (or 18%) in just the last four years. Id.
    \5\ The Council recently released a white paper discussing in 
detail each of these threats to the defined benefit system, along with 
recommendations for ensuring that defined benefit pension plans remain 
a viable retirement plan design. See American Benefits Council, 
Pensions at the Precipice: The Multiple Threats Facing our Nation's 
Defined Benefit Pension System (May 2004), available at http://
www.americanbenefitscouncil.org.
    \6\ ``Policymakers should take action sooner rather than later in 
order to create greater regulatory certainty for plan sponsors. 
Decisions are needed on the status of cash balance pension plans, 
permanent funding rules, and interest rates to be used in plan 
calculations, accounting treatment related to using smoothing versus 
mark-to-market for investment returns and interest rates, and rules and 
premiums under Title IV of ERISA and the Pension Benefit Guaranty 
Corporation. Until these kinds of policy decisions are made, further 
erosion of the defined benefit system can be expected to continue.'' 
Jack VanDerhei and Craig Copeland, Employee Benefit Research Institute, 
ERISA At 30: The Decline of Private-Sector Defined Benefit Promises and 
Annuity Payments? What Will It Mean?, Issue Brief No. 269 (May 2004).
---------------------------------------------------------------------------
    Before going on, Mr. Chairman, I want to thank you and the members 
of the Committee for enacting a temporary replacement for the 30-year 
Treasury bond interest rate used for pension calculations. As you know, 
one of the threats to the defined benefit system has been the required 
use of an obsolete interest rate, and we sincerely appreciate your 
leadership in enacting a corporate bond replacement rate for 2004 and 
2005. The Council and its members look forward to working with you and 
the Committee to find an appropriate permanent replacement for the 30-
year Treasury bond rate and enacting this replacement in the very near 
future.
The Specific Advantages of Hybrid Defined Benefit Plans
    Hybrid plans are defined benefit pensions that also incorporate 
attractive features of defined contribution plans. The most popular 
hybrid plans are the ``cash balance'' design and the ``pension equity'' 
design. In a cash balance plan, employers provide annual ``pay 
credits'' to an employee's hypothetical account and ``interest 
credits'' on the balance in the account. In a pension equity plan, 
employers provide credits for each year of service and these credits 
are multiplied by an employee's final pay to produce a lump sum figure. 
Hybrid plans not only offer the security of employer funding and 
assumption of investment risk, federal guarantees and required lifetime 
and spousal benefit options, but also show account balances in lump sum 
format, are portable, and provide for a more even benefit accrual 
pattern across a worker's entire career.\7\ Hybrid plan participants 
are able to reap these rewards typical of defined contribution plans 
without bearing any concomitant loss of security (i.e., a decline in 
account balance due to stock market conditions).
---------------------------------------------------------------------------
    \7\ Traditional defined benefit plans tend to provide the bulk of 
earned benefits at the very end of a worker's career.
---------------------------------------------------------------------------
    Employers like hybrid plans primarily because the benefits in the 
plans are so tangible to employees, resulting in greater appreciation 
of the pension program. In fact, a survey published in 2000 found that 
the dominant motives for employer conversions were employee 
appreciation of the plan, facilitating communication with employees, 
and the ability to show the benefit amount in a lump sum format.\8\ 
Many assume that conversions are pursued to cut employer pension costs. 
While this has been the case for some companies, for most employers it 
is neither the rationale for the conversion nor the reality that 
results.\9\ We trust you will agree that, when employers do conclude 
that costs must be reduced, it is better for them to retain an 
affordable defined benefit plan (and one that fits the realities of the 
modern workforce) than to not have one at all.
---------------------------------------------------------------------------
    \8\ Sylvester J. Schieber, et al., Watson Wyatt Worldwide, The 
Unfolding of a Predictable Surprise: A Comprehensive Analysis of the 
Shift from Traditional Pensions to Hybrid Plans 44 (February 2000) (96% 
of respondents indicated employees'' appreciation of the plan was 
either very important or important in the decision to convert to a 
hybrid plan; 93% of respondents indicated facilitation of communication 
and the ability to show the benefit amount in a lump sum format were 
either very important or important in the decision to convert to a 
hybrid plan).
    \9\ Data released just this year shows that retirement plan costs 
have increased an average of 2.2% following a conversion, and when 
companies that were in severe financial distress were excluded from the 
pool, this figure increased to 5.9%. Watson Wyatt Worldwide, Hybrid 
Pension Conversions Post-1999: Meeting the Needs of a Mobile Workforce 
3 (2004). In addition, conversions are often accompanied by 
improvements to other benefit programs, such as 401(k) plans, bonuses, 
and other post-retirement benefits. In fact, one recent survey found 
that when these improvements are taken into account, 65% of respondents 
expected the costs of providing retirement benefits following a cash 
balance conversion to increase or remain the same. Mellon Financial 
Corporation, 2004 Survey of Cash Balance Plans 15. Another survey, 
conducted in 2000, also found that overall costs following a conversion 
were expected to increase or remain the same in 67% of the cases. 
PricewaterhouseCoopers, Cash Balance Notes 4 (May 2000).
---------------------------------------------------------------------------
    Hybrid plans and their level benefit accrual pattern are also 
effective in helping employers attract and retain employees in today's 
fluid job market where few individuals plan or expect to stay with one 
employer for a career.\10\ Employees likewise appreciate hybrid plans 
because they are more transparent, more portable, and deliver benefits 
more equitably to short, medium and longer-service employees than 
traditional pensions, while also retaining the favorable security 
features of the defined benefit system.\11\
---------------------------------------------------------------------------
    \10\ Women rank promoting portable pensions as their top retirement 
policy priority. Center for Policy Alternatives and Lifetime 
Television, Survey: Women's Voices 2000.
    \11\ The Federal Reserve, Cash Balance Pension Plan Conversions and 
the New Economy 5 (Oct. 2003) (``[R]easons that workers may want 
pensions include the desire to earn tax-favored returns, or to realize 
economies of scale on the transaction costs of investment, although 
both of these goals can be realized in a [defined contribution] plan as 
well as a [defined benefit] plan. In a [defined benefit] plan workers 
may also realize the opportunity to insure to some degree against 
mortality, inflation, macroeconomic, and disability risks through 
inter-and intra-generational risk sharing.'').
---------------------------------------------------------------------------
    The unique value of hybrid plans in meeting employee retirement 
plan preferences is demonstrated in a new survey. The survey reveals 
that workers prefer two retirement plan attributes above all others--
the portability of benefits and benefit guarantees.\12\ It is only 
hybrid plans that can deliver both these advantages. Traditional 
defined benefit plans typically do not provide for portability, and 
benefits in 401(k) and other defined contribution plans are not 
guaranteed. Indeed, if policymakers were today working from a blank 
slate to produce the ideal retirement plan, it is a hybrid plan they 
would likely develop. Clearly, preserving hybrid plans as a viable 
pension design is critical if employers are to maintain retirement 
programs that meet employee needs and preferences.
---------------------------------------------------------------------------
    \12\ Watson Wyatt Worldwide 2004, supra note 9 at 6.
---------------------------------------------------------------------------
    Perhaps most important of all, studies show that nearly 80% of 
participants build higher retirement benefits under a hybrid plan than 
a traditional plan of equal cost.\13\ Why? Traditional defined benefit 
plans tend to award disproportionate benefits (often as much as 75% of 
total benefits under the plan) to employees with extremely long 
service. Yet very few employees spend a career with a single 
employer.\14\ Hybrid plans were designed to respond to this reality. 
The advantage of hybrid plans for most workers is confirmed by a recent 
study that shows that if an employee changes jobs just three times in 
the course of his career, she or he can expect to receive in excess of 
17% more in retirement benefits from participating in cash balance 
plans than had his or her employers provided traditional plans 
instead.\15\
---------------------------------------------------------------------------
    \13\ Watson Wyatt Worldwide 2000, supra note 8 at 24-25.
    \14\ Watson Wyatt Worldwide 2004, supra note 9 at 6 -7. In fact, 
only 9.5% of employees work in the same job for 20 years or more. 
Employee Benefit Research Institute.
    \15\ Watson Wyatt Worldwide 2004, supra note 9 at 6. The Federal 
Reserve has likewise reported that ``conversions have generally been 
undertaken in competitive industries that are characterized by tight 
and highly mobile labor markets. Since mobile workers benefit most from 
such conversions, we conclude that this trend may have positive 
implications for the eventual retirement wealth of participants.'' The 
Federal Reserve, supra note 11 at 3.
---------------------------------------------------------------------------
    The advantages of the hybrid plan are not reserved for younger 
workers. Even longer-service workers often fare better under a hybrid 
plan.\16\ One of the many ways in which hybrid plan sponsors address 
the needs of longer-service and older employees is by contributing pay 
credits that increase with the age and service of employees. Recent 
surveys show that 74% of cash balance plan sponsors provide pay credits 
that increase with age or service, \17\ while 87% of pension equity 
plan sponsors do the same.\18\
---------------------------------------------------------------------------
    \16\ Watson Wyatt Worldwide 2000, supra note 8 at 23-25 (February 
2000) (Among the 78 plans studied, on average a worker age 50 with 20 
years of service would have earned benefits 1.48 times as great if he 
had participated in a cash balance plan rather than a traditional 
plan).
    \17\ Mellon Financial Corporation, supra note 9 at 12.
    \18\ Watson Wyatt Worldwide 2004, supra note 9 at 2.
---------------------------------------------------------------------------
    Employers also devote significant energy and resources to 
developing transition assistance programs to help older and longer-
service employees who may not accrue as much in benefits on a going 
forward basis under a hybrid plan as they would under the prior plan. 
Successful conversion assistance techniques vary, but generally include 
one or more of the following: grandfathering some or all current 
employees in the prior pension plan, allowing certain employees to 
choose whether to remain in the traditional plan or move to the hybrid 
plan, providing whichever benefit is greater under either the 
traditional or new formula, providing additional transition pay credits 
in an employee's account over some period of time, or making extra one-
time contributions to employees'' opening accounts. Employers draw from 
these varying techniques and apply them to smaller or larger groups of 
employees as appropriate to suit the needs of their workforce and carry 
out the goals of the conversion. Studies conducted within the last few 
years show that employers provide older and longer-service employees 
with these special transition benefits in nearly all conversions.\19\ 
Indeed, employers'' already significant focus on the needs of older 
workers has only increased in light of public and congressional 
interest in the effect of conversions.
---------------------------------------------------------------------------
    \19\ Mellon Financial Corporation, supra note 9 at 11 (90% of 
conversions contain special transition benefits); Watson Wyatt 
Worldwide 2004, supra note 9 at 4 (89% of conversions contain special 
transition benefits). In those instances where these special transition 
benefits are not provided, it is usually because the business is in 
financial distress at the time of the conversion.
---------------------------------------------------------------------------
    As this data reveals, hybrid plans are proving extremely successful 
in delivering valuable, appreciated, and guaranteed retirement benefits 
to employees of all ages.
The Legal and Regulatory Landscape
    Let me now turn to a discussion of the history of hybrid plans and 
how the current uncertainty in the legal and regulatory landscape came 
about. The first cash balance plan was adopted in 1985 and the first 
pension equity plan was adopted in 1993. For nearly fifteen years after 
adoption of the first cash balance plan, the Internal Revenue Service 
(IRS) regularly issued determination letters for hybrid plan 
conversions indicating that the plans and conversions satisfied all 
Internal Revenue Code requirements (including those related to age 
discrimination). In 1999, however, the IRS announced a moratorium on 
such letters partly in response to several high-profile conversions 
that were receiving significant congressional and media scrutiny. As a 
result of this scrutiny and after thorough review of the issues through 
numerous congressional hearings in the committees of jurisdiction, 
Congress in 2001 enacted legislation to require employers to provide a 
more detailed and more understandable advance notice to participants 
regarding any hybrid conversion (or any other defined benefit plan 
amendment) that significantly reduced future benefit accruals.\20\ At 
the time, some in Congress proposed various benefit mandates and design 
restrictions as a response to cash balance conversions, but these 
proposals were all rejected. Congress concluded that the best response 
to the issues that had been raised was to ensure absolute transparency 
for employees about how their benefits would be affected by hybrid plan 
conversions.
---------------------------------------------------------------------------
    \20\ ERISA section 204(h); Notice of Significant Reduction in the 
Rate of Future Benefit Accrual, 68 Fed. Reg. 17,277 (Apr. 9, 2003) (to 
be codified at 26 C.F.R. pts. 1, 54, and 602).
---------------------------------------------------------------------------
    Benefit Plateaus (``Wear-Away''). Let me now turn to a discussion 
of one of the conversion issues that has generated questions and 
concerns throughout the congressional review of hybrid plans--so called 
``wear-away.'' At the outset, it is important to understand that 
parallel rules in ERISA and the Internal Revenue Code protect all 
benefits that an employee has already earned for service to date.\21\
---------------------------------------------------------------------------
    \21\ ERISA section 204(g); Internal Revenue Code section 411(d)(6).
---------------------------------------------------------------------------
    Thus, despite assertions to the contrary, existing benefits are 
never reduced in a hybrid plan conversion.
    ``Wear-away'' is the term used for the benefit plateau effect that 
some employees can experience in conjunction with a cash balance 
conversion. When employers convert to a cash balance plan, they 
typically provide an opening balance in employees'' cash balance 
account. A benefit plateau results if the value of the employee's cash 
balance account is less than the value of the benefit he or she accrued 
under the prior plan as of the date of the conversion. Until the value 
of the cash balance account catches up to the value of the previously 
accrued benefit, it is the higher accrued benefit to which the worker 
is entitled if he or she departs the company--hence the plateau.\22\ We 
believe that the term ``wear-away'' is, in fact, confusing and even 
misleading, as the employee always receives the higher of the two 
benefit levels and nothing earned is taken away. Thus, we use the term 
benefit plateau throughout the discussion below.
---------------------------------------------------------------------------
    \22\ It is worth noting that the use of benefit plateaus as a 
method of transitioning between benefit formulas has been expressly 
approved under IRS pension regulations for many years. Indeed, plateau 
periods can result from constructive and necessary plan changes, such 
as updating plan mortality assumptions to provide more accurate 
benefits, aligning the benefits of employees from different companies 
in the wake of business acquisitions and mergers, or revising a plan to 
meet new statutory requirements (such as legislative restrictions on 
the amount of benefits that may be paid under a plan).
---------------------------------------------------------------------------
    There have been three leading causes of this plateau effect in the 
conversion context.
      First, the plateau can result simply from a change in the 
rate of interest on 30-year Treasury bonds. Our pension laws require 
that when benefits earned in a defined benefit plan are converted from 
an annuity payable at retirement into a lump sum present value, this 
calculation must be performed using the 30-year Treasury bond rate.\23\ 
As interest rates on 30-year bonds fall, the lump sum present value of 
the benefit earned by the employee prior to the conversion will 
increase.\24\ The result can be that although a worker's previously 
earned benefit and opening cash balance account were both equal to 
$50,000 at the time of conversion, a decrease in 30-year bond interest 
rates can increase the value of the previously earned benefit to 
$55,000. Until the cash balance account reaches $55,000, this worker 
will experience a benefit plateau.
---------------------------------------------------------------------------
    \23\ ERISA section 205(g); Internal Revenue Code section 417(e). 
This required use of the 30-year Treasury bond rate was not changed by 
the recently enacted legislation replacing the 30-year rate for pension 
funding calculations.
    \24\ This is because one needs a larger pool of money today to grow 
to an equivalent benefit at age 65 if that pool will be earning less in 
interest.
---------------------------------------------------------------------------
      Second, benefit plateaus can result when employers 
translate the previously accrued traditional benefit into an opening 
cash balance account using an interest rate higher than the 30-year 
bond rate. When this is done, the value of the opening cash balance 
account will be lower than what the employee would be eligible to take 
under the prior plan (since the present value of that benefit must be 
calculated using the 30-year bond rate). The result is that workers 
will plateau at the higher level until the cash balance account catches 
up. Employers generally use a higher interest rate when they believe 
the 30-year Treasury bond rate is historically low (which has been the 
case in recent years).\25\ Yet because using a higher interest rate can 
produce benefit plateaus and plateaus have been of concern to 
employees, few employers have set opening balances in this way. The 
clear trend has been for employers to determine opening account 
balances using the Treasury rate or a rate more favorable for 
employees.\26\ Thus, this use of higher interest rates is not a 
frequent cause of benefit plateaus today.
---------------------------------------------------------------------------
    \25\ This is yet another reminder of how important it is for 
Congress to move quickly to enact a permanent replacement for the 30-
year Treasury bond rate, including for calculations that determine lump 
sum benefits in defined benefit plans.
    \26\ In a 2000 study of cash balance conversions, Watson Wyatt 
reports that of the 24 plans it reviewed that converted to a hybrid 
design since 1994, 22 of them (92%) set opening account balances using 
the Treasury rate or a rate more beneficial to employees. Watson Wyatt 
Worldwide 2000, supra note 8 at 40; Mellon Financial Corporation, supra 
note 9 at 6 (77% of 101 cash balance conversions did the same).
---------------------------------------------------------------------------
      Third, benefit plateaus can result when employers 
eliminate early retirement subsidies (on a prospective basis) from the 
pension.\27\ A plateau can result in this instance because workers who 
have already earned a portion of an early retirement subsidy prior to a 
conversion will typically have a previously earned benefit under the 
prior plan that is higher than the opening cash balance account (which 
is typically based on the normal retirement age benefit earned under 
the prior plan as of the date of the conversion and does not include 
the value of any early retirement subsidy).\28\ Elimination of the 
early retirement subsidies on a prospective basis is the primary cause 
of benefit plateaus in most conversion cases where plateaus are seen 
today. It should be noted that benefit plateaus can also occur in cases 
where early retirement subsidies are eliminated from traditional 
defined benefit plans.
---------------------------------------------------------------------------
    \27\ An early retirement subsidy provides an enhanced benefit if 
the employee leaves the company at a specified time prior to normal 
retirement age. For example, a fully subsidized early retirement 
benefit might provide an employee the same pension at age 55, say, 
$1,500 per month for life, which he would not normally receive until 
age 65. The ability to earn the higher pension without any actuarial 
discount for the additional 10 years of payments provides a strong 
financial incentive to retire at the earlier age. The value of such an 
early retirement subsidy decreases every year until normal retirement 
age, at which point no subsidy remains.
    \28\ Opening account balances do not typically include the value of 
early retirement subsidies because doing so would provide the value of 
the subsidy to a large number of workers who will work until normal 
retirement age and therefore not be entitled to the subsidized early 
retirement benefits. Those few employers that have included some or all 
of the subsidy in opening accounts have done so as a particular 
conversion assistance technique.
---------------------------------------------------------------------------
    While some may be concerned about the plateau effect resulting from 
subsidy removal, Mr. Chairman, we feel strongly that employers must 
maintain their flexibility to eliminate these early retirement 
subsidies on a going forward basis. Early retirement subsidies are 
certainly a preferable alternative to layoffs and can help a company 
manage its workforce in a humane way. But employers will never adopt 
such a feature of their plan if policymakers make it difficult or 
impossible to eliminate these subsidies prospectively when they no 
longer make sense. Today, for example, given the significant shortages 
that employers experience in certain job categories, it makes no sense 
for them to continue to offer highly-productive employees rich 
financial incentives to retire in their 50s. While current law protects 
any subsidy that employees have already earned for their service to 
date, it wisely allows employers to remove such incentives from their 
plan going forward.
    Moreover, any legislative requirement that employers maintain 
ongoing early retirement subsidies in their pension plans--and this is 
what a ban on plateaus would entail--would be out of step with 
congressional actions regarding our nation's public pension system, 
Social Security. With respect to Social Security, Congress has raised 
the retirement age and repealed the earnings test in order to encourage 
older Americans to work longer. Requiring employers to continue to 
offer private pension plan incentives to retire early would be flatly 
inconsistent with these actions.
    Although we understand that benefit plateaus can be confusing and 
even upsetting to some employees, they result from interest rate 
anomalies and valid actions taken by employers to eliminate early 
retirement subsidies. Nonetheless, given the employee concern, many 
employers design their conversions to mitigate these plateaus or 
eliminate them altogether. Moreover, the disclosure requirements 
enacted by Congress in 2001 (and implemented by the Treasury Department 
through regulations) ensure that employees are fully aware of the 
possible benefit plateau effects of a conversion. The Council believes 
these steps appropriately respond to the concerns that have been raised 
about plateaus.
    Age Discrimination Principles. Subsequent to Congress'' enactment 
of disclosure legislation, the Treasury Department and IRS drafted 
proposed regulations in consultation with the Equal Employment 
Opportunity Commission addressing retirement plan design and age 
discrimination principles. These proposed regulations were issued in 
December 2002. Among other items, the proposed regulations established 
the validity of the cash balance design under the pension age 
discrimination statute and provided guidelines on how employers could 
convert from traditional to hybrid pension designs in an age-
appropriate manner.
    Disregarding the interpretation contained in the proposed 
regulations and other legal authorities, one federal district court 
judge dramatically shifted the focus of the debate surrounding hybrid 
plans by declaring in July 2003 in the case of Cooper v. IBM that 
hybrid plan designs were inherently age discriminatory.\29\ According 
to the court's flawed logic, simple compound interest is illegal in the 
context of defined benefit pension plans.\30\ Under the Cooper court's 
reasoning, a pension design is discriminatory even if the employer 
makes equal contributions to the plan on behalf of all its workers and, 
ironically, even in many instances where the design provides greater 
contributions for older workers. Such a conclusion flies in the face of 
common sense.\31\ It would hold all 1,200 plus hybrid pension plans, 
\32\ regardless of whether adopted as new plans or through conversion 
from traditional plans, to be in violation of the pension age 
discrimination laws.
---------------------------------------------------------------------------
    \29\ Cooper v. IBM Pers. Pension Plan, 274 F. Supp. 2d 1010 (S.D. 
Ill. 2003). The pension age discrimination statute in question provides 
that the rate of a participant's benefit accrual may not decline on 
account of age. The district court interpreted this rule to mean that 
the amount of annuity benefit received at age 65 for a year of service 
cannot be less for an older worker than a younger worker. The 
defendants in the case argued that it is nonsensical from an economic 
perspective to compare the age 65 benefit accrual rate of a 25-year old 
and a 64-year old because the 64-year old will receive his or her 
benefit much sooner and have a much shorter period of time to accrue 
interest. In other words, the ``time value'' of money must be taken 
into account. The court itself acknowledges the strength of this 
argument, stating, ``From an economist's perspective, Defendants have a 
good argument.'' Nonetheless, the court goes on to argue incorrectly 
that the age discrimination laws require rejection of basic economic 
common sense.
    \30\ The court's reading of the 1986 pension age discrimination 
statute would invalidate a broad range of long-standing pension 
designs, including contributory defined benefit plans (common in the 
state and local government sector and among multiemployer plans), plans 
that are integrated with Social Security and plans with pre-retirement 
indexation to help protect employees from the effect of inflation. 
These plans were all regarded as perfectly age appropriate when 
Congress enacted the pension age statute.
    \31\ If the Cooper court's reasoning were applied to the Social 
Security program, even it would be considered age discriminatory.
    \32\ The most recent government data indicates that as of the year 
2000 there were 1,231 hybrid plans covering more than seven million 
participants. PBGC, supra note 4 at 3-6.
---------------------------------------------------------------------------
    The conclusion that all hybrid plan designs are inherently age 
discriminatory begs the question why the Internal Revenue Service 
issued favorable determination letters for fifteen years blessing 
hybrid plan designs and issued proposed regulations providing that the 
cash balance plan design is not inherently age discriminatory. It is 
surprising, at a minimum, that the Cooper decision completely ignored 
this history. Even more astonishing is the fact that the Cooper 
decision ignores the legislative history of the pension age 
discrimination statute adopted in 1986. That legislative history makes 
clear that the intent of Congress was limited to prohibiting the 
practice of ceasing pension accruals once participants attained normal 
retirement age.\33\ Moreover, an example in the 1986 legislative 
history that clarifies a separate but related pension issue describes 
approvingly a type of plan (a ``flat dollar'' plan) that would be 
deemed age discriminatory under the Cooper decision.\34\ It makes 
absolutely no sense that Congress would use as an example of a viable 
pension design one that would fail the age discrimination prohibition 
it was enacting at the very same time.\35\ Lastly, prior to the Cooper 
decision, numerous other federal district courts addressed and rejected 
charges that the basic hybrid plan designs were age discriminatory.\36\ 
These too were ignored in the Cooper decision. Importantly, another 
federal district court decision decided subsequent to Cooper has 
rejected its logic and concluded that the cash balance pension design 
is age appropriate.\37\
---------------------------------------------------------------------------
    \33\ H.R. Conf. Rep. No. 1012, 99th Cong., 2d Sess. at 376-379. A 
number of other federal district courts that have had the opportunity 
to review this issue have likewise concluded that the pension age 
discrimination statute is only applicable to benefit accruals after a 
participant has reached normal retirement age. See Tootle v. ARINC, 
Inc., Civ. Action No. CCB-03-1086 *15-16 (D. Md. June 10, 2004); Engers 
v. AT & T Corp., No. 98-3660, letter op. at 9 (D. N.J. June 6, 2001); 
Eaton v. Onan, 117 F. Supp. 2d 812, 827-29 (S.D. Ind. 2000).
    \34\ H.R. Conf. Rep. No. 1012, 99th Cong., 2d Sess. at 381.
    \35\ Eaton acknowledged this inconsistency and concluded it was 
illogical to read the pension age discrimination statute in such a way 
as to invalidate this example and with it a wide variety of defined 
benefit plans. 117 F. Supp. 2d at 830, 834.
    \36\ Campbell v. BankBoston, N.A., 206 F. Supp. 2d 70 (D. Mass. 
2002) (rejecting the notion that hybrid plan designs are inherently age 
discriminatory, the court stated that a ``claim based on the fact that 
older workers will have a smaller amount of time for interest to accrue 
on their retirement accounts--is not permitted under the [age 
discrimination laws].'' ), aff'd 327 F.3d 1 (1st Cir. 2003); Eaton v. 
Onan, 117 F. Supp. 2d 812, 826 (S.D. Ind. 2000) (in holding that the 
cash balance pension design is not age discriminatory the court stated: 
``Plaintiffs'' proposed interpretation would produce strange results 
totally at odds with the intended goal of the OBRA 1986 pension age 
discrimination provisions.'').
    \37\ Tootle v. ARINC, Inc., Civ. Action No. CCB-03-1086 (D. Md. 
June 10, 2004).
---------------------------------------------------------------------------
    Spurred on by the Cooper decision, cash balance critics in Congress 
pushed through an appropriations prohibition preventing the Treasury 
Department from finalizing its age regulations addressing hybrid plan 
designs and conversions.\38\ Congress at the same time directed the 
Treasury Department to make legislative recommendations regarding 
conversions from traditional to cash balance plans.\39\ In the relevant 
legislative history, however, Congress did make clear that ``[t]he 
purpose of this prohibition is not to call into question the validity 
of hybrid plan designs (cash balance and pension equity). The purpose 
of the prohibition is to preserve the status quo with respect to 
conversions through the entirety of fiscal year 2004 while the 
applicable committees of jurisdiction review the Treasury Department's 
legislative proposals.'' \40\
---------------------------------------------------------------------------
    \38\ See Section 205 of the fiscal year 2004 Omnibus Appropriations 
Act (PL 108-199).
    \39\ These recommendations were recently issued by the Treasury 
Department as part of the Bush Administration's fiscal year 2005 budget 
submission to Congress.
    \40\ H.R. Conf. Rep. No 401, 108th Cong., 1st Sess. at 1185 (2003).
---------------------------------------------------------------------------
    While the Cooper decision is an isolated one, and there is clear 
and significant authority to the contrary concluding that hybrid plans 
are age appropriate, Cooper is a high-profile case that has led to 
copycat class action lawsuits being filed against a number of employers 
for the alleged discriminatory nature of their plan design. Applying 
the rationale in the rulings to date in the Cooper case, ultimate 
damages against the defendants are estimated to be between $1 and $6 
billion dollars. It is this range of figures that are required to 
overcome and ``correct for'' the natural operation of compound 
interest. Employers are understandably extremely anxious about the 
crippling effect of such lawsuits and potential damage awards, and are 
concerned that they will be the next on the growing list of companies 
targeted for class-action suits. While employers certainly expect the 
anomalous Cooper decision ultimately to be overturned on appeal, such a 
result is many years away and many hybrid plan sponsors may find the 
intervening risks unbearable.
The Need for Congressional Action
    Mr. Chairman, the operation of the hybrid pension system is at a 
standstill. Employers cannot get determination letters from the IRS 
regarding the compliance of their plans with legal guidelines. The 
regulatory agencies that normally assist the smooth functioning of the 
system through issuance of periodic interpretive guidance have been 
told by Congress through the appropriations process not to do so. Any 
final resolution of the age discrimination question by appellate courts 
is years away at a minimum.
    Moreover, the judicial system is not the appropriate forum for 
resolving an issue of this sort, which has far-reaching public policy 
ramifications. The very nature of the judicial process makes it 
difficult for these types of broad public policy issues to receive 
thorough examination much less appropriate handling. Not all 
stakeholders are present before the court and the system-wide 
ramifications are intentionally given less weight than the narrow legal 
issues.
    Perhaps some are tempted to view this current legal uncertainty and 
regulatory standstill as a victory of sorts. Perhaps they will see the 
slowdown in the number of hybrid plan conversions as a positive 
development for employees. They should not. In a recent survey, 41% of 
hybrid plan sponsors said they would freeze their plans if the legal 
uncertainty was not resolved within a year.\41\ As we noted earlier, 
other pressures in the defined benefit system are already prompting 
employers to consider freezes or terminations. The hostile climate for 
hybrid plans and the litigation risks and extreme damage potential are 
unfortunately starting to make this an easier and easier decision for 
corporate decision-makers.\42\ If employers are pushed to abandon 
hybrid plans, we will lose a retirement vehicle that delivers higher 
benefits to the vast majority of employees and meets workers'' key 
retirement plan needs--for portability and benefit guarantees--all 
while utilizing transition methods that protect older workers. How, 
exactly, is this good for employees and their families?
---------------------------------------------------------------------------
    \41\ Hewitt Associates LLC, Current Retirement Plan Challenges: 
Employer Perspectives 2 (2003).
    \42\ A majority of companies have made it clear that if hybrid 
plans become untenable they will be offering only a 401(k)/defined 
contribution program going forward. They will not be reverting to a 
traditional defined benefit plan design. Deloitte Consulting LLP, 
Pension Crisis Prompting Majority of Surveyed Companies to Change or 
Consider Changing Their Plans 2 (2004). While defined contribution 
plans provide valuable retirement benefits, defined benefit plans 
provide unique retirement security features for employees and their 
families that are hard to replicate. Employees are typically best 
served by the ability to participate in both types of plans. The 
Council believes that our nation's retirement income policy should be 
crafted to promote maximum flexibility so that employers and employees 
can utilize the plan or plans that best suit their needs.
---------------------------------------------------------------------------
    The prospect of hybrid plan freezes and terminations poses another 
risk--to the Pension Benefit Guaranty Corporation (PBGC). We must be 
mindful that many of the companies that sponsor hybrid plans are 
financially strong companies in healthy industries. These strong 
companies today pay insurance premiums to the PBGC. If these employers 
are forced to exit the defined benefit system, the loss of premiums 
could aggravate the long-term financial challenges faced by the agency. 
Hybrid plan participants comprise 21% of all plan participants 
protected by the PBGC insurance program. Hence employer insurance 
premiums on these participants comprise 21% of the revenue generated by 
the PBGC through its per-participant premium program.\43\ If hybrid 
plans were removed from the defined benefit system, future premiums to 
the PBGC would be reduced significantly.
---------------------------------------------------------------------------
    \43\ This figure is derived from data collected by the PBGC 
indicating that, as of the year 2000, the PBGC protected 34,342,000 
single-employer defined benefit plan participants, 7,155,000 of whom 
participate in hybrid plans. PBGC, supra note 4 at 6.
---------------------------------------------------------------------------
    Mr. Chairman, the situation today is distressingly clear. The harms 
that result from today's legal uncertainty are unmistakable. The 
regulatory agencies and courts are unable to act effectively to prevent 
these harms. Only through prompt legislative action can Congress rescue 
hybrid defined benefit plans and prevent the damage to the retirement 
security of millions of American families that will unquestionably 
result from their demise.
Recommendations
    Clarify the Age Appropriateness of the Hybrid Plan Designs. The 
first and most important step for Congress to take is to clarify that 
the cash balance and pension equity designs satisfy current age 
discrimination rules. Congress must make clear that the legal 
interpretation holding these designs discriminatory merely because the 
accounts of younger workers have more years to earn interest is 
unfounded. Rather, Congress must clarify that age discrimination in 
hybrid plans is measured by the pay credits contributed on workers'' 
behalf. If the pay credits for older workers are the same, or greater, 
than the pay credits for younger workers, then the pension age 
discrimination rules are satisfied.\44\ This clarification is 
consistent with the legal authorities and with plain common sense. It 
will end the needless legal jeopardy in which every hybrid plan sponsor 
today finds itself and will preserve the important benefits that 
millions of employees today earn under these plans.
---------------------------------------------------------------------------
    \44\ The hybrid plan proposals made by the Treasury Department in 
the Bush Administration's fiscal year 05 budget contain a provision 
recognizing that this is the appropriate way to evaluate age 
discrimination for hybrid plans. However, this clarification regarding 
the hybrid plan designs is prospective only in the Treasury 
recommendations, leaving employers with hybrid plans already in 
existence open to legal suit regarding the legality of their plan 
designs.
---------------------------------------------------------------------------
    Provide Legal Certainty for Past Hybrid Conversions. In addition to 
clarifying the age appropriateness of the hybrid plan designs, the 
Council believes it is essential for Congress to provide legal 
certainty for the hybrid plan conversions that have already taken 
place. These conversions were pursued in good faith and in reliance on 
the legal authorities in place at the time. Transition methods, such as 
benefit plateaus, that have not given rise to concerns about age 
discrimination in other contexts should not now do so merely because of 
the context of hybrid plan conversions.
    Resolve Legal Uncertainties with Anti-Employee Effects. Beyond 
resolving the questions about the basic hybrid designs and the 
treatment of past conversions, the Council believes Congress should 
take a number of additional steps to provide legal clarity regarding 
hybrid plans. Addressing these additional issues will very concretely 
aid the employees who participate in hybrid plans.
      Whipsaw. First, we recommend that you make clear that, so 
long as a cash balance plan does not credit interest in excess of a 
market rate of return, the proper benefit payment to a departing 
employee is that employee's account balance. This will remedy the so-
called ``whipsaw'' problem that has forced employers to reduce the rate 
of interest they pay on employees'' cash balance accounts.\45\
---------------------------------------------------------------------------
    \45\ Whipsaw is the term used to describe the anomaly that occurs 
when employers must project a departing employee's cash balance account 
forward to normal retirement age using the plan's interest crediting 
rate and then must discount the resulting amount back to a present 
value using the statutorily-mandated 30-year Treasury bond rate. When 
an employer's interest crediting rate is higher than the 30-year rate, 
this process results in a plan liability to the employee in an amount 
greater than the employee's actual account balance. The only way to 
avoid this ``whipsaw'' effect is to reduce a plan's interest crediting 
rate to the same 30-year rate the law requires for discounting future 
benefits into present value lump sums. In the wake of several court 
decisions mandating this whipsaw effect, this is what cash balance 
sponsors around the country have done to insulate themselves from 
liability. However, the unfortunate result is that employees in cash 
balance plans earn lower rates of interest on their accounts than would 
otherwise be the case. Even a modestly lower rate of interest earned on 
an account over the course of a career can translate into a significant 
reduction in the ultimate account balance at retirement. The Treasury 
Department helpfully included this same resolution of the whipsaw 
problem in its legislative recommendations contained in the Bush 
Administration's fiscal year 05 budget proposal. As with the provision 
regarding hybrid plan design, however, the recommended whipsaw fix was 
prospective only. This would require employers to continue to pay low 
interest rates on employees'' existing cash balance accounts.
---------------------------------------------------------------------------
      Inclusion of Early Retirement Subsidies. Second, we 
recommend that you make clear that employers may include some or all of 
the value of early retirement subsidies in employees'' opening account 
balances. A number of employers have chosen to do this as a conversion 
technique to assist those nearing early retirement eligibility but some 
in the regulatory agencies are suggesting that to do so is problematic 
under our current pension age discrimination rules.
      Protection of ``Greater Of'' Transition Method. Third, we 
recommend that you make clear that employers that voluntarily choose to 
offer employees the greater of the benefits in the prior traditional or 
new hybrid plan do not run afoul of the pension back-loading rules. 
Some regulators have suggested this ``greater of'' conversion approach 
violates these rules.
      Protection of Employee-Friendly Transition Techniques. 
Fourth, some conversion approaches that employees and Members of 
Congress have praised (choice, greater of, grandfathering in the prior 
plan) are likely to violate the non-discrimination rules over time. 
Why? The group of typically older employees who remain under the prior 
plan formula will over time and very naturally have a greater and 
greater proportion of so-called highly-compensated employees (those 
making $90,000 and above) and may well be the only group eligible for 
continued accrual of benefit features exclusive to the prior 
traditional plan (e.g., early retirement subsidies). This creates a 
problem under the non-discrimination rules. We urge you to make clear 
that these employee-friendly conversion techniques can be pursued.
    Reject Benefit Mandates That Prevent Employers from Modifying 
Benefit Programs. Some in Congress are seeking to impose specific 
benefit mandates when employers convert to hybrid pension plans. For 
example, some would require that employers pay retiring employees the 
greater of the benefits under the prior traditional or new hybrid 
plan.\46\ Others would require employers to provide employees the 
choice at the time of conversion between staying in the prior 
traditional plan or moving to the new hybrid plan.\47\ Pursuant to a 
directive from Congress, the Treasury Department has also made 
legislative recommendations regarding requirements for hybrid plan 
conversions undertaken in the future. The Treasury proposal would 
require employers to pay benefits at least as high as were provided 
under the prior traditional plan for a period of five years following 
the conversion.
---------------------------------------------------------------------------
    \46\ See H.R. 1677, which has been introduced by Representative 
Bernie Sanders (I-VT).
    \47\ See H.R. 2101, which has been introduced by Representative 
George Miller (D-CA).
---------------------------------------------------------------------------
    These proposals may perhaps sound innocuous to some, and indeed 
some employers have voluntarily adopted the transition techniques that 
would be mandated under these proposals, but each of the proposals 
embraces a fundamental and truly radical shift in the rules of the game 
for our nation's voluntary employer-sponsored benefits system. Under 
these proposals, Congress would be (1) guaranteeing employees future 
retirement plan benefits for service that the employees have not yet 
performed, and (2) preventing employers from changing the benefit 
programs they voluntarily offer. Indeed, Congress would be converting 
the natural and understandable hopes and wishes of employees that their 
benefits will remain the same into concrete legal rights. Such 
enshrinement of expectations is a fundamental departure from the 
existing rules of the voluntary benefits system. The Council believes 
this would be an extremely unwise--and extremely counterproductive--
step for Congress to take.
    Under such regimes, it is unfortunately clear what actions 
employers will take. If they conclude that a traditional defined 
benefit plan is no longer meeting business and employee needs, they 
will not remain in the defined benefit system through conversion to a 
hybrid plan. They will exit the defined benefit system altogether 
knowing they can avoid these unprecedented mandates by simply utilizing 
a defined contribution plan going forward. As discussed above, this is 
typically not the response that best serves employees'' retirement 
income needs.
    Perhaps even more damaging than pushing employers from the defined 
benefit system is the dangerous precedent that would be set by these 
mandates that seek to enshrine expectations. Employers will naturally 
ask themselves whether, if other developments in the benefits and 
compensation landscape come in for heightened scrutiny, Congress will 
respond by preventing them from making changes to those programs 
(through imposition of greater of, mandated choice or hold-harmless 
requirements). Will employers be unable to redesign their health plans? 
Will they be unable to remove early retirement subsidies from their 
traditional defined benefit plans? Will they be unable to reduce cash 
bonuses? Will they be unable to shift from profit-sharing to matching 
contributions in their defined contribution plans? Will they be unable 
to reduce the degree of price discount in their stock purchase 
programs? Where exactly will it end? There appears to us to be no 
principled stopping point.
    Given the extremely significant administrative burdens, financial 
costs and legal exposure that already accompany voluntary employer 
sponsorship of benefit programs today, we hope all who believe in 
employer-provided benefits as we do will see that these are not the 
questions you want stirring in the minds of corporate decision-makers. 
They can only result in a world where employees are offered fewer 
benefits.
Conclusion
    The American Benefits Council believes that hybrid defined benefit 
plans play an invaluable role in delivering retirement income security 
to millions of Americans and their families. Nevertheless, hybrid plans 
are facing legal uncertainties that threaten their continued existence. 
Of these, the most pressing threat is a rogue judicial interpretation 
that declares all hybrid plans in the nation illegal. To prevent 
widespread abandonment of hybrid plans by employers and the resulting 
harm to employees, we hope Congress will provide the legislative 
certainty and clarity for hybrid pension plans we have recommended 
above.
    Thank you again, Mr. Chairman and Ranking Member Miller, for the 
opportunity to appear today. I would be pleased to answer any questions 
you may have.
                                 ______
                                 
    Chairman Boehner. Ms. Collier.

    STATEMENT OF ELLEN COLLIER, DIRECTOR OF BENEFITS, EATON 
                  CORPORATION, CLEVELAND, OHIO

    Ms. Collier. Chairman Boehner, Ranking Member Miller, thank 
you for the opportunity to appear here today. My name is Ellen 
Collier, and I am the Director of Benefits for Eaton 
Corporation. Eaton is a diversified industrial manufacturer 
with world headquarters in Cleveland, Ohio. We have over 51,000 
employees worldwide, including 27,000 employees in more than 40 
States.
    I am appearing today on behalf of the Coalition to Preserve 
the Defined Benefit System, a broad based employer coalition 
that works exclusively on legislative and regulatory issues 
related to hybrid pension designs.
    This is a critical time for defined benefit pension plans 
and hybrid plans in particular. Congressional action is 
urgently needed to confirm the validity of cash balance and 
pension equity designs. If Congress does not clarify the 
current legal uncertainty, employers facing the threat of class 
action lawsuits will increasingly be forced to abandon these 
retirement programs. Given the success of hybrid plans in 
delivering meaningful guaranteed retirement benefits to today's 
workers, abandonment of these programs would be disastrous for 
employees and for our Nation's retirement system. Employees 
will not win if the current uncertainty persists.
    Let me now discuss why we at Eaton concluded that a cash 
balance plan was right for us. Eaton's diverse business nature 
and acquisition activity created a challenge for our retirement 
programs. Our challenge is to continually attract and retain 
high level talent and to reduce the confusion resulting from 
multiple pension structures.
    Eaton began to examine pension plan alternatives in the 
mid-90's. While this was under way, we acquired Aeroquip 
Vickers, a company with about 5,000 nonrepresented employees. 
These employees had no defined benefit pension plan, making the 
development of a new pension design even more urgent.
    We considered several options for a new pension design, but 
in the end we decided that a cash balance plan was best for 
Eaton and our employees. Why? The simplicity, visibility, 
portability and ease in integrating acquired companies into 
Eaton. Once we settled on an ongoing design we had to make sure 
we responded to the needs of employees that were already in 
existing pension designs. All new hires would enter the cash 
balance plan on 1/1/02 as would the Aeroquip Vickers employees. 
Fifteen thousand nonrepresented employees would get an informed 
choice effective 1/1/03 between remaining in their existing 
traditional plan and switching to the cash balance pension 
plan.
    Employee reaction to our cash balance design was 
overwhelmingly positive. It is important to note that choice 
may not make sense for all employers. Companies need to have 
flexibility to modify their retirement plans to meet their 
individual business needs.
    Let me emphasize Eaton did not introduce a cash balance 
plan to reduce costs. In fact, the cash balance design has 
increased costs. Although the choice process required a 
significant amount of money and resources, the cost of 
congressional inaction would be far greater. If certain 
proposed judicial remedies were applied to Eaton, the cost to 
modify our plan could curtail discretionary spending in vital 
areas like research and development. Furthermore, there would 
be increased litigation, confusion and complexity if we were 
forced to modify or freeze our plan at this time. The resulting 
damage to employee morale and trust would greatly disrupt 
Eaton's day-to-day manufacturing operations. Without 
legislative action, the efforts to align our benefit structure 
with our business needs will have been wasted.
    Legislation is the only effective way to address today's 
uncertainties surrounding the hybrid pension designs. Why? 
Congress has indicated through the appropriations process that 
it does not want these important policy issues being determined 
by the agencies, and final resolution of the age discrimination 
question by appellate courts is years away at a minimum. This 
will be too late to address the litigation risks that are 
already beginning to drive employers from the system. In the 
meantime, the retirement security of millions of American 
families will remain in limbo.
    To prevent widespread abandonment of pension plans by 
employers, Congress must clarify the legality of hybrid plans. 
Thank you again for the opportunity to appear today. I would be 
pleased to answer any questions.
    [The prepared statement of Ms. Collier follows:]

 Statement of Ellen Collier, Director of Benefits, Eaton Corporation, 
                             Cleveland, OH

    Chairman Boehner, Ranking Member Miller, thank you for the 
opportunity to appear today. My name is Ellen Collier and I am the 
Director of Benefits at Eaton Corporation. Eaton Corporation is a 
diversified industrial manufacturer headquartered in Cleveland, Ohio. 
We have over 50,000 employees worldwide, including over 27,000 
employees in 100 locations in the U.S. The states with our greatest 
concentration of employees are Michigan, Ohio, Pennsylvania, North 
Carolina and South Carolina. In total, we have employees in over 40 
states.
    Eaton has four main business groups that manufacture highly-
engineered components: Fluid Power, which manufactures hydraulic 
components, hoses and connectors, and Aerospace products; Electrical, 
which manufactures residential and commercial power distribution 
equipment; Automotive, which manufactures engine valves, lifters and 
superchargers; and Truck, which manufactures transmissions for heavy 
and medium duty trucks.
    Our 2003 sales topped $8 billion, with sales in over 100 countries. 
The business mix of the company has evolved significantly in the past 
10 years as a result of over 50 acquisitions and 48 divestitures.
    I am appearing today on behalf of the Coalition to Preserve the 
Defined Benefit System, a broad-based employer coalition that works 
exclusively on legislative and regulatory issues related to hybrid 
plans. The Coalition's nearly 70 member companies, which range from 
modest-size organizations to some of the largest corporations in the 
U.S., sponsor hybrid defined benefit plans covering more than one 
million participants.
    Before I turn to the specifics of the hybrid issue, I want to thank 
you Chairman Boehner, Ranking Member Miller and other members of the 
Committee for your hard work earlier this year to enact a corporate 
bond replacement for the obsolete 30-year Treasury bond rate. As you 
know, we defined benefit plan sponsors face a range of challenges today 
and having an appropriate replacement rate was critical to the 
functioning of the pension system.
The Need for Legislative Action
    I want to thank you for calling this hearing to address what is the 
most pressing challenge today in the defined benefit system--the legal 
uncertainty surrounding hybrid plans, and in particular the radical 
judgment by a single court that hybrid plans are age discriminatory. 
Congressional action is urgently needed to confirm the dominant view--
expressed by all other legal authorities--that the cash balance and 
pension equity designs satisfy current age discrimination rules.\1\ 
Absent such action by Congress to clarify the current legal 
environment, employers facing the threat of copycat class action 
lawsuits over the validity of their plan designs will increasingly be 
forced to abandon these important retirement programs. Given the 
success of hybrid plans in delivering meaningful, guaranteed retirement 
benefits to today's workers, \2\ abandonment of these programs would be 
a disastrous result for employees and for our nation's retirement 
system. None of us should kid ourselves that somehow employees win if 
the current uncertainty persists. Nor should any of us assume that a 
retreat from hybrid plans will be accompanied by a return to 
traditional defined benefit plans. Indeed, it is far more likely that 
employers will abandon defined benefit plans altogether.
---------------------------------------------------------------------------
    \1\ The Treasury Department recently withdrew proposed regulations 
addressing hybrid plans and age discrimination, which had the potential 
to provide the needed clarity. The Treasury acted in response to clear 
indications--expressed through the congressional appropriations 
process--that Congress did not want these issues definitively addressed 
by the regulatory agencies. I.R.S. Announcement 2004-57, I.R.B. 2004-
27.
    \2\ Nearly 80% of employees earn higher benefits under a hybrid 
plan than a traditional plan of equal cost. Watson Wyatt Worldwide, The 
Unfolding of a Predictable Surprise: A Comprehensive Analysis of the 
Shift from Traditional Pensions to Hybrid Plans 24-25 (February 2000). 
As discussed below, those employees who do better under a traditional 
defined benefit plan are typically granted transition assistance and/or 
remain under the traditional formula after the hybrid plan is 
introduced.
---------------------------------------------------------------------------
    To give you a feel for the valuable role hybrid plans play, let me 
now discuss why we at Eaton concluded that a cash balance plan was 
right for us. Our experience is comparable to those of many other 
companies in our Coalition.
The Need for a New Pension Design
    Eaton's presence in various lines of business, and our substantial 
acquisition activity, created a challenge for our retirement programs: 
We needed to continue to attract and retain high-level talent to remain 
competitive and continue our growth, and we also needed to reduce the 
confusion and administrative cost resulting from multiple pension 
structures inherited through various acquisitions. Through different 
acquisitions and across different lines of business we had 6 ongoing 
pension designs for 15,000 non-union represented employees. These 
included two final average pay designs, one Social Security offset 
design, two flat-dollar multiplier designs, and one cash balance 
design. Based on employee survey results, we also knew we needed to 
make our pension plans easier for employees to understand.\3\
---------------------------------------------------------------------------
    \3\ This correlates with the general experience of other employers. 
Surveys show that improving communication about and employee 
appreciation of the pension plan, as well as being able to show 
benefits in a lump sum format, are the most important factors 
underlying employer conversions to hybrid plans. Watson Wyatt Worldwide 
2000, supra note 1 at 44.
---------------------------------------------------------------------------
    Eaton began to examine pension plan alternatives in the mid-1990's. 
We knew the resulting design would need to be attractive to high-skills 
talent, easy to understand, and suitable to a mobile workforce. This 
attention to mobility was important--not only in the labor marketplace, 
but also within Eaton, as we do have employees that transfer between 
business groups with different pension plans. Under our existing 
traditional designs, one employee could have benefits from two pension 
plans, simply by transferring from Pittsburgh (headquarters of our 
Electrical group) to Minneapolis (headquarters of our Fluid Power 
group). Finally, any new retirement program would have to permit 
seamless integration of new employees brought on as a result of 
acquisitions. This was necessary in order to provide equitable and 
uniform benefits across our workforce and to enhance Eaton's ability to 
grow.
    While the examination of pension plan alternatives was underway, 
Eaton acquired Aeroquip Vickers, a company with about 5,000 non-union 
represented employees. These employees had a defined contribution plan 
from the prior owner, but no ongoing defined benefit plan--their 
pension plan had been frozen many years before. We at Eaton felt 
strongly that we wanted to provide these employees once again with the 
security of a defined benefit plan--in addition to Eaton's 401(k) plan 
(which has an employer match). We knew that employer funding and 
assumption of investment risk, professional investment management and 
federal insurance guarantees translated into tangible retirement income 
and significant peace of mind for employees. Thus, the need to 
integrate the Aeroquip Vickers employees into Eaton's benefit structure 
made the development of a new pension design even more urgent.
Key Considerations
    We considered several options for a new pension design, including a 
final average pay plan, a pension equity plan, and a cash balance plan. 
We even considered a defined contribution-only program (which we did 
not prefer, since it lacked the security of a defined benefit plan). In 
the end, the simplicity, visibility, portability, and ease with which 
an acquired company could be integrated led us to choose a cash balance 
design.\4\ Along the way, we kept abreast of all regulatory and 
judicial developments to ensure we were designing a plan that would 
meet the relevant legal standards. Like most other companies that 
consider switching to a cash balance plan, Eaton engaged the top legal, 
actuarial, and human resources consulting available to help with this 
process.
---------------------------------------------------------------------------
    \4\ Once again, Eaton's reasons are consistent with those of other 
employers that move to hybrid plans. Watson Wyatt Worldwide 2000, supra 
note 2 at 44.
---------------------------------------------------------------------------
    Now that the basic hybrid designs have been called into question, 
employers facing a set of circumstances similar to ours would have far 
fewer options. One choice would be to stay with the traditional pension 
design, which tends to deliver meaningful benefits to a relatively 
small number of career-long workers, has limited value as a recruitment 
device in today's marketplace and makes integration of new employees 
difficult. The other alternative would be to exit the defined benefit 
system and provide only a defined contribution plan, which while an 
important and popular benefit offering, provides none of the security 
guarantees inherent in defined benefit plans. Clearly, it is employees 
that lose out as a result of today's uncertainty surrounding hybrid 
plans.
    As we at Eaton analyzed our specific situation, we took into 
account the needs of employees that were already in our other pension 
designs. We knew that a cash balance design might not meet the needs of 
every current employee in our existing traditional plans. However, we 
also knew that forcing current workers to remain in their existing 
traditional defined benefit plan, while working side-by-side with new 
workers who earned what might be perceived as a more valuable benefit 
under the new cash balance design, was also not desirable.
    Once we settled on cash balance as our ongoing design, we focused 
on the particular transition approach we would adopt. We were aware of 
the diversity of transition approaches and knew that each of these 
transition techniques had proven successful at addressing the needs of 
particular companies'' older workers. Such approaches include 
grandfathering employees in the prior traditional plan, offering 
employees the choice between the prior and new hybrid formulas, 
providing the ``greater of'' the benefits under the prior or hybrid 
plan, providing transition pay credits or making one-time additions to 
employees'' opening cash balance accounts.
    These special transition techniques are used in the vast majority 
of conversions and the variety of approaches provides the flexibility 
companies need to address their unique circumstances and employee 
demographics.\5\ Indeed, congressional concerns about how older and 
longer-service workers are treated during conversions have been 
successfully addressed by employers through the use of the variety of 
transition protections.\6\
---------------------------------------------------------------------------
    \5\ Mellon Financial Corporation, supra note 4 at 11 (90% of 
employers provide special transition benefits); Watson Wyatt Worldwide, 
Hybrid Pension Conversions Post-1999: Meeting the Needs of a Mobile 
Workforce 4 (2004) (89% of employers provide special transition 
benefits). Those employers that do not (and that solely convert the 
prior accrued benefit into an opening account balance without 
additional transition techniques) are typically experiencing financial 
distress at the time of the conversions. Yet despite their financial 
challenges, they are interested in retaining a defined benefit plan 
that delivers meaningful benefits across their workforce.
    \6\ This discussion of conversions highlights another reason why 
legislative action is so urgently needed. Many employers that have 
converted to hybrid plans using these successful and generous 
conversion methods have nonetheless been unable to obtain a 
determination letter from the Internal Revenue Service (IRS) stating 
that their plan complies with the requirements of the Internal Revenue 
Code. This is due to the fact that the IRS announced a moratorium on 
issuance of such letters for hybrid conversions in September 1999 
pending review of some of the hybrid issues by the IRS national office. 
Memorandum from the Internal Revenue Service, to the EP/EO Division 
Chiefs (Sept. 15, 1999). It has become clear that the IRS will not 
begin issuing determination letters (for either past conversions caught 
up in the moratorium or new conversions) until Congress resolves the 
legal uncertainty surrounding hybrid plans.
---------------------------------------------------------------------------
    The absence of determination letters harms both employers and 
employees. The determination letter process works as a partnership 
between employers and the government to ensure that plans are 
maintained in accordance with our nation's very complex pension 
statutes and regulations. The fact that this process has broken down 
means plans are not getting the definitive guidance they rely upon to 
operate their plans in full compliance with the law.
    We decided that all 15,000 current non-union employees--regardless 
of age or service--would be able to choose whether to remain in their 
existing traditional plan or earn a pension benefit under the cash 
balance formula. This choice would be effective 01/01/03. All of the 
recently acquired non-union Aeroquip Vickers employees would enter the 
new cash balance plan on 01/01/02, and all non-union Eaton employees 
hired on or after 01/01/02 would enter the new cash balance plan.
    We should emphasize that Eaton did not introduce a cash balance 
plan to reduce cost, and in fact the new plan increased costs in the 
short-term, and will slightly increase plan costs in the long term. 
This is described in more detail below.
Description of Plan Design
    Our new cash balance design--the Eaton Personal Pension Account, or 
EPPA--consists of several important features. Each participant earns 
monthly pay credits based on the sum of their age and years of service 
(including any service with an acquired company). These credits range 
from 5% of pay up to 8%, increasing as the sum of age and years of 
service increases. To reiterate, we contribute higher pay credits to 
the cash balance account of older employees and those with longer 
service. Indeed, providing pay credits that increase with age or 
service is the typical approach in hybrid plans.\7\ Under Eaton's plan, 
the pay credits accumulate, with interest based on the rate of interest 
for 30-year Treasury bonds, to create the ``personal pension account.'' 
This design benefits employees of a company acquired by Eaton since it 
recognizes past service with that company when calculating pay credits. 
The cash balance design is also helpful in recruiting mid-career 
talent, since age (and not just service) is a component in the 
calculation of pay credits. Note that we received an IRS determination 
letter for this basic cash balance design in November of 2002 as it 
applied to the new Eaton hires and the Aeroquip Vickers employees (none 
of whom experienced a conversion).\8\ We have also received 
determination letters for our other active cash balance plan, and 
another cash balance plan that has since been frozen due to a spin-off.
---------------------------------------------------------------------------
    \7\ Seventy-four percent of 146 employer respondents to a Mellon 
survey provided pay credits in their cash balance plans that increased 
with age or service. Mellon Financial Corporation, 2004 Survey of Cash 
Balance Plans 9. Eighty-seven percent of pension equity plans analyzed 
in a recent Watson Wyatt study provided pay credits that increased with 
age or service. Watson Wyatt Worldwide 2004, supra note 4 at 2.
    \8\ Due to the IRS moratorium on determination letters discussed 
above, we do not have a determination letter for our core cash balance 
conversion affecting Eaton employees as of 1/1/03.
---------------------------------------------------------------------------
    An employee who chose to switch to the new Eaton Personal Pension 
Account would start with an opening account balance, equal to the value 
of their pension benefit under the existing traditional pension plan--
including any early retirement subsidies or supplements.\9\ Since one 
of our goals with the new design was to make our pension plan easier 
for employees to understand, we felt that using an opening balance 
approach, as opposed to using the existing traditional formula for past 
benefits and a cash balance formula for future benefits (the so-called 
``A+B'' approach), was appropriate. To calculate these opening 
balances, we assumed a retirement date of the later of age 62 or 01/01/
06. Employees whose prior pension formula was tied to their final pay 
(this included the vast majority of the employees eligible for making 
an informed pension choice) also received indexing credits on the 
opening balance amount for as long as they remained active employees. 
These indexing credits were based on annual changes in the Consumer 
Price Index (CPI) to mimic the effect that pay increases would have had 
on the employees'' prior pension benefit. These indexing credits were 
in addition to the ongoing interest and pay credits mentioned above. 
So, each month a participant's balance would increase by pay credits, 
interest credits on the prior balance (including any past pay credits), 
and indexing credits (on the opening balance only).
---------------------------------------------------------------------------
    \9\ An early retirement subsidy in a pension plan provides a 
financial bonus for employees to retire early. To provide a simple 
example of a fully subsidized benefit, a worker retiring at age 55 
might receive the full $1,000 per month pension benefit he would 
normally only be entitled to at age 65. In other words, there is no 
actuarial reduction in benefits for the early retirement date. One 
thousand dollars per month for life beginning at age 55 is more 
valuable than $1,000 per month for life beginning at age 65; hence the 
subsidy. The subsidy declines in value if the employee remains at the 
company beyond age 55 and has no remaining value if the employee works 
until 65. In contrast, early retirement supplements are additional 
temporary benefits payable until Social Security normal retirement age. 
Employers have taken a variety of approaches to the question of whether 
to include early retirement subsidies in employees'' opening account 
balances. Some have chosen not to do so since it is impossible to know 
at the time of conversion whether an employee will actually leave the 
company at a time in the future when they would have qualified for the 
subsidy. Others, like Eaton, have included some or all of the value of 
the subsidy in the opening cash balance account as one technique to 
minimize the effect of the conversion for employees nearing early 
retirement eligibility. It is important to note that current law 
protects any subsidy that an employee may have already earned at the 
time of a conversion. To qualify for this subsidy, the employee must of 
course retire at the retirement eligibility age. Of equal importance, 
current law also allows employers to remove such incentives from their 
plans on a going forward basis.
---------------------------------------------------------------------------
    A final, but important, note regarding this plan design change is 
that we made several costly changes to the existing traditional plans 
as well. Our intention was to remove certain differences in the plan 
designs in order make the choice process even more equitable. For 
instance, we added a non-spousal death benefit and an enhanced 
disability pension provision to the traditional plans--both were 
features of the new cash balance design--to ensure that an employee's 
choice would not be skewed by concerns over unexpected death or 
disability. We had concluded that the existing ``spouse-only'' death 
benefit in our traditional plans was not meeting the needs of single 
parents working at Eaton.
    Along with changes in our pension plan, we also made important 
changes in our 401(k) savings plan. These changes included permitting 
diversification of the company stock matching contribution. The 
decision to permit diversification had been made prior to news reports 
of troubled company savings plans, such as Enron. Under the changes we 
have adopted, all company stock matching amounts will be fully 
diversifiable by the end of 2004.

Informed Choice Process
    After deciding on the design, and to give existing employees 
choice, we had to ensure that the new plan, and the choice, were 
communicated clearly to all affected participants. For the recently 
acquired Aeroquip Vickers employees, who would be receiving a new 
pension for the first time since joining Eaton, we issued Summary Plan 
Descriptions, held on-site meetings, and created a website where 
employees could model future EPPA benefits under a variety of economic 
assumptions.
    For the choice process, we drafted written communication materials 
with the intent of satisfying--and, in fact, exceeding--ERISA section 
204(h).\10\ Each employee received a detailed Decision Guide, an 
individualized Personal Choice Statement, and an easy-to-read Quick 
Comparison Chart. In developing these materials, we kept in mind the 
high standard that had been set by Kodak--whom Senator Moynihan 
publicly cited as the ``gold standard'' for hybrid conversion 
communications--during its choice process, and strived to meet or 
exceed it. In addition, we made continual use of employee focus group 
feedback to refine these materials.
---------------------------------------------------------------------------
    \10\ Section 204(h) of ERISA requires employers to provide advance 
notice of amendments to defined benefit plans that provide for a 
significant reduction in the rate of future benefit accrual. Congress 
amended section 204(h) as part of the Economic Growth and Tax Relief 
Reconciliation Act of 2001 to require employers to provide a more 
detailed and more understandable notice of any hybrid conversion or 
other plan amendment that significantly reduces future accruals. This 
reflected Congress'' view that the appropriate response to the issues 
that had been raised about cash balance conversions was to ensure 
transparency rather than to impose benefit mandates on employers. The 
Treasury Department has subsequently issued regulations carrying out 
this expanded notice requirement. Notice of Significant Reduction in 
the Rate of Future Benefit Accrual, 68 Fed. Reg. 17,277 (Apr. 9, 2003) 
(to be codified at 26 C.F.R. pts. 1, 54, and 602).
---------------------------------------------------------------------------
    The Decision Guide explained, in detail, the features of the 
participant's existing traditional plan and the EPPA, including details 
regarding the calculation of the opening balance. This document 
displayed charts of both options--the current plan and the EPPA--and 
how they compared at future ages under a certain set of assumptions, 
using hypothetical examples. In addition, we explained the concept of 
wear-away, \11\ and graphically described the effect it could have on 
employees. The Quick Comparison Chart was a side-by-side comparison of 
the main provisions of each option. We should note that Eaton's 
approach minimized the effect of wear-away. The inclusion of early 
retirement supplements and subsidies, as well as the effect of indexing 
credits, mitigated the effect of, and shortened the duration of, wear-
away in most cases. In fact, often it was the inclusion of early 
retirement supplements in the value of the protected benefit under the 
existing current design--which is not required by law--that caused an 
appearance of wear-away.\12\
---------------------------------------------------------------------------
    \11\ Wear-away is the benefit plateau effect that some employees 
can experience incident to a cash balance conversion. When employers 
change to a cash balance plan, they typically provide an opening 
account balance in the cash balance account. A benefit plateau results 
if the value of the employee's cash balance account is less than the 
value of the benefit he accrued under the prior plan as of the time of 
the conversion. Until the value of the cash balance account catches up 
to the value of the previously accrued benefit, it is the higher 
accrued benefit to which the worker is entitled--hence, the term 
``plateau.'' This benefit plateau typically results from the fact that 
the prior accrued benefit includes an early retirement subsidy while 
the opening account balance does not. It should be noted that wear-away 
has long been approved by the regulatory agencies as a valid method for 
transitioning between benefit formulas.
    \12\ Those employees who experienced a wear-away as part of the 
conversion process did so only because they chose the new cash balance 
formula, concluding that even with some period of wear-away the new 
cash balance design was best for them.
---------------------------------------------------------------------------
    The Personal Choice Statement used actual individualized 
participant data so that each employee could compare their estimated 
future benefit accruals under each option, under a certain set of 
assumptions. The data used for these statements was audited in advance 
of, and in anticipation of, this project. In particular, each of the 
15,000 eligible employees was asked to review and confirm or correct 
their work history so that accurate service data was used for any 
estimate.
    After the written materials were sent out, we held over 250 
educational meetings and web casts at all 100 U.S. and Puerto Rico 
locations. Spouses and financial advisors of employees were also 
invited to attend these meetings, which were led by independent third-
party pension experts.
    We also developed a website where employees could model 
individualized scenarios based on their own differing economic 
assumptions, including salary increases and interest rate assumptions. 
In addition, the Choice Website contained all the educational 
information that was included in the written materials.
    If employees had questions, they could call the Pension Choice 
Helpline, where independent third-party pension experts answered 
questions about the different plans and ran individualized comparisons 
on the spot. If there was a question that the Pension Choice Helpline 
representatives could not answer, we made sure the employee was 
connected to someone at Eaton who could answer his or her question.
    If an employee did not make a choice, he or she remained in his or 
her existing traditional plan. In addition, we permitted employees to 
make a one-time change in their initial choice during a ``grace 
period.''

The Reception
    At the end of the day, we wanted to make sure that all participants 
had enough information to make an informed choice. Based on the 
overwhelmingly positive reaction we received from employees, we believe 
we accomplished that goal.
    Across the board, employee reaction was very positive regarding the 
pension choice process. The vast majority of employees said that the 
materials provided helped them make an informed decision. In fact, 
employee feedback indicates that this process helped employees 
understand their existing traditional pension plan as well as the new 
cash balance option. In addition, we received many comments that this 
process only strengthened the trust that existed between Eaton and its 
employees. We received no letters of complaint, and encountered no 
disruption in daily business operations during the conversion process.
    In the end, about one-third of eligible employees chose the EPPA. 
The breakdown by age and service went as expected. Of the employees 
more than 20 years away from retirement, over 60% elected to switch to 
the EPPA. Of the employees at retirement age, or within 10 years of 
retirement, over 80% elected to remain in their existing traditional 
pension plan. However, there were several instances where, after 
modeling personalized scenarios and reviewing examples in the Decision 
Guide, employees close to or at retirement eligibility chose the EPPA. 
It was not unusual for the EPPA to provide a greater benefit for a 
retirement eligible employee some years in the future, largely due to 
the inclusion of early retirement supplements and subsidies in the 
opening balance and the application of indexing credits. Had we kept 
these employees in their current pension design, we would have deprived 
them of a chance to increase their pension benefit, even at a point 
late in their careers. Of the employees between 10 and 20 years from 
retirement, over 40% switched to the EPPA.
    I was in the ``in-between'' group mentioned above, and although I 
chose to remain in the existing traditional plan, both benefit designs 
had distinct advantages depending on my expectations regarding my 
future career path. Before joining Eaton I worked at a company where I 
participated in a cash balance plan for 12 years. As a mid-career hire 
at Eaton, and as a full-time working mother, it's important to me to 
have retirement benefits that fit my needs. The employee reaction to 
Eaton's decision to implement a cash balance plan and provide an 
informed choice was overwhelmingly positive. This, along with similar 
data from numerous surveys, indicates that employees understand and 
appreciate the need for companies to have flexible retirement programs 
that fit the needs of today's workforce.
    All in all, the choice process set a new standard at Eaton for 
communicating change throughout the company. However, we recognize that 
choice may not be the right answer for other businesses and other 
employee populations and, under different circumstances, it might have 
been the wrong answer for Eaton. Some employers, for example, have 
focused on grandfathering employees or pursuing a ``greater of'' 
approach rather than asking their employees to choose between the 
plans. Other companies, while scrupulously protecting benefits already 
earned (as current law requires), have been limited by economic 
circumstances in the degree of special transition benefits they can 
provide.
    Our Coalition believes it would be extremely unwise to mandate 
particular transition techniques for future conversions, as some in 
Congress have proposed to do, since a broad range of methods is 
available to ensure that employees are treated fairly in the transition 
process. One mandated conversion method--or even several--would deny 
employers needed flexibility to customize their transition approaches 
to their particular workforce. Such conversion mandates--to pay the 
greater of the traditional or hybrid benefits or to offer choice, for 
example--also provide employees with a guaranteed right to future 
benefits that have not yet been earned.
    These mandates would represent a disturbing shift in the basic 
norms of American industrial relations. Employee hopes or expectations 
as to future benefits would be converted into explicit legal 
entitlements. This profound change from existing principles suggests 
that the terms and conditions of a worker's employment may not be 
revised from those in existence at the time the employee is hired. Such 
a regime would rob employers of the ability to adapt to changed 
circumstances and would undermine the business flexibility on which 
America's prosperity and robust employment are built. Presumably, 
policymakers would not restrict employers from being able to alter--on 
a prospective basis--their 401(k) match level or the design of their 
health plan--but this is exactly the kind of restriction that mandated 
conversion techniques impose. Our Coalition sees no end to the harm if 
Congress goes down the path of converting expectations into legal 
rights. Certainly, employers will be extremely reluctant to institute 
any new benefit program in the future, and those employers that today 
do not offer pension or health plan coverage for their employees will 
be extremely unlikely to do so.

The Cost
    It is very important to note that Eaton did not introduce a cash 
balance plan to reduce costs. In fact, the long-term ongoing cost of 
the EPPA is slightly higher than the steady-state costs of the prior 
plan designs. In addition, we incurred higher short-term costs due to 
the fact that most participants maximized their benefits, and therefore 
the cost to Eaton, when they made their individual pension choice. 
Outside of plan-related costs, Eaton spent several million dollars in 
the overall choice effort, including consulting fees, communication 
materials and pension modeling tools, as well as lost work hours due to 
employee meetings.
    Based on press accounts about cash balance conversions, one might 
expect that Eaton's cost experience is atypical. This is not the case. 
Recent surveys confirm that conversions to hybrid plans typically 
increase costs. Recent data from a Watson Wyatt Worldwide study 
examining 55 large companies that have recently converted from 
traditional defined benefit plans to hybrid plans shows that retirement 
plan costs increased by an average of 2.2% following a conversion.\14\ 
This figure further increased to 5.9% when seven companies that were in 
severe financial distress were excluded from the pool.\15\
---------------------------------------------------------------------------
    \14\ Watson Wyatt Worldwide 2004, supra note 4 at 3.
    \15\ Id. In addition, conversions are often accompanied by 
improvements to other benefit programs, such as 401(k) plans, bonuses, 
and other post-retirement benefits. In fact, one very recent survey 
found that when these improvements are taken into account, 65% of 
respondents expected the costs of providing retirement benefits 
following a cash balance conversion to increase or remain the same. 
Mellon Financial Corporation, supra note 4 at 15. Another survey, 
conducted in 2000, also found that overall costs following a conversion 
were expected to increase or remain the same in 67% of the cases. 
PricewaterhouseCoopers, Cash Balance Notes 4 (May 2000).
---------------------------------------------------------------------------
The Ramifications if Congress Does Not Provide Clarity
    If Congress does not move quickly to provide legal certainty for 
hybrid plans, many Americans may soon lose valuable retirement 
benefits. The current legal landscape is ominous. One rogue judicial 
decision has made the threat of age discrimination class action 
litigation a very real concern for employers.\16\ Potential damage 
awards from such suits could reach astronomical figures--into the 
hundreds of millions or even billions of dollars--and the potential 
amounts of these awards continue to grow the longer the plans remain in 
effect. In Eaton's case, the cost to modify our plan for alleged ``age 
discrimination'' in its design could curtail our ability to commit 
funds for other important functions, such as for research and 
development--and this is for a plan that has not yet been in existence 
for 3 years!
---------------------------------------------------------------------------
    \16\ This decision, Cooper v. IBM Pers. Pension Plan, 274 F. Supp. 
2d 1010 (S.D. IL 2003), held that the cash balance and pension equity 
hybrid designs were inherently age discriminatory. The court concluded 
that such pension designs violate the pension age discrimination 
statute which provides that the rate of a participant's benefit accrual 
may not decline on account of age. The court interpreted the pension 
age discrimination statute to mean that the amount of annuity benefit 
received at normal retirement age for a period of service (e.g., 1 
year) cannot be less for an older worker than a younger worker. Such a 
conclusion is clearly contrary to the basic ``time value of money'' 
principle that a younger worker will have a longer period of time to 
accrue interest, and thus will have a larger benefit amount at 
retirement based on an equal contribution today. Under this decision, 
any pension plan that contains a compound interest feature is 
inherently age discriminatory. This misguided logic not only impugns 
hybrid plans, but also contributory defined benefit plans (common among 
state and local government employers), plans that are integrated with 
social security and plans that provide indexing of benefits to guard 
against inflation. All other federal courts that have addressed this 
issue, including those decided subsequent to the Cooper case, have 
reached the opposite conclusion and indicated that the cash balance 
design is age appropriate. Tootle v. ARINC, Inc., Civ. Action No. CCB-
03-1086 (D. MD June 10, 2004); Campbell v. BankBoston, N.A., 206 F. 
Supp. 2d 70 (D. MA 2002); Eaton v. Onan, 117 F. Supp. 2d 812 (S.D. IN 
2000). See also Godinez v. CBS Corp., 31 Employee Benefits Cas. (BNA) 
2218 (C.D. CA 2002), afff'd, No. 02-56148, 2003 U.S. App. LEXIS 23923 
(9th Cir. 2003); Engers v. AT&T, No. 98-3660 (D. NJ June 6, 2001). 
Nonetheless, a number of employers have now been sued for the alleged 
discriminatory nature of their plan design based on the Cooper 
decision.
---------------------------------------------------------------------------
    Beyond the cost in dollars, there would be increased complexity in 
the administration of our benefit programs and the programs would be 
harder to understand should we have to ``correct'' for the natural 
effect of compound interest. Moreover, any change to our well-received 
conversion process would greatly disrupt our day-to-day business 
operations. If a remedy would require Eaton to redo the choice process, 
there would be even more confusion, complexity and business disruption. 
Worst of all, there would be a huge impact on employee morale and 
employee trust. Eaton prides itself on building trust with its 
employees, and we believe that the cash balance conversion experience 
strengthened that trust.
    Like the majority of other employers who switch to a cash balance 
design, Eaton made every effort to act in ``good faith'' during this 
conversion. As opposed to adopting a less costly, less secure and less 
controversial defined contribution design, Eaton incurred additional 
cost through the conversion process, provided a variety of 
communications materials and tools, used a fair conversion method, and 
minimized the effects of wear-away. While Eaton was able to provide a 
generous ``choice'' conversion, it is by no means the only suitable 
method by which employers can change benefit designs, and does not 
reflect the business realities for all companies. Without legislative 
clarification that our cash balance design is age appropriate, the 
efforts we made to align our benefit structure with our business needs, 
while at the same time enhancing benefits for and strengthening trust 
with our employees, will have been wasted.
    In today's economic climate, prudent business leaders seek to 
minimize corporate risks not associated with the company's core 
business. Absent congressional action to mitigate such risks associated 
with hybrid plan sponsorship, these leaders will likely be forced to 
terminate or freeze hybrid pension plans in order to limit exposure to 
class-action litigation with 9 or 10 figure damage awards. In an 
October 2003 survey, 41% of hybrid plan sponsors said they would freeze 
their plans if the legal uncertainty surrounding hybrid plans was not 
resolved within a year.\17\ Based on the most recent government data 
available, this translates into approximately 506 hybrid plan 
terminations or freezes, which could affect as many as 3 million 
participants and their families.\18\ It should be noted that the bulk 
of these employers have concluded that the traditional pension design 
no longer meets the needs of large numbers of their current and future 
employees. Thus, these employers are extremely unlikely to return to a 
traditional defined benefit plan after freezing or terminating their 
hybrid plan. This unfortunate reality of widespread freezes and 
terminations will only become more stark should legislative resolution 
take longer.
---------------------------------------------------------------------------
    \17\ Hewitt Associates LLC, Current Retirement Plan Challenges: 
Employer Perspectives 2 (2003).
    \18\ These figures are based on data from the Pension Benefit 
Guaranty Corporation (PBGC) indicating that, as of the year 2000, there 
were 1,231 hybrid plans in existence with 7,155,000 participants. PBGC, 
Pension Insurance Data Book 2002, at 5-6.
---------------------------------------------------------------------------
    Why must Congress be the one to act to clarify the validity of the 
hybrid designs? First, Congress has indicated through the 
appropriations process that it does not want these important policy 
issues being determined by the regulatory agencies. As a result, the 
Treasury Department has withdrawn its proposed regulations addressing 
hybrid plans and age discrimination principles, which had the potential 
to settle the open issues regarding hybrid plans. Second, final 
resolution of the age discrimination question by appellate courts is 
years away at a minimum, too late to address the litigation risks that 
are beginning to drive employers from hybrid plans and the defined 
benefit system. Neither are the courts the appropriate forum to 
consider the broad public-policy ramifications (for employees and their 
families, for employers, and for our nation's retirement policy) of 
holding the cash balance and pension equity designs to be age 
discriminatory.
    In order to prevent widespread abandonment of hybrid plans by 
employers--and the loss of retirement security this would produce for 
millions of American families--Congress must clarify that the cash 
balance and pension equity designs are age appropriate under current 
law. Congress should also provide legal protection for the hybrid plan 
conversions that have already taken place in good faith reliance on the 
legal authorities operative at that time. Finally, should Congress 
decide to establish rules to govern future conversions, our Coalition 
strongly recommends that it avoid the mandates guaranteeing future 
benefits that will merely accelerate employers'' departure from the 
defined benefit system.
Conclusion
    Mr. Chairman, I want to thank you once again for calling this 
hearing. Legislation is the only effective way to address today's 
uncertainty surrounding hybrid pension designs and prevent further 
erosion of the retirement benefits of American families. Our Coalition 
looks forward to working with you and members of the Committee to 
achieve this objective.
    Thank you, again, for the opportunity to appear today. I would be 
pleased to answer any questions you may have.
                                 ______
                                 
    Chairman Boehner. Professor Clark.

    STATEMENT OF DR. ROBERT L. CLARK, PROFESSOR, COLLEGE OF 
  MANAGEMENT, NORTH CAROLINA STATE UNIVERSITY, RALEIGH, NORTH 
                            CAROLINA

    Dr. Clark. Mr. Chairman, Members of the Committee, ladies 
and gentlemen, I appreciate the opportunity to testify today on 
characteristics of cash balance plans. Over the past 5 years I 
have written a series of papers examining advantages and 
disadvantages of hybrid plans and the impact of the transition 
from traditional defined benefit plans to cash balance plans. 
The Committee staff has reviewed many of these papers.
    My comments today will focus on three important issues that 
form the basis of the current policy debate on cash balance 
plans. First, starting a new cash balance plan where there was 
none previous to that, what are the primary issues and are 
there concerns; second, converting a traditional defined 
benefit plan to a cash balance plan; and, third, the presence 
of the present value of pension benefits, how does it change 
with continued work and what is this wear-away issue?
    First, starting a new pension plan, Table 1, which is in 
the testimony I think available to all the Members, illustrates 
the different characteristics of defined benefit plans, defined 
contribution plans, and hybrid plans. By looking at this, even 
a cursory review of these characteristics would convince us 
that most workers, some workers, and some firms are likely to 
prefer traditional defined benefit plans. Other workers and 
other firms are likely to prefer defined contribution plans. 
And some other workers will prefer cash balance or their hybrid 
plans. It is this choice that makes our system work in many 
regards.
    Cash balance plans, for example, do not have some of the 
characteristics of defined contribution plans that worry many 
policy analysts. Cash balance plans tend to cover all workers, 
participation is not voluntary. Investment risk is primarily 
borne by the firm and not individual workers. They provide an 
annuity option. In addition, cash balance plans provide the 
portability that is lacking in most traditional defined benefit 
plans. So workers in firms can choose what kind of pension plan 
most directly fits their own preferences and needs.
    Thus, I do not see any social policy reason for excluding 
cash balance plans as an option for firms and workers when they 
are first considering the adoption of their plans.
    Second, converting existing defined benefit plans. In fact 
most of the adverse reaction to cash balance plans has come not 
from new startup plans but from conversion of traditional plans 
and the potential loss expected by senior workers. I would just 
reiterate the comments of Mr. Miller, who used very carefully 
the words ``can lose unexpected benefits.'' these are not 
earned benefits, they are not promised benefits, as he must 
well know, instead the potential to gain these benefits.
    In a series of papers I have examined the change in pension 
wealth associated with plan conversions. Virtually all of these 
studies show that plan conversions are likely to increase the 
lifetime pension wealth of most workers covered by pension 
plans on their current jobs. This finding is due primarily to 
the portability or the various lack of portability inherent in 
defined benefit plans.
    In contrast, traditional defined benefit plans also 
subsidize the long tenured senior workers while penalizing 
mobile workers. As a result of this subsidy most senior workers 
who expect to remain with the company until early retirement 
will, in fact, face a decline in potential retirement benefits. 
Please note I use the word ``potential.''
    It is important to consider what relevant comparisons 
should be used in assessing the impact of plan conversions. 
Most discussion has assumed that the relevant counter-factual 
is that the worker would remain with the firm, the old pension 
would remain in place, and wage growth would continue. This 
perception is in part due to some of the ways that companies 
have in the past communicated their information to their 
workers.
    Again, Mr. Miller mentioned the pension calculators that 
companies use, that actually assume, make those assumptions. 
But are these assumptions consistent with the reality that we 
face today? Again Mr. Miller went through a long list of 
problems in our economy today that make those assumptions seem 
less reasonable or less likely.
    First, a worker could be fired or laid off from their job. 
Second, the plant could close. Third, the company could be 
facing difficult financial problems and terminate a plan 
without starting a new plan. Fourth, the company could be 
facing difficult financial problems and reduce the rate of 
growth of earnings. Fifth, the company could terminate the 
defined benefit plan and start a defined contribution plan. 
Sixth, the worker could leave for personal reasons. If any of 
these events were to happen, they would have essentially the 
same impact as the company converting from a traditional 
defined benefit plan to a cash balance plan.
    So one would have to then question why would you pick out 
one of these options and have legislation restricting it when 
all of these other events would have essentially the same 
effect.
    In several papers I have shown that the potential loss in 
pension wealth is basically the same as the early retirement 
subsidy in these plans. And as Mr. Delaplane pointed out, this 
is certainly a key in the future with population aging, concern 
about Social Security financing, and other issues related to 
our slowly growing labor force. The idea that companies want to 
restrict or encourage workers to leave is going to be less 
important. They may actually be trying to encourage them to 
stay in the traditional defined benefit plan when the early 
retirement subsidies are certainly not consistent with that.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Clark follows:]

  Statement of Dr. Robert L. Clark, Professor, College of Management, 
              North Carolina State University, Raleigh, NC

INTRODUCTION
    Coverage of employees by traditional defined benefit plans has been 
declining for almost three decades. Initially, the shift was away from 
traditional defined benefit plans to greater coverage by defined 
contribution plans, especially 401 (k) plans. This trend was most 
prominent among small employers (Clark and McDermed, 1990). Beginning 
in the 1980s, many large employers began converting their traditional 
defined benefit plans to hybrid plans, primarily cash balance plans. 
Interestingly, the conversion to cash balance plans has generated a 
major policy debate while the more comprehensive shift to defined 
contribution plans has continued with relatively little controversy.
    In my testimony today, I will address key aspects of the plan 
conversion process and why changes in pension plans are being made. In 
addition, I will review the policy issues associated with these 
conversions and place them in the broader context of labor market 
policies in the U.S. Two questions seem paramount. First, should 
federal regulations allow traditional defined benefit plans, defined 
contribution plans, and cash balance plans to continue to exist? 
Second, are new regulations needed to deter plan conversions for 
workers covered by an existing defined benefit plan or at least to 
compensate these workers for potential loses incurred by the plan 
conversion? Given the current discussion in Congress and the on-going 
judicial review, it is important to understand the pros and cons of 
each type of pension plan and to determine whether these plans help 
working Americans to achieve an adequate retirement income.
CHOOSING A PENSION PLAN TYPE
    The value of participation in any type of pension plan is a 
function of lifetime working patterns, rates of growth in annual 
earnings, risk preferences, tax rates, and retirement ages. Employers 
offer pensions to help attract, retain, motivate, and then retire 
workers. Both employers and employees are interested in the cost of 
providing a dollar of pension benefits. In a free labor market, workers 
search for the firm and the compensation package that best meets their 
preferences while companies use pensions (or the lack their of) to 
entice individuals with the desired employment characteristics to 
become part of their workforce.
    Workers who expect to change employers frequently will desire jobs 
that have a higher percentage of total compensation in earnings and 
pensions that are portable. Employees who believe that they will remain 
with a company for their entire career will be satisfied with pensions 
that penalize turnover and are based on their final earnings. Companies 
that offer noncompetitive compensation packages will tend to have more 
difficulty hiring and retaining quality workers. Employers must attempt 
to provide the compensation package that provides the greatest value to 
workers per dollar of cost.
    Over time, events can change the pension plan that workers and 
firms find most desirable. Changes in regulatory costs, shifts in labor 
demand, and the changing composition of the labor force will affect the 
type of pension that provides the highest value per dollar of cost to 
workers. In response, companies may (1) transform traditional defined 
benefit plans to cash balance plans, (2) terminate the defined benefit 
plan and establish a defined contribution plan, or (3) terminate the 
defined benefit plan and offer no pension plan. Any of these changes 
will have an impact on current workers and in general, a change in 
pension plan will make some workers better off while potentially having 
an adverse impact on others. My testimony today examines the three 
basic choices of pension plans that are currently available in the U.S. 
labor market. The basic premise is that some workers and some firms 
will prefer traditional defined benefit plans while other workers and 
firms will find greater value in defined contribution and cash balance 
plans.
    Employers offer pension plans to their employees because they help 
in the management of human resources. Retirement policies are integral 
components of employment contracts. Some individuals will seek out 
firms that provide pension plans and alter their careers to remain with 
these employers, while other workers have a higher preference for 
current income and will select employers who do not provide deferred 
compensation. Traditional defined benefit plans impose financial 
penalties on workers who leave ``too early'' and thus these firms will 
tend to have lower turnover rates than companies with defined 
contribution and cash balance plans.
    Most traditional defined benefit plans also provide substantial 
early retirement subsidies. These subsidies to retire at ages as early 
as 50 or 55 have been a major determinants of retirement ages in these 
firms. Early retirement subsidies are one of the major differences 
between traditional defined benefit plans and cash balance plans and it 
is the elimination of these subsidies that is often at the core of the 
debate over plan conversions.

TYPES OF PENSION PLANS
    Pension plans have traditionally been divided into two basic types: 
defined benefit and defined contribution plans; however, in the past 
decade many large employers have converted their traditional defined 
benefit plans into cash balance plans. These three plan types differ 
substantially in the manner in which benefits are determined, their 
methods of funding, who bears the investment risk associated with the 
pension portfolio, the portability of benefits from one company to 
another, and the regulatory status of the two types of plans. The basic 
characteristics of defined benefit plans, defined contribution plans, 
and cash balance plans are shown in Table 1.
    In general, defined benefit plans promise a specified benefit based 
on years of service, average earnings over the last three or five years 
of employment, and a generosity parameter chosen by the firm.\1\ These 
plans typically provide significant retirement benefits to career 
employees but award much smaller benefits to employees who remain with 
the company for a shorter period. In defined contribution plans, 
employers and employees make periodic contributions into individual 
accounts for each worker. Workers often determine the size of their 
annual contributions and they decide how their pension funds will be 
invested. Cash balance plans are legally defined benefit plans but have 
many characteristics of defined contribution plans. The benefit in 
these plans is specified as a lump sum that workers may claim when they 
leave the firm.
    Each type of plan has advantages and disadvantages for workers and 
for the plan sponsor. Which plan type is best for employees? The 
highest value plan for a worker will depend on individual risk 
preferences and expected lifetime work patterns. None of the three plan 
types dominates the other two for all workers. Some workers and firms 
will be better off with traditional defined benefit plans while others 
will have greater lifetime income if they participate in a defined 
contribution or cash balance plan.
    The major disadvantage to workers of participation in defined 
benefit plans is the lack of portability of the pension benefits. 
Workers who change jobs frequently will have significantly lower 
benefits than those that remain with a single firm throughout their 
careers. Lower total retirement benefits are the result of final pay 
benefit formulas. Final earnings for workers who leave before 
retirement are not indexed to prices or future wage growth. Individuals 
who leave a pension-covered job relatively early in their careers will 
have retirement benefits from their first job based on average earnings 
many years in the past.
    A key point for policy makers to understand is that defined benefit 
plans systematically provide greater benefits to senior workers with 
long years of service while providing only minimal benefits to mobile 
workers who expect to remain with the company for only a few years. 
Advocates that argue that traditional defined benefit plans are the 
``best'' type of pension tend to ignore the limited benefits that these 
plans provide to short-term workers. The more frequent transitions of 
working women means that they are most vulnerable to suffering repeated 
losses in potential pension wealth throughout their working careers.
    Another disadvantage of defined benefit plans is that the method of 
benefit accrual and the value of benefits are more difficult to 
understand compared to the value of individual accounts under defined 
contribution plans. Managers report that workers often do not 
understand the difference between the current and future value of these 
pensions, the annual gain in value or cost associated with the plans, 
and the impact of job changes on ultimate retirement benefits (Clark 
and Munzenmaier, 2000). The difficulty in communicating the value of 
defined benefit plans has led many employers to conclude that their 
employees do not give them sufficient credit for the costs of defined 
benefit pensions. This implies that workers do not correctly assess the 
cost and value of defined benefit plans. Managers often give this as a 
reason for converting traditional defined benefit plans to cash balance 
plans with individual accounts that are easier to explain to their 
workers (Clark, Haley, and Schieber, 2001).
    The retirement benefit for participants in defined contribution 
plans depends on the size of employer and employee contributions 
throughout the work life and the returns to the investments made with 
the pension funds. Under these plans, the value of the pension at any 
point in time is the account balance. If contributions are made at a 
relatively even rate throughout a worker's career, the value of the 
account will grow more proportionately than under a defined benefit 
plan of comparable generosity. An important advantage of these pension 
plans is that the benefits are portable and can be taken with the 
workers when they change jobs.
    Potential disadvantages of defined contribution plans for employees 
are contributions are often voluntary, workers bear the investment risk 
of these plans, and the benefits are typically paid in the form of lump 
sum distributions. Many defined contribution plans require workers to 
decide if they will make a pension contribution. Employer contributions 
may be contingent on employee contributions. Workers who are myopic may 
decide not to make pension contributions early in their careers and 
will therefore accumulate relatively low retirement accounts. In 
defined contribution plans, workers generally must make decisions 
concerning how to invest their funds. Some participants may invest too 
conservatively while others may make more risky choices that affect the 
size of their ultimate retirement accounts.
    Primary policy concerns with the growing incidence of defined 
contribution plans include their reliance on worker decisions on when 
to participate and the level of contributions, the financial market 
risk that the worker must bear, and use of lump sum distributions. 
Thus, workers may start contributing late in their working lives and 
accumulate relatively low retirement benefits, they may contribute too 
little and thus have only small retirement accounts, or they may make 
bad investment choices that could dramatically lower retirement 
benefits. The lack of annuitization also raises the possibility that 
workers and spouses could outlive their retirement income.
    In the past decade, many large employers have increasingly 
converted traditional defined benefit plans into cash balance plans 
(Brown, et al, 2000). In many regards, the conversion of traditional 
defined benefit plans into cash balance plans by employers is an 
attempt to offer workers a pension plan that combines desirable 
features of both defined benefit and defined contribution plans. Cash 
balance plans are legally defined benefit plans but they contain many 
of the features of defined contribution plans that workers seem to 
prefer.
    In cash balance plans, all qualified workers are covered by the 
plan and the firm typically makes all of the contributions into the 
pension fund. The firm is responsible for insuring that sufficient 
monies are in the pension account to pay all promised benefits and the 
plans are regulated as defined benefit plans. Benefits are specified as 
an account balance similar to defined contribution plans. Upon leaving 
the firm, the worker receives the full value of the pension account. 
The account grows each year from new contributions and from the 
crediting of a specified return on the existing monies in the account. 
In addition, cash balance plans tend to be more age neutral in their 
retirement incentives compared to defined benefit plans.
    Compared to traditional defined benefit plans, cash balance plans 
provide the advantage of distributing benefits more equally across 
years of service, are easier to explain to workers, and provide 
portable benefits to mobile workers. Compared to defined contribution 
plans, cash balance plans typically provide universal coverage to 
qualified workers, keep the investment risk with the employer, and 
offer a choice of an annuity or a lump sum distribution.
    Given the differences in plan characteristics and how they affect 
ultimate retirement benefits, it is easy to see why some workers and 
firms will prefer each type of pension plan. Consider an economy where 
employer-based pensions were previously banned. Now let this legal 
restriction be eliminated and assume that firms could choose to 
establish a traditional defined benefit plan, a cash balance plan or a 
defined contribution plan. It is likely that we would observe a 
distribution of plan types that would reflect the human resource 
objectives of firms and the preferences of their workers. Plan choices 
would maximize the well being of workers and their employers.

ESTABLISHING NEW PENSION PLANS
    Based on this analysis, it is difficult to understand why anyone 
would oppose limiting the choice of pension plan types that are 
available to workers and firms provided that they are consistent with 
broad national retirement objectives and federal regulations. Each of 
the three plan options provides value to workers; however, workers with 
different characteristics will benefit more or less under various plan 
options. Individuals who remain with a single firm for many years, 
especially those that stay with the company until they retire are the 
big winners in traditional defined benefit plans. In contrast, more 
mobile workers accumulate far less benefits and are the big losers in 
defined benefit plans.
    The trend toward greater use of defined contribution plans and the 
transition toward cash balance plans clearly indicates changes in the 
composition of the labor force and the emergence of workers who do not 
expect to remain with the same company over their entire career. In 
addition, workers are now leery about accepting the implicit promise of 
lifetime employment that many larger firms formerly offered. In the 
past, many workers employed by large industrial corporations thought 
they had lifetime jobs and were willing to accept benefits that were 
based on that premise. With the recent history of significant layoffs 
of senior workers, many of these corporate giants have lost their 
traditional aura as companies where workers, even highly productive 
ones, can expect to spend an entire career. Thus, workers are much less 
willing to participate in defined benefit plans and are much more 
likely to demand cash balance plans or defined contribution plans.
    Thus, in answer to my first question, I believe that a reasonable 
public policy is one that allows employers and employees to choose from 
among these three types of retirement plans when first considering the 
establishment of a pension. This range of choices should be good for 
employers and allow workers to select the type of pension plans that 
maximizes their chances of saving for retirement.
    In fact, it is not the establishment of new cash balance plans that 
has spawned the rebellion against these plans. Instead, worker 
criticism and the demand for policy actions to restrict the use of cash 
balance plans has been the result of companies converting existing 
defined benefit plans into cash balance plans. It is in the conversions 
where winners and losers are most clearly identified. One can only 
wonder why critics have focused on conversions to cash balance plans 
while devoting much less attention to the much large trend of 
terminating defined benefit plans and establishing defined contribution 
plans. All of the issues are the same concerning the lost opportunities 
to earn future pension benefits based on final earnings and how 
starting values or termination benefits are determined. Yet for almost 
30 years, the trend away from defined benefit plans toward defined 
contribution plans went basically unchallenged while the more recent 
movement toward cash balance plans has been aggressively opposed.
    Consider an economy much like that prevailing in the United States 
prior to 1975 in which defined benefit plans dominated. Now allow the 
economic, demographic, and regulatory environments to change. Other 
changes follow. Congress imposes significant new government 
regulations, there are major changes in the composition and growth rate 
of the labor force, and domestic employers face increased global 
competition. In response to these new conditions, turnover rates 
increase and job tenure declines. In such a changing economic 
environment, it is not surprising that workers and firms consider 
amending their pension plans. These shifts provide choices to workers 
just entering the labor market but also have important implications for 
current employees who have been participants in existing defined 
benefit plans. Current employees, especially senior workers who are 
nearing early and normal retirement ages face the potential of 
reductions in future pension benefits. It is these potential adverse 
affects that are now considered.

ACCUMULATING PENSION BENEFITS IN DEFINED BENEFIT PLANS
    A defined benefit pension plan promises a stream of future income 
in exchange for the current labor of plan participants. When employees 
leave the firm or the company terminates a pension plan, the plan 
sponsor is legally required to pay workers the value of all vested 
benefits based on the existing benefit formula, earnings to date, and 
their years of service. This is the benefit that would be paid when the 
worker reaches the normal retirement if she were to quit the company 
today. In the case of a plan termination, this is the benefit that the 
firm is legally required to pay the worker at the normal retirement 
age.
    The present value of vested benefits beginning at the normal 
retirement age discounted back to the current age or the termination 
date can be found. This is the present value of the legally vested 
pension accrued to date. Changes in this value with continued 
employment represent annual benefit accruals. It is easily shown that 
the accrued benefit rises with increases in years of service, increases 
in annual earnings, and as the age of retirement approaches (Kotlikoff 
and Wise, 1985, 1989). The present value of vested benefits increases 
as a proportion of earnings as the individual remains with the firm and 
approaches retirement. A worker who remains with the firm with a 
traditional defined benefit plan will see pension wealth and pension 
compensation grow rapidly with continued employment. A worker who quits 
loses the opportunity to achieve this higher pension at older ages.
    Most defined benefit plans offer early retirement benefits. 
Typically, the there is a sharp increase in the value of pension 
benefits when the worker reaches the early retirement age. This occurs 
because plans usually do not actuarially reduce benefits when they are 
started between the early and normal retirement ages. Instead these 
benefits provide a higher level of lifetime pension benefits than if 
the receipt of benefits was delayed until the normal retirement age. 
This early retirement subside provide a strong incentive for workers to 
retire at the earliest possible age and many employees choose to retire 
at that time.
    Prior to reaching the age of early retirement, each additional year 
of service produces increases in future benefits that progressively 
increase in absolute value and as a percent of annual compensation. The 
present value of benefits is also increasing with additional years of 
employment. This pattern of benefit accrual is often called 
``backloading'' and is the reason that defined benefit plans provide 
higher benefits to workers who remain with a single company compared to 
more mobile workers who change jobs throughout their careers. If the 
worker continues to work after the early retirement, the gain in future 
benefits is substantially reduced in a form of wear away of pension 
benefits. It is possible that continued employment would ultimately 
result in a decline in the present value of lifetime benefits, yet 
another form of wear away in existing plans.
    The shift to cash balance plans has sometimes been characterized as 
plan sponsors reneging on their employment and pension contract. If the 
company simply provides workers their vested benefit as required by 
law, the workers will suffer the same pension loss as if they had 
voluntarily left their employer or if they had been laid off. It is 
important to recognize that the effect on the present value of pension 
benefits is the same whether the plan is terminated, converted to a 
cash balance or defined contribution plan, the worker quits to take a 
new job, the company lays off the worker, or there is a plant closing. 
In most conversions to cash balance plans, plan sponsors have used a 
combination of grandfathering and other transition provisions to 
eliminate or reduce the extent to which workers are adversely affected 
by plan changes.
    Virtually all traditional defined benefit plans have subsidized 
early retirement provisions. These plan characteristics have been an 
integral component of company retirement policies since the 1960s or 
1970s and have been used to encourage workers to retire at specified 
ages. The economic expansion of the 1990s was accompanied by a slowing 
in the growth the labor force. The twin forces of rapid economic growth 
accompanied by very low unemployment rates and a relatively slow growth 
in the labor force meant that many firms were having difficulty 
attracting the desired number of young, quality workers. These same 
companies observed that they had in place policies that encouraged 
skilled older workers to retire. In response, many large companies 
converted their traditional defined benefit plans to cash balance plans 
that do not have these early retirement incentives (Clark and Schieber, 
2002).
    Eliminating the early retirement subsidy is an important part of 
human resources policies for many firms in the twenty-first century as 
firm adapt to an aging labor force. Extending worklife is also part of 
our national retirement policy and increasing labor force participation 
among older persons would help ease the funding problems of Social 
Security. Ending these subsidies is also consistent with Congressional 
action that does not provide subsidized Social Security benefit taken 
prior to the normal retirement age. One should also note that companies 
could eliminate the early retirement subsidies in the current plans 
without converting to cash balance plans.

PENSION VALUES AFTER PLAN CONVERSIONS
    The level and composition of labor compensation are the products of 
worker preferences and the desire of firms to attract and retain 
quality workers. Changes in the labor market and other economic 
conditions can alter the equilibrium level of compensation and the 
characteristics of employee benefits. In recent years, there has been a 
dramatic shift away from traditional defined benefit plans as many 
companies have terminated their existing plans and established new 
defined contribution plans or transform the old defined benefit plans 
into cash balance plans. We now turn to the impact of plan conversions 
on real and expected pension benefits and identify the winners and 
losers in the plan conversion process.
    There are two major questions associated with the conversion of 
pension plans:
    1.  How is the opening balance in the new accounts for current 
employees determined?
    2.  Are current workers, especially senior employees, given an 
option to continue in the old plan until they retire?
    When all workers are given a choice of remaining in the old plan or 
shifting to the new plan, there typically is little opposition or 
objection to plan conversions. However, this option implies that the 
company may have to continue to manage the old plan for as much as 40 
years into the future. In actuality, most young workers with relatively 
few years of experience are likely to opt for the new cash balance plan 
or a new defined contribution plan because the expected value of 
participation in these plans will be greater than continued coverage by 
the traditional defined benefit plan. While relatively few employers 
have given all workers a choice, many companies have given this option 
to senior workers who are close to the normal retirement age in the 
plan. Depending on the age and service requirements associated with 
this option, companies can avoid most objections to the plan 
conversion; however, this does require the continued management of the 
plan for 10 to 20 additional years.
    The closeout value from the old defined benefit plan and/or the 
starting balance in the new pension plan is a crucial component of any 
plan conversion. Companies can decide if they want to roll the closeout 
account balance from the old plan into the new plan or start the new 
account balance at zero. The closeout value from the old pension is the 
legally accrued benefit as specified in the plan's benefit formula. 
This is the benefit that would be paid when the worker reaches the 
normal retirement if she were to quit the company. In the case of a 
plan termination, this is the benefit that the firm is legally required 
to pay the worker at the normal retirement age. Having determined the 
value of participation in the old defined benefit plan, firms could pay 
the workers this value or transfer it to individual accounts under the 
new cash balance or defined contribution plan. The closeout value and 
the start up amounts are at the heart of workers'' views on whether 
they have been treated fairly.
    Some critics of cash balance plans have argued that this form of 
evaluation imposes significant losses on senior workers and thus, 
should not be allowed. In effect, the argument is that once a firm 
establishes a traditional defined benefit pension plan it must guaranty 
all workers enrolled in this plan the right to remain in that plan 
until they retire as long as the company retains a defined benefit 
plan. Interestingly, few analysts question the right of firms to 
eliminate an existing defined benefit plan without instituting any new 
plan. Also, there have been few questions raised when companies have 
terminated a traditional defined benefit plan and established a new 
defined contribution plan. Why then has the animosity been aimed at 
almost exclusively at cash balance plans?
    In fact, the conversion of a traditional defined benefit plan to a 
cash balance does impose ``potential'' losses on senior workers. These 
losses would occur if that the firm retained the pension plan and the 
worker stayed with the company until retirement age. Neither of these 
conditions is a certainty. First, some individuals may choose to quit 
their current job and move to another firm. In this case, they would 
receive only the legally required value of their pension. Second, the 
company could terminate the worker due to adverse economic conditions 
or for cause. Once again, the worker would likely receive only the 
legally required benefit (of course, the company could offer a greater 
benefit through an early retirement plan). Third, the company could 
terminate the plan and not start a new plan. Here again, the worker 
would only be guaranteed the legally required benefit. All of these 
possibilities are legal and all have occurred throughout the American 
economy during the past three decades. It is important to remember that 
no company is required to offer a pension and once established, a 
company has the legal right to terminate the plan provided it pays all 
vested workers the benefits that they are legally owned.
    If workers receive the amount that they are legally guaranteed, why 
do they feel that they have been treated unfairly? The answer follows 
from expectations concerning future employment, earnings growth, and 
the formula under the old defined benefit plan. Workers expectations 
are a function of the information provided by employers. Many employers 
may have provided their employees access to benefit calculators that 
show workers the retirement benefits that they could expect prior to 
the plan conversion. After a plan conversion, senior workers making the 
same type of conditional projections of future benefits would find that 
they can now expect smaller benefits if they remain with the company 
until retirement. Thus, some senior workers could easily reach the 
conclusion that they have been mistreated. The potential response by 
senior employees highlights the need for full and detailed 
communication with workers during the termination/conversions 
process.\2\ This assessment should also be a warning to companies that 
still provide traditional defined benefit plans that they should 
improve their communications to better illustrate retirement benefits 
conditional on staying with the firm and if the worker were to leave at 
various ages. Of course, no worker is guaranteed employment until the 
specified retirement age and there is no promise of a specific rate of 
earnings growth. Obviously, employment conditions have been changed by 
the conversion of the pension plan.
    Studies by Clark and Schieber (2000, 2002, 2004 forthcoming) have 
shown that a large majority of workers under age 40 will ultimately 
have higher total benefits under a new cash balance plan. The primary 
reason for this is the mobility risk described earlier and the prospect 
of a plan termination or layoff in the future. In general, the closer 
workers are to the early retirement age specified in the plan, the more 
likely they are to be losers after the plan conversion. This is primary 
reason that most companies have attempted to provide some additional 
benefits or choice to their senior workers. However, studies have shown 
that many senior workers also will gain from a transition to a cash 
balance because of the uncertainty of future employment with their 
career firm.
    A final issue is that much of the potential loss in pension wealth 
for senior workers in a conversion to a cash balance plan occurs due to 
the elimination of early retirement subsidies. It should be noted that 
a company could eliminate these early retirement subsidy by requiring 
an actuarial reduction of benefits at early retirement. Thus, the 
existing defined benefit plan could be retained without a subsidized 
early retirement benefit. Clark and Schieber (2002) have shown that 
many cash balance conversion impose less severe reductions in benefits 
than if companies simply eliminated the early retirement subsidy.

DETERMINING WINNERS AND LOSERS IN PLAN CONVERSIONS
    Calculating the impact of plans on the lifetime value of retirement 
benefits for specific workers requires a series of assumptions 
including: the probability that a worker will remain with the firm 
until retirement, the probability that the firm will remain in 
business, the rate of growth of future earnings, the probability that 
the current pension plan will be terminated at some future date, and 
the probability that the parameters of the current and/or the new plan 
will be changed in the future. In addition, we need to know the cost 
implications of the conversion process including: whether the firm is 
attempting to reduce its total pension cost or simply altering the 
distribution of pension benefits and whether the firm is attempting to 
reduce its total labor costs or restructuring expenditures away from 
pension contributions while increasing earnings, stock options, or 
payments to health plans. Another key to understanding the impact of 
plan conversions on specific workers is whether the company provides 
transition benefits to some or all of its current workers to offset 
potential losses in pension wealth.
    Clark and Schieber (2002) examined 77 companies that converted 
traditional defined benefit plans to cash balance plans or another type 
of hybrid pension plan between 1985 and 2000. They simulated the impact 
of plan conversions on workers of different ages of first employment, 
age at the time of the conversion, and level of pay. Their underlying 
assumption was to assume that the company will remain in business for 
the working life of their employees, either the old plan would have 
remain unchanged until all current workers reached retirement or the 
new plan would remain unchanged during this period, and that earnings 
growth would be unaffected by changes in the economic climate or by the 
change in pension plan. They applied age-specific turnover 
probabilities that reflected the experience of large clients of Watson 
Wyatt.
    The results of Clark and Schieber's analysis indicate that the vast 
majority of workers who quit or are laid off before age 55 could expect 
to receive greater benefits under the new cash balance or hybrid plans 
compared to their continued participation in the traditional defined 
benefit plans. Workers who remained on the job past age 55 would expect 
to receive considerably lower benefits under the new plan. Obviously, 
older workers at the time of the plan transition are more likely to 
anticipate that they would still be with the company at age 55. Thus, 
it is senior workers that are most likely to be adversely affected by 
the transition and most likely to oppose these changes in the 
employment contract.
    It should be noted that Clark and Schieber's analysis focuses 
solely on the mobility risk associated with these plans and ignored 
other risks associated with economic fluctuations such as significant 
declines in the number of workers needed by the company due to adverse 
economic conditions, future changes in pension characteristics, and the 
possible termination of the pension plan at some future date. 
Explicitly modeling these risks would in most cases reduce any 
projected losses associated with converting a traditional defined 
benefit plan to a cash balance plan.\3\
    While there have been relatively few studies of plan transitions 
and their impact on actual workers, the basic designs of the plan types 
have unmistakable implications for current and future workers. 
Adjusting for mobility risk, most newly hired workers will be better 
off working for companies with cash balance and defined contribution 
plans. Among existing employees, senior workers are more likely to be 
adversely affected while younger workers are likely to gain from plan 
conversions. Of course, all comparisons depend on the level of 
generosity that is provided by either the defined benefit plan or the 
cash balance plan.
    The potential impact of plan conversions to cash balance plans or 
defined contribution plans is well known to both workers and firms. In 
recognition of this, many companies provide significantly higher 
benefits to senior workers. Such transition benefits reduce the 
potential loss in pension wealth associated with the plan conversion 
and typically, result in many fewer complaints. High quality human 
resource planning is a key to the plan conversion process.
    In response to the second question I raised earlier, policy makers 
must remember that the pension system is voluntary and employers have 
many choices. A key concern is what is the appropriate counterfactual 
if conversions to cash balance plans are not allowed. If cash balance 
plans are not an option, firms my terminate their defined benefit plans 
and have no new plan, they might terminate their defined benefit plans 
and establish a new defined contribution plan, or them may retain the 
current plan but change the benefit formulas to reduce or eliminate the 
early retirement subsidies. Would the opponents of cash balance plans 
prefer one of these options? With this caveat in mind, regulations that 
are only aimed at preventing cash balance conversions would seem unwise 
and unlikely to achieve the desired results..

CONCLUSIONS
    Employer-sponsored pension plans are an important component of 
retirement income for many Americans and a significant part of total 
compensation for many workers. In the U.S., our pension system is 
voluntary. No company is required to offer a pension plan and no 
company is required to retain a plan forever. Pension regulations and 
the accompanying administrative costs alter the pension choices of 
workers and firms. A policy to preclude the establishment of cash 
balance plans would restrict pension choices and adversely affect 
American workers. A policy that would not allow companies to convert 
traditional defined benefit plans to cash balance plans would likely 
result in other forms for changes in retirement plans that would have 
similar effects on pension benefits of senior workers.
    Comprehensive analysis of the impact of plan conversions indicates 
that most workers will have higher lifetime pension benefits in a world 
of cash balance plans (and defined contribution plans) compared to 
traditional defined benefit plans. Turnover and the lack of portability 
is the primary determinant of this finding. Senior workers who are near 
retirement do face the potential loss in lifetime pension benefits; 
however, this loss is only realized if the worker remains with the 
company until the age of early retirement. It should also be remembered 
that layoffs, plant closings, voluntary quits, firings, and plan 
terminations have the same impact on senior workers as conversion to 
cash balance plans. It is unlikely that all of these options will be 
restricted.
    Finally, the primary reason for the loss in pension wealth with 
plan conversions is the prevalence of early retirement subsidies in 
current defined benefit plans. In the coming years, it is highly likely 
that firms will continue to try to eliminate these subsidies as they 
compete for workers. The aging population and the projected slow growth 
of the labor force will increase the value of senior workers to the 
firm. Why pay highly valuable senior workers to leave at relatively 
young ages only to have to search for new workers? Ending early 
retirement subsidies is also consistent with our emerging national 
retirement policies and the need to promote greater labor force 
participation among older persons.

REFERENCES
Brown, Kyle, Gordon Goodfellow, Tomeka Hill, Richard Joss, Richard 
        Luss, Lex Miller, and Sylvester Schieber. 2000. The Unfolding 
        of a Predictable Surprise, Bethesda: Watson Wyatt.
Clark, Robert, John Haley, and Sylvester Schieber. 2001. ``Adopting 
        Hybrid Pension Plans: Financial and Communication Issues,'' 
        Benefit Quarterly, first quarter, 7-17.
Clark, Robert and Ann McDermed. 1990. The Choice of Pension Plans in a 
        Changing Regulatory Environment, Washington: American 
        Enterprise Institute.
Clark, Robert and Fred Munzenmaier. 2000. ``Impact of Replacing a 
        Defined Benefit Plan with a Defined Contribution or a Cash 
        Balance Plan.''
Clark, Robert and Melinda Pitts. 1999. ``Faculty Choice of a Pension 
        Plan: Defined Benefit vs. Defined Contribution,'' Industrial 
        Relations 38:1, 18-45.
Clark, Robert and Sylvester Schieber. 2000. ``The Shifting Sands of 
        Retirement Plans,'' WorldatWork Journal, fourth quarter 9:4, 6-
        14.
Clark, Robert and Sylvester Schieber. 2002. ``Taking the Subsidy Out of 
        Early Retirement: Converting to Hybrid Pensions,'' in Olivia 
        Mitchell, Zvi Bodie, Brett Hammond, and Steve Zeldes (eds.) 
        Innovations in Retirement Financing, Philadelphia: University 
        of Pennsylvania Press, 149-174.
Clark, Robert and Sylvester Schieber. 2004 forthcoming. ``An Empirical 
        Analysis of the Transition to Hybrid Pension Plans in the 
        United States,'' in William Gale, John Shoven, and Mark 
        Warshawsky (eds.), Public Policies and Private Pensions, 
        Washington: The Brookings Institution.
Kotlikoff, Laurence and David Wise. 1985. ``Labor Compensation and the 
        Structure of Private Pension Plans: Evidence for Contractual 
        Versus Spot Labor Markets,'' in David Wise (ed.), Pensions, 
        Labor, and Individual Choice, Chicago: University of Chicago 
        Press, 55-85.
Kotlikoff, Laurence and David Wise. 1989. The Wage Carrot and the 
        Pension Stick, Kalamazoo, MI: Upjohn Institute for Employment 
        Research.
Samwick, Andrew and Jonathan Skinner. 2003. ``How Will 401(k) Pension 
        Plans Affect Retirement Income?'' Unpublished working paper.

ENDNOTES
    \1\ Some plans have benefit formulas that specify benefits as a 
dollar amount per year of service. These formulas are most commonly 
found in plans that are part of collectively bargained contracts.
    \2\ Communications with workers concerning the reasons for plan 
changes and the impact of these changes on worker benefits is essential 
to plan terminations and conversions. Clark, Haley, and Schieber (2001) 
and Clark and Munzenmaier (2001) examine the important role of 
communications in plan conversions.
    \3\ Samwick and Skinner (2003) focus on the differences in 
financial market risks and earnings growth risks between defined 
benefit plans and 401(k) plans. They could that 401(k) plans are 
preferred to defined benefit plans by all workers, except those with 
the highest risk aversion.

[GRAPHIC] [TIFF OMITTED] T4751.001

                                 ______
                                 
    Chairman Boehner. Mr. Hill.

  STATEMENT OF ROBERT F. HILL, ESQ., PARTNER, HILL & ROBBINS, 
                        DENVER, COLORADO

    Mr. Hill. Good morning, Mr. Chairman and distinguished 
Members of the Committee. Thank you for the invitation to share 
my views regarding cash balance plans. I am an attorney in 
private practice in Denver, Colorado, with the law firm of Hill 
& Robbins, and we represent employees in cases involving cash 
balance plans.
    The adverse impact that cash balance plans have had on 
older employees has been well documented. I won't repeat that. 
But I will say that that only begins to tell the story of the 
hardship that cash balance plans have imposed on those older 
workers. All too often the cash balance plan arrives long after 
these employees have made employment retirement and saving 
decisions based on the promise of a traditional defined benefit 
plan, leaving them absolutely no practical ability to make that 
up in their remaining working years.
    Equally egregious, older workers often experience what is 
referred to as wear-away, which means that even though they 
continue working for their long established employer, they do 
not continue to generate additional retirement or pension 
benefits.
    The title of this session today I think is well chosen, 
separating myth from fact, and I have found that a challenge as 
I have approached this issue from the outside and tried to 
become acquainted with it. Cash balance advocates frequently 
suggest that employers are motivated by the increased, quote, 
mobility, closed quote, in the workforce. But the facts 
indicate otherwise. All available studies indicate that baby 
boomers have been staying on the job as long as or longer than 
their parents and grandparents when you look at people in the 
same age. There is also, I have found, a public and a private 
face when you try to understand what the pension consultants 
have been recommending to employers in this arena, and this 
Committee to properly legislate needs to go behind the public 
veneer.
    Thus, while cash balance advocates publicly contend that 
cost savings is not a significant factor in the rise of cash 
balance plans, in private and professional society meetings and 
other organizational meetings such as this they acknowledge 
that cash balance plans would hardly exist at all if it weren't 
for cost savings. While they also publicly cite the need for 
competitiveness in private they acknowledge that although 
combativeness sounds important, it is rarely an issue in the 
decisionmaking process. In private, these same cash balance 
advocates concede that conversions are often used to camouflage 
or mask, and those are quotes, a benefit cutback or to remove 
early retirement subsidies.
    Even the most aggressive of these proponents concede that 
in the early days many benefit consultants panned cash balance 
plans as a gimmick and contended that they couldn't satisfy the 
rules. There has been talk about clarification. The law is as 
Congress has pronounced it, and the law is the same as it has 
been for a long time. For example, following a meeting of what 
later became known as the Cash Balance Practitioners Group, 
attendees, which included representatives from four large 
pension consulting firms and two major law firms, circulated a 
memorandum. I remind you this is in 1990. They circulated a 
memorandum acknowledging that, quote, it is well known that a 
cash balance plan is at risk under a little reading of the age 
discrimination laws. For that reason the group focused on the 
need for a, quote, legislative fix, closed quote, a prospect 
that the group did not view with optimism.
    In 1996 and in 1997 warning signs became dramatically clear 
regarding the age discrimination issues raised by cash balance 
plans. These came from the Treasury Department notice. They 
came from the filing of employee lawsuits. They came from a 
letter from an Internal Revenue district office indicating that 
a proposed cash balance plan was age discriminatory because 
the, quote, benefit accrual rate decreases as a participant 
attains each additional year of age, closed quote.
    Despite those warning signs, the number of employees 
covered by cash balance plans more than quintupled from 1997 to 
2000, and I would suggest that against that background it is 
impossible to suggest that most employers entered into these 
conversions ignorant of the risks that cash balance plans 
violated the age discrimination laws.
    While I would suggest that in addition to the well-
documented cost savings and the desire of many employers to use 
the conversions to mask benefit cutbacks, it now appears that 
many of the cash balance plans were motivated by accounting 
rules that allow publicly held companies to use cash balance 
plans to present a more attractive financial picture to the 
investing public, something sometimes referred to as accounting 
gimmicks.
    I would comment that William Sweetnam, then a member of the 
Senate Finance Committee staff and now Treasury Department Tax 
Benefit Council, acknowledged in 1998 that, quote, the primary 
reason cash balance plans are financially advantageous is the 
accounting treatments of all cash balance plans versus final 
average earnings plans. The reason that cash balance plans are 
better is that they make the corporation's financial statement 
look better since pension liabilities are less, closed quote.
    To understand and deal with cash pension plans you need to 
understand both the public and the private face. You need to 
separate myth from fact. I thank you for giving us an 
opportunity to share our views on that the subject.
    [The prepared statement of Mr. Hill follows:]

 Statement of Robert F. Hill, Esq., Partner, Hill & Robbins, Denver, CO

    Mr. Chairman and distinguished Members of the Committee:
    I am an attorney in private practice in Denver, Colorado with the 
law firm of Hill & Robbins, P.C. Our law firm has represented employees 
in several law suits challenging the legality of conversions from 
traditional defined benefit plans to cash balance plans. These cases 
include the IBM Pension Litigation in the United States District Court 
for the Southern District of Illinois in which Chief Judge Murphy 
entered an order last year finding that IBM's cash balance formula 
violated ERISA's age discrimination rules.
    The adverse impact cash balance plans have on long-term older 
employees has been well documented. Even cash balance supporters have 
acknowledged that ``it is not unusual in some cash balance conversions 
for the 40 to 50 year old employee to lose one-third to as much as one-
half of his expected pension.'' \1\
---------------------------------------------------------------------------
    \1\ Shapiro & Rachal, Litigation Issues in Cash Balance Plans, 
Benefits Link, (1999), http://benefitslink.com/articles/
cashbalance.html .
---------------------------------------------------------------------------
    The dramatic reduction in benefits for older workers created by the 
adoption of a cash balance plan was confirmed by a detailed report 
submitted to this Committee by the General Accounting Office in 
September 2002. Under the model of a typical conversion used for the 
GAO study,
        a 45-year old worker at the time of conversion receives an 
        annual annuity of about $18,500 at retirement from the cash 
        balance plan instead of the $39,800 annuity the worker could 
        have received from the defined benefit plan with a final 
        average pay formula. Likewise, a worker 50 years old at 
        conversion receives an annual annuity of about $17,800 from the 
        cash balance plan rather than the $35,100 annuity the final 
        average pay formula would have provided.\2\
---------------------------------------------------------------------------
    \2\ U.S. General Accounting Office, PRIVATE PENSIONS--Implications 
of Conversions to Cash Balance Plans, GAO/HEHS-00-185, at 24-25 (Sept. 
2000) (hereinafter ``GAO Report'') http://www.gao.gov/new.items/
he00185.pdf
---------------------------------------------------------------------------
    But that only begins to tell the story of the hardship that cash 
balance plans impose on older workers. These are employees who have 
labored long and hard for an employer based on the promise of benefits 
under a traditional defined benefit plan where the value of benefits 
increase significantly in the later years of their career. Suddenly, 
after decades on the job, the promise of increasing age 65 benefits 
based on years of service and final pay is withdrawn and replaced by a 
benefit formula that benefits younger workers at the expense of older 
workers. A chart included in the GAO report illustrates this 
phenomenon:

[GRAPHIC] [TIFF OMITTED] T4751.002

    As shown, due to the conversion, older workers, generally those 
over age 40, end up with the worst of both worlds.
    The findings in an ERISA Advisory Group study submitted to the 
Department of Labor in 1999 aptly describes this problem:
        When a pension plan is converted to a plan design that gives 
        lower benefit accruals to older, longer-service employees, 
        without appropriate transition protections there is a 
        takeaway--a loss of expected future benefits--which is felt 
        much more sharply than if the employer were simply adding a new 
        benefit that tended to offer more to younger employees.
        The loss that older employees experience in some cash balance 
        conversions is especially profound in companies that had 
        previously invested the most in promoting their traditional 
        pension plan to employees as a valuable component of the 
        employees'' compensation, encouraging employees to build 
        careers in reliance on what they viewed as a retirement income 
        promise.\3\
---------------------------------------------------------------------------
    \3\ U.S. Dept. of Labor, Report of the Working Group Studying the 
Trend in the Defined Benefit Market to Hybrid Plans, Findings 3(a) and 
3(c) (November 10, 1999, http://www.efast.dol.gov/ebsa/publications/
cbalinfo.htm ). (hereinafter ``Working Group Study'').
---------------------------------------------------------------------------
    As that same study recognized, all too often the cash balance plan 
comes at a time in the employees'' lives when they have long ago made 
employment, retirement and savings decisions based on the promise of a 
traditional defined benefit plan only to find their reasonable 
expectations dashed with no practical ability to make up for that loss 
in their remaining working years.
    Some cash balance proponents point to ``grandfathering'' and other 
types of transition relief as a means to address this problem. However 
a study of actual cash balance conversions conducted by the actuarial 
firm Towers & Perrin determined that in over one-third of the 
conversions the employers provided no grandfathering or other form of 
transition benefit.\4\ And even when transition relief is provided for 
some workers, the vast bulk of conversions leave many adversely 
impacted workers unprotected.
---------------------------------------------------------------------------
    \4\ Arcady & Mellors, Cash Balance Conversions, JOURNAL OF 
ACCOUNTANCY, February 2000, http://www.aicpa.org/pubs/jofa/feb2000/
arcady.htm.
---------------------------------------------------------------------------
    Equally egregious, in many conversions older workers experience 
what is referred to as ``wearaway,'' which means that even though they 
continue working they earn no additional pension benefits until the 
amount in their cash balance plan reaches the amount they had already 
earned under their traditional defined benefit plan. The GAO found that 
the amount of wearaway any employee experiences is tied directly to 
age, with older workers suffering the longest periods of wearaway, 
sometime many years. For example, a typical conversion scenario 
``generated a 2-year lump sum wearaway for a 35-year old worker, a 4-
year wearaway for a 45-year old worker, and an 11-year wearaway for a 
55-year old worker at conversion.'' \5\ In such an instance, 
shockingly, the 55-year old would earn no additional pension benefit 
before reaching normal retirement age.
---------------------------------------------------------------------------
    \5\ GAO Report, at 28.
---------------------------------------------------------------------------
    During the past seven years, a significant number of employers have 
converted from traditional defined benefit plans to cash balance 
plans--thereby adversely impacting millions of older workers in the 
ways described by the GAO Report. We are before the Committee today 
because employers and employer related groups want Congress to provide 
exemptions for cash balance plans from the current law that applies to 
defined benefit plans, including the present prohibition against age 
discrimination.
    Cash balance plans have often been described as ``a defined benefit 
plan masquerading as a defined contribution'' plan.\6\ While no one 
disputes that cash balance plans are defined benefit plans, cash 
balance proponents essentially want the best of both worlds--they want 
to avoid the income and excise taxes that a change from a defined 
benefit plan to a defined contribution plan would entail and to retain 
the funding flexibility of the defined benefit plan, but they also want 
cash balance plans treated as defined contribution plans for purposes 
of the ERISA vesting and age discrimination rules.
---------------------------------------------------------------------------
    \6\ Remarks of Eric Lofgren, Vol 12. No 1 Report of the Society of 
Actuaries, at 419 (1986)(hereinafter ``Lofgren 1986'')(copy attached).
---------------------------------------------------------------------------
    However Congress has enacted very specific and very different legal 
frameworks for defined benefit plans and defined contribution plans. 
These rules were designed with a recognition that taxpayers pay 
hundreds of millions of dollars to subsidize the private tax-qualified 
pension system--to assure that employees were treated fairly and to 
avoid abusive practices that undermine the promises made to employees 
and the employees'' reasonable expectations. The Joint Committee on 
Taxation has estimated that in 2004 taxpayers will pay about $89 
billion in foregone taxes to subsidize the private tax-qualified 
pension system.\7\ It is only right and proper that Congress assure 
that the taxpayers'' monies provide a system that is fair to all 
workers, including older workers.
---------------------------------------------------------------------------
    \7\ Joint Committee on Taxation, Estimates of Federal Tax 
Expenditures for fiscal years 2000-2004 p. 23, JCS-13-99, December 22, 
1999) http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1999--
joint--committee--on--taxation&docid=f:54622.pdf.
---------------------------------------------------------------------------
    Cash balance plans are the very creative invention of a handful of 
professional consultants who sell their services to employers. While 
these proponents have publicly advanced a number of lofty motivations 
for the conversion of traditional plans to cash balance plans, none of 
their claims justify the harm cash balance plans have imposed on older 
workers.
    Cash balance advocates frequently suggest that employers are 
motivated to adopt cash balance plans by the increased ``mobility'' in 
the workforce. The facts indicate otherwise. Indeed, a prominent cash 
balance proponent has acknowledged that baby boomers ``have been 
staying on the job longer, actually, than their parents and 
grandparents.'' \8\ Similarly, a study conducted in 1998 by the Watson 
Wyatt actuarial firm concluded that this phenomenon applied as well to 
younger workers, age 25 to 34, who in 1996 spent a considerably longer 
time, on average, with one employer than did workers in that same age 
group in the 1950's.\9\
---------------------------------------------------------------------------
    \8\ Remarks of Eric Lofgren, New York Annual Meeting of Society of 
Actuaries, October 18-21, 1998, reported at p.14, Record of Society of 
Actuaries, Vol. 24, No. 3 (hereinafter ``Lofgren 1998'') (copy 
attached).
    \9\ Workforce Management: The Cultural Shift, Watson Wyatt Insider, 
Vol. 8, Issue 8, (August 1998).
---------------------------------------------------------------------------
    Some employers and actuaries also publicly cite the need for 
competitiveness as a reason for cash balance plans. However in private 
they acknowledge that although competitiveness sounds important, it is 
rarely a real issue in the decision making process.\10\
---------------------------------------------------------------------------
    \10\ Lofgren 1998 at 10--11.
---------------------------------------------------------------------------
    The more likely reason for many conversions, as many cash balance 
advocates concede, is that conversions are often used to disguise a 
cutback in benefits. In 1986, when cash balance plans first began to 
receive attention, Eric Lofgren, an actuary with Watson Wyatt, outlined 
for a conference of actuaries that a primary objective of conversion to 
a cash balance plan was to ``to camouflage a benefit cutback, or remove 
early retirement subsidies.'' \11\ Similarly, an actuary with Towers 
Perrin told a conference of actuaries that ``the way the plan is 
presented to employees looks so dramatically different than the defined 
benefit plan that the employees are used to that, and the change can be 
used to mask a benefit cutback.'' \12\ This advantage was still being 
touted in 1998, when an actuary with PriceWaterhouse-Coopers noted to 
the annual meeting of the Society of Actuaries that ``converting to a 
cash balance plan does have an advantage of it masks a lot of the 
changes.'' \13\
---------------------------------------------------------------------------
    \11\ Lofgren 1986 at 419.
    \12\ Remarks of Gary Hallenback, 1986 Conference of Consulting 
Actuaries, quoted in Ward, Eating their Words, Plan Sponsor Magazine 
(March, 2000). http://www.plansponsor.com/magazine--type1/?RECORD--
ID=13766
    \13\ Remarks of William Torrie, 1998 Society of Actuaries Annual 
Meeting, quoted in Ward, Eating their Words, Plan Sponsor Magazine 
(March, 2000)
---------------------------------------------------------------------------
    Mr. Lofgren candidly noted that a company converting to a cash 
balance plan could use two very different definitions to announce the 
same new cash balance plan. The upbeat version most commonly used to 
announce a conversion optimistically touts the purported virtues of a 
cash balance plan, describing it as ``an exciting, modern, flexible new 
plan design with the advantages of both defined benefit and defined 
contribution.'' He also proposed what he described as an equally 
accurate, but more candid, definition:
        ``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. We'll express the 
        benefits as lump sum so we can highlight the use of the CPI, a 
        sub-market 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.'' 
        \14\
---------------------------------------------------------------------------
    \14\ Lofgren 1986 at 419.
---------------------------------------------------------------------------
    While cash balance advocates publicly contend that cost savings are 
not a significant factor in the rise of cash balance plans, in private 
they consistently acknowledge that ``cash balance plans would hardly 
exist at all if it weren't for cost.'' \15\ Most employers with an 
existing, overfunded, defined benefit plan who want to cut pension 
costs by moving to a defined contribution model are not willing to pay 
the cost of terminating the defined benefit plan, which arises 
primarily from the excise tax payable on the surplus, and then creating 
a defined contribution plan. A 2002 empirical study of cash balance 
conversions concluded that:
---------------------------------------------------------------------------
    \15\ Lofgren 1998 at 10.
---------------------------------------------------------------------------
        If instead the firm converts to a cash balance plan, it can use 
        all of the excess pension assets to fund future benefits. 
        Therefore, among firms that plan to switch from a traditional 
        defined benefit plan to a defined contribution-type plan, the 
        likelihood of choosing a cash balance plan increases with the 
        plan's overfunding.\16\
---------------------------------------------------------------------------
    \16\ Niehaus & Yu, Cash Balance Conversions: Evidence of the Excise 
Tax Avoidance Hypothesis, (2002) http://www.cba.uri.edu/tong/cash-
balance.pdf
---------------------------------------------------------------------------
    Employers seek to avoid this tax by creating a cash balance plan 
instead, which has the advantage of both looking to employees like a 
defined contribution plan and at the same time allowing the employer to 
cut their benefit obligations and use the plan surplus to forestall the 
need to make future plan contributions.\17\
---------------------------------------------------------------------------
    \17\ Working Group Study.
---------------------------------------------------------------------------
    As an additional justification for asking Congress to exempt cash 
balance plans from defined benefit law, including the prohibition 
against age discrimination, proponents currently contend that hundreds 
of employers have adopted such plans, in the good-faith belief that 
they complied with existing law. According to this argument, 
``fairness'' to the expectations of employers requires special 
treatment for cash balance plans, regardless of any resulting 
unfairness to older workers who expected to earn most of their benefits 
in their later years under the traditional plans in place for decades.
    No such unfairness to employers exists. Even the most aggressive 
cash balance proponents have conceded that in the early days of cash 
balance plans, many benefits consultants panned cash balance plans as a 
gimmick and argued that they couldn't satisfy the rules.\18\
---------------------------------------------------------------------------
    \18\ Comments of Richard Shea, 1999 Enrolled Actuaries Meeting, 
Session 605: Cash Balance Plans--Current Issues (March 14-17, 1999) 
(copy attached).
---------------------------------------------------------------------------
    For example, following a 1990 meeting of what later became known as 
the Cash Balance Practitioner's Group, attendees--which included 
representatives from four large pension consulting firms and two major 
law firms--circulated a memorandum acknowledging that ``it is well 
known that a [cash balance] plan is at risk under a literal reading 
of'' the age discrimination laws.\19\ The Practitioners Group 
memorandum acknowledged that the practitioners had ``heard 
representatives of the [Internal Revenue] Service express concern that 
because the benefits under cash balance plans are frontloaded, such 
plans may violate a literal reading of'' the age discrimination 
laws.\20\ In addition, the Report noted that a ``number of 
practitioners believe that there is a very significant risk that the 
Service will ultimately take the view that it cannot avoid a literal 
interpretation of the statute.'' \21\ For that reason, the group 
focused on the need for a ``legislative fix a prospect that the group 
did not view with great optimism. Finally, the practitioners warned 
that, absent a legislative change, ``the potential employer exposure is 
extremely high--potentially increasing the plan liabilities four or 
five times.'' \22\
---------------------------------------------------------------------------
    \19\ October 23, `1990 Letter from Hugh Forcier regarding Cash 
Balance Memorandum, at p. 2(copy attached).
    \20\ Memorandum, Cash Balance Plans: Compliance with the 
``qualification'' requirements of the Internal Revenue Code of 1986, as 
amended, at 24 (Oct. 23, 1990) (copy attached).
    \21\ Id.
    \22\ Id.
---------------------------------------------------------------------------
    Despite these legal concerns, and despite the failure of proponents 
to obtain legislation exempting cash balance plans from the age 
discrimination laws applicable to all defined benefit plans, a few 
employers went forward with conversions from traditional plans to cash 
balance plans in the early 1990's. However, according to a Department 
of Labor survey, even by 1996-97 only 4% of U. S. workers covered by a 
defined benefit plan were participants in cash balance plans.\23\
---------------------------------------------------------------------------
    \23\ U.S. Bureau of Labor Statistics, Employee Benefits in Medium 
and Large Private Establishments in 1997, p. 103. http://www.bls.gov/
ncs/ebs/sp/ebbl0017.pdf
---------------------------------------------------------------------------
    It was only after 1997 that the dramatic increase in the adoption 
of cash balance plans took place--and the resulting adverse impact on 
millions of older workers. Employers, eager to exploit the pension fund 
surpluses created by the booming stock market, rushed to adopt them, 
despite both the much earlier recognition of their risk and further 
warning signs that arose in 1996 and 1997. On January 18, 1996, the 
Treasury Department issued Notice 96-8, which clearly indicated that 
cash balance plans were subject to the same benefit accrual rules 
applicable to all defined benefit plans.\24\ Also in 1996, the first 
employee lawsuit challenging age discrimination in cash balance plans 
was filed: a second was filed in May of 1997. In July of 1997, an 
Internal Revenue District Office concluded that a proposed cash balance 
plan violated the age discrimination prohibitions of the Internal 
Revenue Code because the ``benefit accrual rate decreases as a 
participant attains each additional year of age.'' \25\
---------------------------------------------------------------------------
    \24\ www.irs.ustreas.gov/pub/irs-irbs/irb96-06.pdf
    \25\ Letter from Andrew J. Fedders, IRS Cincinnati District Office, 
Government's Position, No. 1 (July 28, 1997) (``The plan does not 
satisfy the clear and straightforward requirement of section 
411(b)(1)(H) of the Code because the plan's benefit accrual rate 
decreases as a participant attains each additional year of age.'') 
(copy attached).
---------------------------------------------------------------------------
    In spite of all of these warning signs, the number of employees 
covered by cash balance plans more than quintupled between 1997 and 
2000, from 4% to 23%.\26\ Against this background, it is impossible for 
the vast bulk of employers to credibly claim that they adopted cash 
balance plans ignorant of the risks that they violated the age 
discrimination laws.
---------------------------------------------------------------------------
    \26\ U.S. Bureau of Labor Statistics, National Compensation Survey: 
Employee Benefits in Private Industry in the United States, 2000, p. 
58. http://www.bls.gov/ncs/ebs/sp/ebbl0019.pdf
---------------------------------------------------------------------------
    Clearly there had to be powerful factors motivating this dramatic 
increase in the adoption of cash balance plans in the late 1990's. In 
addition to the well documented cost savings and the desire of many 
employers to use the conversions to mask benefits cutbacks to older 
workers, it now appears that many of these conversions were either 
primarily or incidentally motivated by accounting rules that allow 
publicly held corporations to use cash balance conversions to further 
inflate surpluses and generate ``pension income,'' thereby presenting a 
more attractive financial picture to the investing public. As one 
consulting actuary puts it: ``Pension funds are becoming a major profit 
center.'' \27\
---------------------------------------------------------------------------
    \27\ Pesek, Hidden Asset: For Many Companies, Pension Plans Are 
Bolstering Profits, BARRON'S (May 27, 2000)(quoting Adam Reese, Towers 
Perrin).
---------------------------------------------------------------------------
    Because of the way opening account balances are determined in a 
conversion from a traditional defined benefit plan to a cash balance 
plan, the conversion typically reduces the plan's Projected Benefit 
Obligation. Under the financial accounting standards in FASB Statement 
No. 87, the effect of this type of ``negative amendment'' can be spread 
out over several years, which reduces the plan's annual benefit cost 
for financial statement purposes in those years. Thus, as Mark Beilke, 
the current Chairman of the Academy of Actuaries Pension Accounting 
Committee, recently observed, ``gains [from cash balance conversions 
are] mostly derived from ``accounting gimmicks.'' \28\
---------------------------------------------------------------------------
    \28\ Comments posted as ``MGB'' on Benefits Link Cash Balance 
Discussion Forum, May 13, 2003. http://benefitslink.com/boards/
index.php?act=Print&client=printer&f=22&t=19682
---------------------------------------------------------------------------
    Employers and their advisors have long privately acknowledged the 
powerful motivation these accounting devices have provided to fuel the 
increased number of conversions. William Sweetnam, then a member of the 
Senate Finance Committee staff and now Treasury Department Tax Benefits 
Counsel, acknowledged in 1998 that the
        ``primary reason cash balance plans are financially 
        advantageous is the accounting treatment of cash balance plans 
        versus final average earnings plans . . . With final average 
        earnings plan [sic], you must book as a liability on your 
        financial statements the value of pension benefit assuming 
        future earning growth for participant's benefit. With a cash 
        balance plan, you don't have to include future earnings growth 
        you only have to book your current liability for account 
        balances. This reduces the liability in all circumstances--even 
        if the plan grandfathers the old final average earnings benefit 
        for older workers. So the reason that cash balance plans are 
        better is that they make the corporations [sic] financial 
        statement look better since pension liabilities are less.'' 
        \29\
---------------------------------------------------------------------------
    \29\ E-mail from ``Bill'' Sweetnam dated 12-22-98(copy attached); 
See also, Actuarial Aspects of Cash Balance Plans, Society of Actuaries 
Conference (July 07, 2000) http://www.soa.org/ccm/cms-service/stream/
asset?asset--id=1052150.
---------------------------------------------------------------------------
    This accounting treatment of cash balance conversions can create 
substantial increases in a company's reported income--increases that 
compound the already misleading impressions that can arise from the 
inclusion of ``phantom'' pension income as part of a company's bottom 
line.\30\ In 1999, an accounting expert at Bear Stearns, conducted a 
study showing that 25% of the companies in the Standard & Poor's 500-
stock index reported pension income in 1998, that overall pension 
income accounted for 3% of 1998 operating income of the companies 
overall, and that for 15 of those companies pension income represented 
10% or more of their total operating income for the year.\31\
---------------------------------------------------------------------------
    \30\ Warren Buffet has described the growing practice by some 
companies of creating ``phantom'' pension income to inflate reported 
income as a misrepresentation that ``dwarfs the lies of Enron and 
WorldCom.'' Buffet, Who Really Cooks the Books?, New York Times, 
Section A, Page 19 (July 24, 2002).
    \31\ Singh, Feathering the Nest Egg, CFO Magazine (October 1, 2000) 
http://www.cfo.com:8080/article/1%2C5309%2C1006/8/A/7/7%2C00.html ; 
McGough & Schultz, How Pension Surpluses Lift Companies' Profits, Wall 
Street Journal (September 21, 1999) http://acct.tamu.edu/loudder/
private/647--Readings/How%20Pension%20Surpluses.htm ;
---------------------------------------------------------------------------
    While the debate over the motivations of employers to implement 
cash balance plans in the absence of clear legal authorization will no 
doubt continue, there is no debate regarding the dramatic and adverse 
impact of these plans on older workers. It punishes--in some cases 
brutally and without the ability to recover older workers who have 
worked for a company for decades based on an unequivocal promise of an 
increasing age 65 retirement benefit determined by reference to years 
of service and higher income in their later years.
    Equally importantly, cash balance plans often come long after these 
employees made irreversible decisions regarding employment and savings 
based on their understandable reliance on their employers'' promises 
only to have them suddenly dashed by the announcement of a change to a 
newly created pension scheme--the cash balance plan.
    That is precisely the kind of abuse of the American work force that 
our pension laws were intended to prohibit. And it is even more 
unacceptable when the adverse impacts are due to discrimination based 
on age.
    As the Committee considers any possible legislation addressing the 
legal issues raised by cash balance plans, I strongly encourage you to 
keep the need to protect these loyal, long-term older workers in the 
forefront. At their age and position these abrupt and unfair changes 
often dramatically and irreversibly adversely impact their remaining 
years.
    These employees are the backbone of our nation's economic engine 
and they deserve far better and fairer treatment. Congress should 
continue to assure that if taxpayers are to subsidize the private 
pension system, employers must treat their workers fairly and without 
discrimination based on age.
                                 ______
                                 
    Chairman Boehner. Ms. Pfotenhauer.

   STATEMENT OF NANCY M. PFOTENHAUER, PRESIDENT, INDEPENDENT 
                WOMEN'S FORUM, WASHINGTON, D.C.

    Ms. Pfotenhauer. Thank you, Mr. Chairman and distinguished 
Members of the Committee. I am grateful to have the opportunity 
to appear here today. As the Chairman said, my name is Nancy 
Mitchell Pfotenhauer, and I am president of IWF. However, my 
background is in the field of economics. I have served as 
Economic Counsel to a former Member of the Senate Republican 
leadership who sat on the Budget and Banking and Finance 
Committees. I have also served as Chief Economist as the 
cabinet level regulatory review body.
    As you probably know, the labor force participation rates 
of women, unlike men, have been increasing across all age 
groups. This comes as no surprise to us and probably no 
surprise to the Committee. The Bureau of Census and the Bureau 
of Labor Statistics simply provide the quantitative evidence of 
what we have observed in American society. Simply put, more 
women are working more often while balancing the pressures of 
home and family, often taking time out of the workforce to care 
for children and for elderly parents.
    Why has IWF got even into this debate over pension policy? 
Because the national poverty rate for women 65 and older is 
almost twice that of men. The average age of widowhood in the 
United States is 56 years old. Fully 80 percent of widows now 
living in poverty weren't poor when their husbands were alive. 
The likelihood of poverty increases with age, particularly for 
minority women.
    Right now several specific factors drive the discrepancy 
between men and women in their later years. First and perhaps 
most importantly, we live longer. To put it bluntly we may 
outlive our savings. The average life expectancy at 60 years of 
age for women is 83 and for men it is 78.
    Perhaps most relevant for this discussion, however, is the 
fact that women change jobs more frequently than men. We 
average 4.8 years with each employer and, therefore, may not 
stay on the job long enough to be vested in traditional 
retirement plans. Because women are more likely to leave the 
job market to handle family responsibilities, we average 11.5 
years out of the workforce compared to 1.3 years for men. With 
our earning record interrupted we not only lose the opportunity 
to vest but we have fewer years in which to contribute to 
retirement plans.
    Traditional retirement and pension approaches simply fail 
to meet the needs of our changing society. Succinctly, they do 
not reflect the work patterns and demographics of American 
women. Luckily, pension innovations in the private sector hold 
promise. Cash balance pension equity and other hybrid pension 
plans combine attractive features of a traditional defined 
benefit plan with attractive features of a defined contribution 
plan. These modernized arrangements have evolved to suit 
today's more mobile workforce and to respond to employee 
preferences for transparency, portability and accrual of a more 
meaningful benefit earlier in one's career.
    We believe the emergence of hybrid plans is encouraging 
news for many, but is a cause for particular hope for women. In 
fact, one benchmark study done in 1998 by the Society of 
Actuaries found that an amazing 77 percent of women do better 
under a cash balance system. They are better off under the 
system because they move in and out of the workforce in order 
to balance family needs and because they cannot afford to 
retire early.
    Despite this promise it is clear that controversy exists 
about how firms should transition to hybrid plans, and many 
have questioned the fairness of changing pension approaches for 
employees over 40 years of age. An alternative perspective, and 
one that we believe has credence, is that any adoption of 
restrictions that effectively limit the abilities of companies 
to transition to hybrid plans places the financial well-being 
of the relatively few employees who have the luxury of staying 
with one company for a long period of time, usually decades, 
have the luxury of taking early retirement, and have the luxury 
of taking their pension benefit in the form of an annuity 
rather than a lump sum, ahead of all the employees who do not 
have these options.
    So regardless of one's perspective, any discussion about 
transition is appropriately done within the context of a clear 
understanding that these plans are voluntarily sponsored by 
employers. As such, an employer currently could decide to 
freeze benefit accruals or completely terminate plans 
altogether if costs become too burdensome, and experience has 
shown us that many more plans have fallen victim to this fate 
over the past decade than have transitioned to hybrid plans.
    The problem before this Committee is complex and worthy of 
an objective analysis that is focused on providing a solution 
that fits the changing nature of America's economy and 
workforce. The Independent Women's Forum believes that 
portability is a real and growing need as we look to the future 
of working women in this country. As such, we strongly urge 
Congress to act in the manner that recognizes the attributes of 
new approaches like the cash balance and other hybrid plans and 
keeps in mind that the one law that cannot be amended is the 
law of unintended consequences.
    Thank you.
    [The prepared statement of Ms. Pfotenhauer follows:]

   Statement of Nancy M. Pfotenhauer, President, Independent Women's 
                         Forum, Washington, DC

    Mr. Chairman and distinguished members of the Committee, thank you 
very much for the opportunity to be here today. My name is Nancy 
Mitchell Pfotenhauer and I am president of the Independent Women's 
Forum. IWF is a non-profit, non-partisan public policy organization 
that focuses on issues of importance to women.
    To give you some context, our organization was founded more than a 
decade ago, and counts among its National Advisory Board women who have 
served at the highest levels in federal office. In fact, Department of 
Labor Secretary Elaine Chao, Undersecretary of State Paula Dobriansky, 
and Assistant Attorney General for Tax Policy Eileen O Connor have all 
served on our National Advisory Board. Our Board of Directors and 
Advisors have run divisions of OMB, the Treasury Department, and 
chaired and served on several independent regulatory agencies.
    I personally have served as Economic Counsel to a member of the 
Senate Leadership who sat on the Budget, Banking and Finance 
Committees. Subsequent to that, I was the Chief Economist of a Cabinet-
level regulatory review body. After serving time as Director of the 
Washington office of a $48 billion diversified energy company, I 
transitioned from IWF's Board of Directors into my current position.
    Let me begin by explaining what IWF is not. It is not a grassroots 
organization focused on mobilizing large numbers of our fellow 
citizens. Rather we are a group whose members are legal scholars, 
economists, academicians, historians and foreign policy experts who 
hope to apply our professional experience to impact the formulation of 
public policy. As such, again let me thank you for the opportunity to 
appear before this committee and participate in a candid and 
constructive discussion concerning cash balance pension plans.
    As you probably know, the labor force participation rates of 
women--unlike men--have been increasing across age groups. Women in the 
45- to 54- age group saw the greatest jump in their participation 
during the 1980-90 timeframe, clocking in with an increase of almost 11 
percent. This same cohort again saw the greatest increase in 
participation in the 1990-2000 (when they were aged 55-64). It is 
important to note, however, that for the 2000-2010 period, this group 
will lose their title to a group of younger women aged 25-34.
    This comes as no surprise to the Independent Women's Forum--and 
probably no surprise to this committee. The combined work of the Bureau 
of Census and the Bureau of Labor Statistics simply provides the 
quantitative evidence of what we have all observed in American society. 
Simply put, more women are working more often while still balancing the 
pressures of home and family.
    And, by and large, this is a truly positive indication of the 
tremendous progress women have made in our country. Presently, women 
earn the majority of the undergraduate degrees, the majority of 
master's degrees and--within the next decade--are expected to earn the 
majority of Ph.Ds. Right now, young women comprise roughly sixty 
percent of the students attending law school here in the United States.
    So, the upside of this story is that women are achieving 
educational and professional goals only dreamed of in other countries. 
The challenge from a retirement security standpoint, however, is that 
we refuse to compromise our roles as mothers and caregivers on the 
altar of professional accolades. Specifically, women still tend to take 
time out of the workforce in much greater numbers than men in order to 
care for young children or elderly members of our family. Having five 
children between the ages of 10 and 16, this particular point really 
strikes home with me.
    Why has IWF gotten involved in this debate over pension policy? 
Because the national poverty rate for women 65 and older is almost 
twice that of men. The average age of widowhood in the United States is 
56; fully eighty percent (80%) of widows now living in poverty weren't 
poor when their husbands were alive. The likelihood of poverty 
increases with age, particularly for minority women. The gap between 
Social Security benefits for women and men is slowly narrowing, but the 
difference between pension benefits is increasing rapidly.
    What is driving this phenomenon? We fundamentally reject the notion 
that our current systems were somehow designed to be biased against 
women. In fact, historical records reveal that the social security 
system was, if anything, originally designed to benefit women. 
Unfortunately, through no ill-intent, the framers of that system failed 
to accurately predict societal trends and future workforce 
demographics.
    Right now, several specific factors drive the discrepancy between 
men and women in their later years. First, and perhaps most 
importantly, women live longer then men. To put it bluntly, we may 
outlive our savings. The average life expectancy at 60 years of age for 
women is 83 and for men is78. By 2050, five percent of the baby-boomer 
population will be more than 100.
    Despite our relative longevity, or perhaps because of it, women 
tend to have more chronic health problems than men, resulting in higher 
health care costs during retirement. And, if a woman hasn't seen her 
financial health plummet because her husband died, she's likely to be 
hit hard through a divorce. Statistics have shown that immediately 
following divorce, women 50 and older experience a 39 percent decline 
in income, whereas men's incomes fall only 14 percent. One year after 
divorce, fully 40 percent of men have regained their pre-divorce 
incomes; about half that percentage (21) of women have climbed back.
    Perhaps most relevant for this discussion, however, is the fact 
that women change jobs more often then men. We average 4.8 years with 
each employer and, therefore, may not stay at a job long enough to be 
vested in traditional retirement plans. Because women are more likely 
to leave the job market to handle family responsibilities, we average 
11.5 years out of the workforce compared to 1.3 years for men. With our 
earning record interrupted, we not only lose the opportunity to vest, 
but we have fewer years in which to contribute to retirement plans.
    In the opinion of the Independent Women's Forum, traditional 
retirement and pension approaches simply fail to meet the needs of our 
changing society. Succinctly, they do not reflect the work patterns and 
demographics of American women. Whether it's the Wall Street Journal or 
Family Circle magazine, today's commentators agree that movement in and 
out of the workforce for American mothers has become the ``new 
normal.'' In fact, many are noting a current trend of mothers going 
back home when their children become teenagers. In earlier times, moms 
simply stayed home when their children were young--now we're worried 
about the lack of oversight of our teenage children in an increasingly 
complex culture. Regardless of the reason, this phenomenon, called 
``sequencing,'' appears here to stay.
    Luckily, pension innovations in the private sector hold promise. 
Cash balance, pension equity and other hybrid pension plans combine 
attractive features of a traditional defined benefit plan (employer 
funding, employer assumption of risk of poor investment, government 
insurance and spousal protections) with attractive features of a 
defined contribution plan (individual accounts, an easily understood 
benefit formula and portability).
    These modernized pension arrangements have evolved to suit today's 
more mobile workforce and respond to employee preferences for 
transparency, portability and the accrual of more meaningful benefits 
earlier in a career.
    As you know, unlike traditional defined benefit plans where a 
significant portion of the benefits go to the relatively few workers 
with very long service, benefits in so-called hybrid plans grow more 
evenly over a worker's career and are distributed more equitably across 
short-, medium-, and long-service workers. For the vast majority of 
employees who no longer spend a full career with one employer, a hybrid 
plan will produce higher benefit levels than a traditional benefit plan 
at equal cost.
    We believe the emergence of hybrid plans is encouraging news for 
many and a cause for particular hope among women. In fact, one 
benchmark study done in 1998 by the Society of Actuaries found that an 
amazing 77% of women do better under a cash balance approach. They are 
better off under a cash balance system because they move in and out of 
the workforce in order to balance family needs and because they cannot 
afford to take early retirement \1\. Despite this promise, it is clear 
that controversy exists about how firms should transition to hybrid 
plans. Many have questioned the fairness of changing pension approaches 
for employees over 40 years of age.
---------------------------------------------------------------------------
    \1\ Kopp and Scher. Society of Actuaries. ``A Benefit Value 
Comparison of a Cash Balance Plan with a Traditional Average Pay 
Defined Benefit Plan.'' October, 1998.
---------------------------------------------------------------------------
    An alternative perspective, and one that IWF believes has credence, 
is that any adoption of restrictions that effectively limit the ability 
of companies to transition to hybrid plans places the financial well-
being of the relatively few employees who have had the luxury of 
staying with one company for a long period of time (decades), have the 
luxury of taking early retirement, and have the luxury of taking their 
pension benefit in the form of an annuity rather than as a lump sum, 
ahead of all of the employees who do not have these options.
    Regardless of one's perspective, any discussion about transition is 
appropriately done within the context of a clear understanding that 
these plans are voluntarily sponsored by employers. As such, an 
employer currently could decide to freeze benefit accruals or 
completely terminate plans altogether if costs become too burdensome. 
Experience has shown us that many more plans have fallen victim to this 
fate over the past decade than have transitioned to hybrid plans.
    As such, an overarching concern we have in making these new 
approaches viable is that Congress avoid the seductive panacea of 
mandating choice between traditional defined benefit and cash balance 
plans. Unfortunately, some analysts believe that mandating choice in 
such a manner could result in employees being faced with a ``worst of 
both worlds'' situation. Specifically, employers could make changes to 
their traditional plans that remove aspects most valued by some of 
their employees, while ironically being constrained from offering the 
off-setting attributes of a cash balance plan.
    As pointed out by pension experts Olivia Mitchell and Janemarie 
Mulvey at the University of Pennsylvania's Wharton School, under an 
approach that mandates choice in circumstances when an employer seeks 
to convert to a hybrid plan (but not other changes), an employer could 
eliminate early retirement subsidies without providing choice, but the 
employer ``could not at the same time provide the more portable and 
more understandable cash balance benefit without offering employees a 
choice to keep early retirement subsidies.'' \2\
---------------------------------------------------------------------------
    \2\ Mitchell, Olivia S. and Janemarie Mulvey. Working paper/PRC WP 
2003-25. ``Possible Implications of Mandating Choice in Corporate 
Defined Benefit Plans.'' Pension Research Council, The Wharton School, 
University of Pennsylvania: 17.
---------------------------------------------------------------------------
    Obviously the solution does not rest in mandating choice for every 
plan change. To do so would only facilitate the death of the defined 
benefit system--a system which offers noted attributes in the form of 
employer contributions and employer assumption of risk.
    The problem before this committee is complex and worthy of 
objective analysis focused on providing a solution that fits the 
changing nature of America's economy and workforce. The Independent 
Women's Forum believes that portability is a real and growing need as 
we look to the future of working women in this country. As such, we 
strongly urge Congress to act in a manner that recognizes the 
attributes of new approaches like the cash balance and other hybrid 
plans, and keeps in mind that the one law that cannot be amended is the 
law of unintended consequences.
    Thank you again for your time and your attention to this very 
important matter.
                                 ______
                                 
    Chairman Boehner. Let me thank all of the witnesses for 
your excellent testimony. It is a very important subject, and 
having this hearing less than 5 months before a Presidential 
election and an election for all of the Members of the House 
and a third of the Members for the Senate probably poses some 
risk that politics may enter into the debate.
    But having said that, this is very important. The 
retirement security of American workers is at risk. We have 
seen the number of defined benefit plans, the decline that has 
occurred over the last 20 years, we know the cost of operating 
the defined benefit plan is very expensive and we know that 
especially among younger workers they want more portability 
with their retirement benefits. While you see this explosive 
growth in 401(k) plans and, for that matter, the growth that we 
have seen in cash balance conversions, and for the Members on 
both sides of the aisle who are serious about our voluntary 
retirement system, we know that cash balance conversions are an 
important component to maintaining defined benefit plans, there 
is just no other way in my view that you can turn the clock 
back. And given the uncertainty that is out there, given the 
inability of the regulators to act, we have to open the door 
for those who want to come in and make some money. And I think 
we are causing more concern among employers, we are going to 
see less plans offered, and we are going to see more freezes in 
the future.
    It is pretty clear Congress must act, and I am here to say 
to all of you today that Congress will act. It is our 
responsibility as health legislators and public policymakers to 
make clear what the law is and what it isn't, and too many 
times we turn over to the agencies the regulatory ability, 
which in many cases turns into a responsibility for them, to 
make serious policy decisions as well. But I believe that the 
Congress has sat back far too long on this cash balance issue 
and it is time for us to act. And as we look at a comprehensive 
reform of the defined benefit rules and regulations, the rules 
and regulations surrounding cash balance plans must be dealt 
with and will be dealt with.
    Having said that, Mr. Delaplane, Ms. Collier, Professor 
Clark, you heard Mr. Hill's comments about why we have cash 
balance conversions, what they are intended or not intended to 
do. What do you think?
    Mr. Delaplane. Mr. Chairman, I would have to take a 
different perspective. My guess is that Mr. Hill has not 
actually been in too many of those employer meetings where the 
reasons for cash balance conversions have been discussed. If 
you look at objective studies from folks like the Federal 
Reserve, they have clearly said hybrid plans have been adopted 
in industries where labor mobility has increased, and so we are 
clearly seeing the evidence that tenures are shorter in the 
companies that have these plans, and these plans, as you 
highlighted clearly, deliver higher benefits to employees.
    So I disagree with that characterization. I also think you 
folks very appropriately in 2001 enacted some expanded 
disclosure requirements. The Treasury has issued very detailed 
regulations there under. It is not even possible if anybody 
even wanted to hide the ball to do so. Frankly, when Mr. Hill 
testified in 1999 that was his focus, that we should do more on 
the disclosure front. You have done that. The information that 
employees get is very explicit, very clear as to how they will 
be affected.
    So I think you have addressed the issues that have been out 
there. I take issue with the characterization.
    Chairman Boehner. Ms. Collier.
    Ms. Collier. Thank you, Mr. Chairman. In Eaton's case also 
we are experiencing mobility, both internally and external to 
the company. We have some critical skill sets such as 
engineering that we want to maintain. We go to great lengths to 
recruit those individuals. We find that the cash balance plan 
has already begun to help us in that recruiting process and in 
retention of these employees.
    Similarly, we did not convert our plan in order to save 
money. I think that is another misconception, and I hope we can 
clear that up a little bit here today.
    Lastly, I think that employers go through extensive 
communication campaigns. As Mr. Delaplane said, you did revise 
those disclosure requirements in 2001 in order to prevent 
companies from camouflaging, as the term was used, any benefit 
changes and decreases in benefits.
    Mr. Delaplane. If I could also mention the issue of cost 
reduction. There have been instances where employers have 
decided they need to spend less resources on their pension plan 
overall. That is nothing we should run from. If companies 
decide their programs need to be reduced and that is how to 
stay competitive and grow their business and add jobs that may 
be a perfectly appropriate reason to make a pension change. Of 
course, pension costs can be reduced in many ways. I assume 
most members would prefer that a company remain in the defined 
benefit system and have a plan that better delivers benefits to 
their workforce as opposed to leave the system all together.
    So, again, I don't want to act as if cost reduction on a 
prospective basis is some horrible thing that automatically 
dams the employer that has gone that route.
    Chairman Boehner. Professor Clark, how would you react to 
Mr. Hill's testimony?
    Dr. Clark. Thank you, Mr. Chairman. It is certainly clear 
that in an economy like ours companies have to respond both to 
their own interest and to workers' interest in our labor force 
that has been changing both in terms of age structure and 
gender and minority status in lots of different ways, and that 
has encouraged companies to think about how they are going to 
offer their compensation and in what form.
    So companies are in the business of looking at their 
compensation and trying to determine what is it that their 
workers want because for every dollar a company spends, they 
want the worker to get the most value out of that worker 
wherever that level is.
    It is certainly true that companies must use their benefits 
as well as their cash compensation to help them attract, 
retain, and motivate workers. As the worker preferences change, 
as the worker composition changes, companies must change that 
as well.
    I would come back fundamentally to the issue of what is the 
relevant comparison. As Jamie just said, companies reducing one 
type of compensation happens all the time. Companies change 
their policies, health care policies are changing all the time. 
You could go back and say are you going to hold constant health 
care plans over time or are you going to allow companies to 
restrict them and change them. Certainly the U.S. Congress 
changes Social Security and changes Medicare. We don't give 
workers choices about which ones they are going to take in 
terms of whether they want to stay in the old Social Security 
system right now, could they still get full benefits at 65. 
Workers didn't get that choice. Congress made it for them.
    So the government and the companies are in the business of 
trying to appeal to the workforce, trying to set their policies 
in such a way as to get the maximum value from hiring their 
workers, and wages go up and they go down.
    Chairman Boehner. Professor Clark, do you believe that the 
concept of compounding interest is inherently age 
discriminatory?
    Dr. Clark. No. How it is specified in the law, I am not a 
lawyer, I do not come to talk with you about what is age 
discriminatory or not in terms of the legal approach to it, but 
certainly it seems to me that a dollar in a person's pocket 
whether they be 25, 45 or 65 is an equal treatment of that 
worker. Everybody gets the same dollar, everybody gets the same 
percentage of their compensation.
    Chairman Boehner. The Chair recognizes the gentleman from 
New Jersey, Mr. Andrews.
    Mr. Andrews. Mr. Kildee was here first.
    Chairman Boehner. The Chair is happy to recognize Mr. 
Kildee.
    Mr. Kildee. Thank you, Mr. Chairman. First of all, Mr. 
Chairman, since we were allowed to have only one witness, the 
minority had one witness, I would like unanimous consent to 
submit to the record some documentation to complete the record.
    Chairman Boehner. Without objection.
    Mr. Kildee. I thank the Chairman. I would like to direct a 
question first of all to Mr. Hill and then the others may want 
to comment on that. There is a bill, Sanders-Miller bill, of 
which I am cosponsor, H.R. 1677, which would first of all give 
a choice to the employee between the traditional and the cash 
balance plan and also would ban the wear-away provision.
    Could you comment on that?
    Mr. Hill. Yes, I will be glad to comment on that.
    It is truly clear that some of the most virulent, if you 
will, or the most emotional reactions to cash balance plans 
have come in the conversion process, and two of the issues that 
have caused the most concern among older workers are addressed 
in that bill. One is, and Dr. Clark has written about it, the 
nature of the relationship between the employer and the 
employee. When an employer has essentially entered into what is 
perceived by them to be a long-term contract, they sacrifice 
current income in return for later increasing benefits. Having 
made that choice and having lived with that choice for a 
decade, two decades, in some cases three decades, only to find 
that bargain dramatically altered overnight, has been an 
enormous blow to them, particularly as it comes long after they 
have made decisions about savings and their future.
    That bill would address that very, very serious concern.
    Mr. Kildee. On that point pensions really are an earned 
deferred income, are they not? They are not just a gift from 
the employer.
    Mr. Hill. I have never met an employee yet who didn't 
consider it to be a part of their incomes. When you talk to 
employees who chose to forgo other kinds of plans, chose to 
forgo higher employment pay on a current basis, chose to forgo 
stock options during the late 1990's, they certainly thought 
they made that choice. They lived with that employer and they 
benefited that employer, and the employer made those promises 
with that intention.
    I mean, those promises are made to attract the kind of 
workers those employers wish to attract.
    The second issue that has hit older workers so severely is 
also the wear-away which, as the GAO study acknowledged, could 
impact people to the point where at 55 when their charges 
occurred, they might go the rest of their professional career 
without changing their pension benefits, even though they might 
have been with that employer for 30 years. So that is clearly 
the case and that bill would address two of the most serious 
concerns that have arisen.
    There are employees--employers, excuse me--and Eaton, I 
know, only from what I have heard from Ms. Collier--that have 
taken what I would call a more appropriate response in making a 
conversion. But I would note that according to the recent study 
done by Mellon that I being Eaton would fall in a category of 6 
percent who have made similar kinds of conversion opportunities 
available to their employees.
    So from the perspective of any one company, any one of 
these issues may be, I will say, slight or more serious or less 
serious. However, from the broad breadth of employees, the 7 
million or so that have been impacted by this, clearly those 
two issues are at the forefront of their concerns.
    Mr. Delaplane. If I might just comment on that, Mr. Kildee.
    Mr. Kildee. Surely.
    Mr. Delaplane. I want to reiterate something that Chairman 
Boehner said. We have a provision of law today which ensures 
and requires that no benefit earned for service today can be 
taken away. So promises made by employers are promises kept, 
and that provision of law ensures that. I want to be clear 
about that.
    In addition, let us recognize that when employees 
experience a significant wear-away, it tends to be because this 
early retirement benefit under the prior plan was very, very 
generous. These, again, are some of the richest benefit plans 
in the country. Many workers would be envious to have such a 
subsidy in their plan. So that is what really explains this 
wear-way, the very generosity of the plan prior.
    With respect to the legislation you referenced, here is 
why----
    Mr. Kildee. But their wages may have been generous too. You 
are not asking them to give some of the wages back through the 
years, are you?
    Mr. Delaplane. What I am saying is what Professor Clark has 
said. In the future for days not yet worked, conditions can 
change. So I think we go down a very slippery slope with a bill 
like H.R. 1677 which basically says we are going to guarantee 
employees future benefit expectations. We are going to turn 
them into legal rights. Because if I as an employee decide I do 
not like a pension change, I just choose my way out of it. The 
problem with that is a very slippery slope. Why are we singling 
out cash balance conversions for these kinds of changes? And 
employers are very concerned that quickly we are going to say 
that you can't change your traditional plan without a choice, 
you can't change your health plan without a choice, you can't 
change your 401(k) match without a choice. We are not clear 
where it ends and we worry that that creates very significant 
problems for employers, minimizes their ability to be flexible. 
That is our real policy concern with a bill like H.R. 1677.
    Mr. Kildee. My time has expired. Let me say as one who 
recognizes the fact that you cannot have employees without 
employers, I want to have a balanced bill. And I think that 
H.R. 1677 tries to achieve that balance and give some 
protection to the employee, while recognizing some of the needs 
of the employers.
    We have tried to achieve that balance and I hope if we 
report a bill out of here, that some of the wisdom from this 
side of the aisle might be coupled with some of the ideas on 
your side of the aisle.
    Ms. Pfotenhauer. Congressman Kildee, there is a very 
interesting working paper that is being authored by Olivia 
Mitchell and Janemarie Mulvey at the Wharton School, entitled 
``Possible Implications of Mandating Choice in Corporate 
Defined Benefit Plans.'' it is just a working paper and does 
not speak directly to the legislation that you mentioned. But 
it heightens my concerns about unintended consequences of doing 
this type of thing, and I would highly recommend that your 
staff take a look at this and see whether they think those 
concerns are relevant.
    Mr. Kildee. We will do that. Thank you very much.
    Ms. Collier. Mr. Kildee, I believe you asked me to comment 
on Mr. Hill's testimony as well, and I would like to do that. 
Although it was, I think he used the word ``appropriate,'' that 
we had an appropriate conversion and that was appropriate, but 
it was appropriate for Eaton. I have also worked at a prior 
employer and been involved in two cash balance conversions at 
that employer and we also had conversion techniques but they 
did not involve choice. There are a lot of different techniques 
out there and a lot of valid techniques out there that should 
be appropriate for that company.
    Secondly, you asked me to speak--oh, and your study also, 
Mr. Hill, mentioned the 6 percent. I think that is specific 
just to choice. There are other conversion techniques out there 
that are either in the Mellon study or in the Watson Wyatt 
study. I think the number is larger than that when you include 
all techniques.
    And as far as wear-away, we did some have some wear-away in 
our plan but we took great steps to mitigate that. And also we 
had 11 percent of our employees over 55 choose the cash balance 
plan because wear-away is often a temporary condition. And 
those employees who expect to work longer in their careers were 
actually better served choosing the cash balance plan.
    Mr. Kildee. Thank you, Mr. Chairman. I thank the witnesses.
    Mr. Johnson. [Presiding] Thank you. And you know we will 
take your remarks into consideration in everything we do. 
Especially Rob down there. Mr. Delaplane, if certain mandates 
were required in the voluntary employer-sponsored system to 
mandate employees' expectations of benefits, could these 
mandates affect employment practices and America's overall 
competitiveness in the world economy?
    Mr. Delaplane. Mr. Chairman, I think you raise a very 
important caution about those sorts of proposals. As I 
mentioned in my earlier response, it is not clear where the 
line will be drawn and why all benefit changes would not be 
subject to this protection of expectations. Part of the reason 
that we have had robust employment in our country is that 
employers have had the flexibility, prospectively, to alter 
their benefit programs, alter their comp structure, and be 
nimble and move in the economy accordingly.
    If you contrast that with more of a European model where it 
is very, very difficult for employers ever to change the 
conditions of employment from the day the employee began, you 
see much less robust employment sort of systemically. And I 
think the concern is if we layer on these protections of 
expectations and we prevent employers from being able to make 
changes, that is the direction we are going to go. Employers 
are going to be much less willing to add people to the payroll, 
knowing that it would be virtually impossible to change their 
pay and benefits going forward. So I think it is a very 
significant risk to competitiveness.
    Mr. Johnson. Thank you. You all talk about lump sum 
payments. That seems to hurt more than helps. Would you all 
comment on that and can you tell us whether we should even 
address that issue or not?
    Mr. Delaplane. It has certainly been one of the attractive 
features of the hybrid design for most employees. They value 
the fact that the benefit can be taken as a lump sum.
    Mr. Johnson. But they do not have retirement for the long 
term.
    Mr. Delaplane. By law, luckily the hybrid plans, like the 
defined benefit plans, are required to offer the benefits also 
in the form of a joint and survivor annuity. So unlike the 
defined contribution 401(k) world where that is not a 
requirement, for hybrid plans it is a requirement to offer an 
annuity. Part of the reason here----
    Mr. Johnson. But it is still the employee's choice.
    Mr. Delaplane. Still the employee's choice. One thing that 
may address your concern is that employees can take that lump 
sum from a hybrid, roll it over to an IRA and continue to 
invest it and have it build more in earnings today, before 
retirement. And that actually protects from the harms of 
inflation. In a lot of traditional plans where you can't take a 
lump sum, your benefit is a fixed dollar amount over time and 
becomes less valuable over time. The hybrids help respond to 
that problem. At least the lump sums continue to be invested 
and rolled over and grow all the way to retirement age.
    Mr. Johnson. Yes, sir?
    Dr. Clark. Thank you, Mr. Chairman. In comparing what 
companies might do, certainly many companies might, as has been 
suggested here, close their defined benefit plans and open a 
401(k) plan as many companies have done over the last 30 years. 
And when you start thinking about are cash balance plans better 
than that alternative as opposed to are cash balance plans 
better than retaining the traditional plan, you have to 
consider, because clearly that is an option that many companies 
have followed.
    And the annuitization issue is certainly one that is very 
important in that choice, as is the investment risk. One thing 
about annuitization and lump sums, though, whether you are 
looking at the U.S. or Japan or anywhere around the world where 
lump sum options are offered, people take them.
    Mr. Johnson. Generally speaking, though, they spend it. It 
is not there for their long-term retirement.
    Mr. Delaplane. And one issue that you folks have addressed, 
recently the 30-year Treasury bonds, which you very helpfully 
provided a replacement rate for 2 years. A piece of that issue 
we have not yet confronted is the use of the 30-year Treasury 
rate in valuing lump sums from defined benefit plans. The fact 
that we still have to use this low 30-year Treasury rate means 
that the lump sums are artificially inflated and we are tipping 
the playing field toward employees taking the lump sums today. 
They are more valuable than the equivalent annuity. And 
obviously that is one of the issues you are hoping to address 
long term, but that contributes to the problem that you are 
raising.
    Mr. Johnson. That is a great point. Thank you.
    Mr. Hill. Could I respond to your question earlier about 
international competitiveness? I think employees and employers 
are mutually concerned about international competitiveness. And 
as with so many of the issues that you have addressed 
congressionally in terms of public policy, the question is 
striking the proper balance.
    We are, after all, sitting here talking about Congress 
having mandated a prohibition against age discrimination in 
context of certain tax-incentivized private pension plans. I 
think this year it is going to cost about $90 billion for the 
taxpayers to have this, quote, private retirement system we are 
talking about. We are all concerned about that and we are 
concerned about modifying a prohibition against age 
discrimination.
    If we were talking about modifying a prohibition against 
sexual discrimination or racial discrimination, I think we 
would not be talking about the cost of that in terms of 
international competitiveness. Each of those bears some cost 
arguably. But I think we as a country have decided those things 
are sufficiently important to us that we are going to value the 
prohibitions against sexual discrimination or racial 
discrimination or any other kind of discrimination that you 
have chosen as a public policy.
    So what we are really talking about is whether there is a 
modification of the current prohibition in the tax-incentivized 
private system for pensions. And that is all we are talking 
about here at the core.
    Mr. Delaplane. Mr. Chairman, if I might real quickly. As 
Mr. Hill knows, the legislative history of that pension age 
prohibition in 1986 was very clear that the practice Congress 
was focused on was employers who were ceasing continuing 
accruals when somebody hit normal retirement age at 65. That is 
in the title of the provision in the statute and in the 
legislative history. I do not think--I sort of challenge the 
idea that you are walking away from some commitment that you 
made. It was very clear that was the fact pattern that Congress 
was focused on, which wouldn't even reach to the issue of what 
is happening to pre-65 employees.
    Mr. Johnson. Thank you. You know, this is an interesting 
discussion. I appreciate all of you participating. Did you want 
to make a comment?
    Ms. Pfotenhauer. If I might. Since the Society of Actuaries 
has done the analysis in 1998 that showed that 77 percent of 
women are better off under cash balance plans, I don't think it 
is outrageous to contemplate a scenario where people like me 
might feel that any action of Congress that made it less likely 
that a cash benefit plan was going to be available was actually 
gender discriminatory.
    Mr. Johnson. Thank you. Mr. Andrews, you are recognized for 
5 minutes.
    Mr. Andrews. Thank you, Mr. Chairman. I want to thank the 
witnesses for their very substantive additions to helping us 
solve this difficult problem. Thank you. I have enjoyed reading 
what you had to say and listening. Solving difficult problems 
almost always requires us to compromise and to find middle 
ground between two very defensible positions. The first is the 
fairness to employees who reasonably rely upon a set of 
expectations in their lives and in their family budgets, and 
the second is to make sure that employers who are voluntarily 
providing pensions can do so in a way that is consistent with 
the competitiveness and success of their business. I don't 
think that those are mutually exclusive goals and we are trying 
to find the common ground between the two of them.
    Mr. Delaplane, I wanted to ask you on this question of 
choice prospectively. That is to say, where an employer is 
considering make conversion from a defined benefit plan to a 
cash balance plan. I think I heard you say that you oppose the 
idea that employees would be permitted to choose whether to go 
into the cash balance plan or keep the traditional plan. Is 
that your position?
    Mr. Delaplane. We would oppose that as a mandate; correct.
    Mr. Andrews. Under what circumstances would the employer be 
disadvantaged if an employee chose to stay in the traditional 
defined benefit plan? What is wrong with that from the 
employer's point of view?
    Mr. Delaplane. There may be nothing wrong with that. It 
depends, obviously, on the demographics of your workforce. I 
think part of the problem is if that is a worker who will not 
be with the firm for an entire career, you are likely to see 
disappointing benefits under the traditional formula because it 
is so backloaded to the end of a career. If you are as an 
employer trying to say how can I most equitably use my benefits 
budget to deliver meaningful benefits to the people who work 
for me, the traditional plan for many employees is not the way 
to do that.
    Mr. Andrews. If I may, that is a disappointment for the 
employee and he or she has made that choice. People are 
sometimes a little irrational, but if you have chosen to stay 
in the defined benefit plan, you do not have a lot of grounds 
to complain that it is not as good for anything else you might 
have opted for.
    Mr. Delaplane. I understand. But employers are trying to do 
right by their folks. The traditional plan may have these very, 
very rich early retirement subsidies, and again a lot of 
employers have job shortages in certain categories.
    Mr. Andrews. But if I understand correctly, the legislation 
Mr. Kildee referred to would not prohibit the employer from 
modifying those retirement subsidies. If you kept your DB plan 
and chose to modify your early retirement subsidies, there is 
nothing in that legislation to preclude that. That is a 
separate question from choosing not to go into the cash 
balance.
    Mr. Delaplane. The bill has another provision on wear-away, 
which Mr. Kildee mentioned, which makes more complicated the 
effort to strip out the subsidies. So there is a piece to that 
issue. But I think the primary concern is that you are not--it 
is really the precedent. Why are we elevating this particular 
kind of benefit change above all others for this brand-new kind 
of----
    Mr. Andrews. I think the answer would be because it is the 
only kind of benefit change I could think of where the employee 
might wind up poorer than he or she would otherwise be. I 
cannot think of any other conversion where that would be the 
case.
    Mr. Delaplane. What about the incidents that happened Mr. 
Andrews where employers have concluded they have to suspend 
their matching contributions to their 401(k) plan. And 
employers have had to do that. So that the only money going 
into the 401(k) at that time is the employee money. The 
employer contributions which would normally be triggered are 
not occurring.
    Mr. Andrews. But that is not a plan conversion. That 
presumably flows off of economic difficulties that the employer 
is having generally.
    Mr. Delaplane. I guess what I would say is that we do not 
see a principal distinction why, if Congress believes that 
protecting the expectations is right for the traditional plan, 
it is also right for the----
    Mr. Andrews. Here is how I see the difference. I certainly 
do not support something where we require someone to keep a 
promise that they did not make. If we passed a law that said we 
have to keep the employer match under the 401(k) no matter what 
is happening to your business, that is a promise that the 
employer did not make.
    On the other hand, when an employer enrolls someone in a 
defined benefit plan and says if you work a certain number of 
years and make a certain amount of money and retire at a 
certain age, this is what you are going to get, I know the 
legality of that promise is subject to dispute but the morality 
is not, and it seems to me that it is important.
    Can I ask Mr. Hill a quick question? I know that you do not 
seem to like the cash balance plans at all. At least I derive 
that from your testimony. I do not agree with you on that. I 
don't think there is anything inherently wrong with these 
plans. I would ask you to submit for the record your thoughts 
on what a fair conversion might look like. It is clear what you 
think an unfair conversion looks like. I would be interested in 
your thoughts as to what you think a fair conversion looks 
like.
    Mr. Hill. Would submit that. It is unfair to ask a lawyer 
to do that. We all the time take directions from you and then 
we argue about what you meant.
    Mr. Andrews. I know it is unfair. I am a lawyer; that is 
why I asked you the question.
    Mr. Hill. I respect that. I was going to suggest you were 
getting it back in kind. We normally can dump off and impose on 
you----
    Mr. Andrews. It is a professional discourtesy, I guess.
    Chairman Boehner. [Presiding] Thank goodness I am not a 
lawyer. The gentleman's time has expired. The Chair recognizes 
Mr. Burns.
    Mr. Burns. Thank you, Mr. Chairman. I too share your 
challenge, not being a lawyer. So I will join this discussion a 
bit and seek to get more input.
    As an individual who worked for an organization for 20 
years and enjoyed a defined benefit plan, and having a choice 
late in that career to change, chose not to because, as you 
suggest, maybe that would be to my personal best interest.
    The first question is if you look at defined contribution 
plans versus defined benefit plans, do we agree on which 
theoretically is better? Do we agree theoretically, Ms. 
Collier?
    Ms. Collier. I actually think they serve different 
purposes. Someone earlier stated that savings plans, the 401(k) 
plans were never intended to be one's sole source of 
retirement. So in our case we use them to encourage employees 
to save and we do that by matching at one of the safe harbor 
generous employer match.
    Mr. Burns. If you look at any growth curve--if I started at 
25 and stayed to 65, is a defined contribution plan a superior 
plan?
    Ms. Collier. No, not necessarily. The defined benefit plan 
offers security. It offers a guaranteed interest rate. The cash 
balance plan I am speaking of in this case.
    Mr. Burns. Are we really arguing about conversion issues 
and about the early retirement boost that many--not many, but 
some plans offer?
    Ms. Collier. I think that is one aspect. But I think we are 
also concerned about the general legality of the age 
discrimination.
    Mr. Burns. Age discrimination has come into the discussion 
and it has clouded and muddied the water fairly substantially.
    Dr. Clark. Mr. Burns, if you look at the three types of 
plans and you line them up and you offer them to different 
workers, some workers would clearly prefer the traditional 
defined benefit plans, others would clearly prefer the cash 
balance plans, and others would clearly prefer the defined 
contribution plans. In my view, they are all relevant 
retirement plans that can provide an adequate retirement 
income, provided that the person follows through or the company 
follows through on particular decisions.
    The characteristics of those plans appeal to different 
people based on their risk aversion, their career paths, and 
all of these others, which is why I would say that it is 
important to have all types of plans out there. And the other 
thing we have to keep in mind is that the employer and the 
employee are both interested in the value that they get out of 
the plan for every dollar that is put into the plan. And that 
includes all of the costs of managing the plan and operating 
the plan as well as the net rate of return, then.
    And when there are events that happen that increase the 
costs to any one particular plan, workers and firms are likely 
to move from one plan to another. And that is basically what 
has happened with the defined benefit world, is that Congress 
raised the price of that plan relative to the other types of 
plans and companies and workers were choosing increasingly 
defined contribution plans. It does not make it inherently 
better; it just means that at the current prices, more people 
are choosing this plan versus the other.
    Mr. Burns. I have an inherent problem with mandating 
volunteer participation. And one of the questions I have, if 
Congress was to mandate early retirement subsidies in a 
conversion program, what impact would that have on businesses? 
And really providing benefits to employees that maybe they were 
not entitled to?
    Dr. Clark. I think that early retirement subsidies were put 
into the traditional defined benefit plans in an era when 
companies wanted to encourage older workers to leave. That was 
in the period of rapid labor force growth and a period of more 
homogeneous worker force. Lots of reasons why companies chose 
that as an optimal human resource policy.
    In today's climate that is not happening. Instead, more and 
more companies are going to be looking at a slowly growing 
labor force. Valuable workers with good experience, these are 
productive senior workers. There is no reason to encourage them 
to leave. I believe that companies around the country will 
ultimately be moving more and more in the direction of looking 
at their entire human resource policies and trying to figure 
out how to keep older workers on rather than trying to push 
them out. And certainly the elimination of early retirement 
subsidies is consistent with that public policy and consistent 
with the objectives of Congress as we look at Social Security 
and other areas of fiscal certain.
    Mr. Burns. Ms. Collier would you address that point?
    Ms. Collier. Yes. You mentioned specifically the mandate 
issue and that is what concerns me the most. While we were 
undergoing our conversion process, a lot of people would call 
me from around the country, different companies, and ask how we 
were doing and what the appropriate--how we were converting and 
what our communication strategy was, et cetera.
    Since 2003, even with the threat of mandates and the 
introduction of proposed legislation, those calls have changed 
dramatically in content. The employers are calling but they are 
not changing from one defined benefit plan to another. Rather, 
they are either freezing or terminating or converting their 
defined benefit plan and having a defined contribution plan 
only for the future. It is already starting to take effect in 
my personal experience.
    Chairman Boehner. The Chair recognizes the gentlewoman from 
California, Ms. Woolsey.
    Ms. Woolsey. Thank you, Mr. Chairman. And thank you to this 
panel.
    We were talking about conversions and that we can take care 
of the current older workers, and that is possible by letting 
them grandfather/grandmother and stay in their plans. But you 
know our responsibility up here is to all workers and all 
employers and looking at the longterm for retirement. And 
somebody, one of you, and it may have been you, Mr. Delaplane, 
said that employers are constantly changing their benefit plans 
because they are fluid. I am a human resources specialist 
professional for 20 years before getting here. And that is 
true. They are, and they have that right.
    But sitting up here, the Federal Government, I mean, what 
we do, if we change Medicare, if we change Social Security and 
drastically pull the carpet out from what people know that they 
can count on, we get fired. The CEO does not get fired by the 
employees when they decide that the company wants to cut costs. 
We will get fired.
    And what we are counting on when we have Social Security 
is--the minimum base of what a worker gets is that they are 
building on top of that. So when we talk about--and I have a 
question for you, Ms. Pfotenhauer, Nancy, I want to call you 
Nancy. When we talk about unintended consequences it is not 
just on the employer. We are looking at this long-term woman 
that worked. You said that she was lucky enough to be working 
longterm for the same employer. Wrong. The employer is lucky 
enough to have had an experienced, long-term, loyal employee.
    The unintended consequence is to even think about removing 
her benefits and pulling the rug out from under her. We need to 
protect those workers. We need to encourage long-term loyalty. 
So I want to ask you how you think that can happen. And at the 
same time, I want all of you, if you will, to answer me about 
more portability, mobility, with these cash balance plans 5 
years to vest. How is that more mobile and more portable?
    So I will start with unintended consequences.
    Ms. Pfotenhauer. Let me start with why someone is lucky if 
they are able to maintain employment for two decades. We are 
struggling right now. It takes two working parents to support a 
family. Many women are finding themselves in a position of 
being single parents where they are providing most of the 
financial support for themselves and their children.
    And frankly I think women, as well as the employers who 
employ them, are lucky if they find a job situation that works 
out for two decades. It is clearly not happening for the 
majority of women who stay on a job less than 5 years. And they 
do that for different reasons and the data does not allow us to 
imply why. But it seems to strongly support the contention that 
women tend to take more time out of the workforce as they try 
to do that balancing act to take care of children and elderly 
parents.
    So basically I think someone is very, very lucky, male or 
female, if they are able to find a workable employment 
situation.
    Ms. Woolsey. Absolutely. So I am going to take back my time 
a little bit and have a discussion with you. Therefore, we 
should be using that as the way we want to go, not to make it 
harder for them. Five years, if they are in and out of the 
workforce and 5 years vesting?
    Ms. Pfotenhauer. They are averaging 4.8 years. And what you 
find and what the data clearly shows is that this trend of 
women going in and out of the workforce is not going away. And 
I am not sure it is the job of this Committee to try to make it 
go away. Because what is happening is something called 
sequencing in labor patterns where women are not just taking 
time out when their children are first born, but are actually 
taking time out again when they are in high school, because 
there has been a resurgence of concerns.
    Ms. Woolsey. Actually, you are a great straight person for 
me, because I have legislation called The Balancing Act to 
Bridge Work and Family. Ms. Collier, did you want to respond to 
this?
    Ms. Collier. Yes, I want, thank you. In regards to 
mobility, I think I mentioned mobility is also an issue for us 
internally to the company with over 100 locations in 40 States. 
We have a lot of people that were transferring from one 
location to another. And in doing so, they were often turning 
us down perhaps because of the difference in pension plans. So 
we solved that problem internally as well by doing our choice 
program.
    In addition, as far as vesting, we voluntarily vest our 
401(k) match immediately. And then we want to continue to have 
an incentive for some of these highly recruited employees, be 
it in engineering, HR--we have an H.R. developmental program--
supply resource management, IT, what have you, we would like to 
have an incentive to keep them for 5 years. There is a 
considerable amount of training, as you know, that goes into 
building someone's career skills in the first 5 years, and by 
doing so we hope to continue to entice them to remain with us 
by having a plan that is very visible and attractive to these 
employees.
    Ms. Woolsey. Just a minute Mr. Delaplane. I want to thank 
you. I really think we ought to use Eaton as one of our model 
companies unless there is something I am missing here. But you 
do know that not all employers are as responsible as you are. 
Mr. Delaplane.
    Mr. Delaplane. Just a couple of quick points about vesting 
when an employee stays with a company for 5 years or 6 years. 
Under a hybrid plan they will depart with a much higher benefit 
than they would have departed with under a traditional plan. So 
you have to make it to that vesting threshold, obviously. But 
the way the benefits accrue in a cash balance plan, you leave 
with a much more significant benefit. So that is the advantage.
    Ms. Woolsey. If you stay 5 years.
    Mr. Delaplane. If you stay 5 years. And Ms. Woolsey, as an 
employer organization, we want to emphasize a lot of common 
ground with you. We do want to see as many employees as 
possible enjoy those defined benefit plan benefits. They are 
employer funded, they are backed by Federal guarantees, they 
have spousal protections. And I think our perspective is that 
we do want employees to be able to remain in that system. A 
traditional plan or a hybrid.
    And to your point about conversions, I think Eaton has 
become close to the norm. If you look at the data we cite in 
our written statement, 9 out of 10 employers provide very 
significant conversion assistance of one sort or another to 
their older workers, whether that is choice, whether that is 
grandfathering. It is the unusual employer in financial 
distress who may not do those additional conversion benefits. 
Frankly, I think many of the key concerns many have had about 
conversion has been addressed in the marketplace.
    Ms. Woolsey. Dr. Clark?
    Dr. Clark. I think the fundamental principle of a lot of 
the discussion that we are having today is the difference 
between the exit pension, or what has legally been earned, and 
the expectation of workers from their pension. And as Mr. 
Delaplane just said, if you are leaving from 5 years out to 20 
years, you are typically going to leave with a much bigger 
benefit under a cash balance plan or a defined contribution 
plan than you would with a defined benefit plan.
    If you stay all the way to early retirement, if you stay 
all the way to early retirement, if the company keeps the 
pension plan, if the company does not convert to a defined 
benefit plan, if they do not do away with the early retirement 
subsidy, then you would get a bigger benefit. One of the 
problems that companies have with workers is trying to explain 
what the benefit that they do have under the defined benefit 
plan is. And the benefit calculators that were mentioned by Mr. 
Miller earlier is one way that they try to show that, but that 
is really based on all of these expectations that you might get 
there, and it certainly leads to the impression that it is a 
guaranteed benefit even when it is not.
    And so how do you explain this? Communication is a very 
important key for an ongoing plan, but it is essential when you 
are making a conversion. And those companies that have 
converted pension plans, that have had good communication 
strategy, have had the transitional benefits, have made these 
transitions with essentially no adverse reactions, no need for 
lots of lawyers involved, and the plan has gone forward.
    Those companies that had bad communication plans or did not 
have transitional benefits, or smaller ones, had more problems. 
That is the issue. What is the benefit that people have earned? 
What do they think they have earned? And what is the legal 
benefit that they actually have earned?
    Ms. Woolsey. In the long run, the more healthy our benefit 
plans are, the better the retirement benefits, the healthier 
this Nation is. Because somebody is going to be supporting 
older Americans.
    Chairman Boehner. The gentlewoman's time has expired. The 
Chair recognizes the gentleman from Georgia, Mr. Isakson.
    Mr. Isakson. Thank you, Mr. Chairman. I want to 
congratulate Ms. Pfotenhauer on what I think may be the hearing 
quote of the decade when she admonished us that the only thing 
we cannot amend is the law of unintended consequences. I 
thought that was a great line and I would like to follow up on 
that line by asking you a question.
    It appears to me if the Cooper versus IBM decision stands 
unaddressed by Congress statutorily, that the unintended 
consequence vis-a-vis the age discrimination interpretation in 
that case would be that there are not going to be many defined 
benefit or cash balance plans and everything is going to be 
defined contribution. Would you comment on that?
    Ms. Pfotenhauer. That is really why I am here today. That 
is our greatest concern. As I said, this is not a Republican or 
Democratic cut on the issue. It is just clearly there in the 
numbers, and that is that women benefit much more under a cash 
balance approach than they do under the traditional approaches. 
And it is not just because of their traffic in and out of the 
workforce. It is that other point. It is that we rarely can 
afford to take the option for early retirement.
    So we think that we are a relatively small organization. We 
choose our issues carefully. We think this is dramatically 
important to our constituency in term of what we work on for 
retirement security.
    Mr. Isakson. Mr. Hill, would you agree with my reasoning 
that if Cooper stands and Congress does not address the issue 
of age discrimination and the time value of money, that in the 
future for workers coming into the workplace there is a 
likelihood the only thing you are going to see is the defined 
contribution plan?
    Mr. Hill. I do not agree with it but I recognize it is 
speculation as we are all speculating about something that 
other people would do in the future. The point I would make, 
though, is that with far less expense than converting to a cash 
balance plan, if employers wish to address the women's issues--
--
    Mr. Isakson. I am letting you handle the men's side. She is 
to address the women's side. I want you to address the men's 
side. We do not live as long and all of that stuff. But the 
absence or the unintended consequence of reducing the 
availability of defined benefit or cash option or hybrid plans 
seems to be inevitable if Cooper is not addressed by this 
Congress. My question to you is, does that not seem pretty 
apparent to you too?
    Mr. Hill. No, it does not. What Congress has done is define 
two different worlds, a defined benefit plan and a defined 
contribution plan at this time, and that is what you have done. 
And you have imposed uniform obligation in each of those 
categories that differ because of the different structure, the 
risk analysis, who is taking and making investment decisions, 
and all of those kinds of things.
    It seems to me that if we were properly presented with this 
issue, it would have been those who wish to see changes made 
that would be more receptive, for example, to some of the 
issues that are raised--and I do not disagree that those are 
valid policy issues for this Congress to address--would have 
come before Congress and asked for the creation of a third 
category where these kinds of public issues would have been 
debated, where the balancing that you are talking about--and I 
agree it is a proper balancing--would take place.
    That is not what happened. Rather, without that kind of 
consent in the face, I would say, of mandatory age 
discrimination language in the statute, they chose on their own 
to go off and come up with plans that have some of the aspects 
of both the defined benefit plan but also want to have some of 
the essentially legal defenses and legal authorizations of a 
defined contribution plan. And that is not the current law.
    But the way to come back with that would be for Congress to 
address this in the first instance with a policy balance that 
if you agreed, for example, with Dr. Clark that there should be 
a third type of plan in the marketplace, you would then do that 
and you would address it in that fashion.
    I would suggest also employers can address those same 
issues regarding women and deal with it in a far less expensive 
plan than cash plans if that is truly their motivation.
    Mr. Isakson. Your case, well stated, presumes your obvious 
agreement in Cooper in regards to age discrimination and the 
compounding of interest. My comment to you would be the 
following: Yesterday by happenstance, not by plan, I spoke to 
80 employees of a major company in my district, but it is a 
national company whose company last year, 2003, adopted--gave 
them choice on defined benefit or to a hybrid cash balance 
plan. And the concerns expressed to me in that meeting about 
the uncertainty based in that case on failure of Congress to 
deal, puts in jeopardy those types of choices in the future and 
ends up having the unintended consequence--if you look at 
business and the environment we are in today--of employees 
really getting less options in the future than they have today.
    And I am making a statement here. I am really not asking a 
question, I apologize Mr. Chairman. But it seems--the argument 
to me on the comparison of the 25-year-old worker and the 55-
year-old worker and the compounding of interest and that being 
age discrimination is to me ludicrous. But it is more ludicrous 
that we would sit here as a Congress do nothing and create an 
environment where the opportunity for benefits for employees, 
valuable employees working, just diminished because of the 
consequence of our inaction. Thanks for letting me make a 
statement.
    Chairman Boehner. The Chair recognizes the gentleman from 
Oregon, Mr. Wu.
    Mr. Wu. Thank you very much Mr. Chairman.
    This is a truly challenging issue, and one of the 
challenges of this job is trying to drill down deeply while 
covering the breadth that we need to do. My reading on this was 
done one or more years ago. My recollection from the CRS, the 
Congressional Research Service materials that I read at that 
time, is that if you look at graphs, if you change jobs a 
certain number of times, at some point based on job change and 
number of job changes or period between job changes, there is a 
crossover point between the traditional defined benefit plans 
and the cash balance plans. Do I recall that properly?
    Mr. Delaplane. Mr. Wu, we actually cite in our written 
statement an analysis that looks at a person who changed jobs 
three times in a career as opposed to a person whose changed 
none, no times. And for the person who changes over three 
times, which is less than a lot of people do, the hybrid plan 
would produce 17 percent higher benefits than the traditional 
plan. And for many employees just a single job change can yield 
the hybrid plan producing a higher benefit.
    Mr. Wu. Conservatively speaking, if there are three to five 
job changes in a career in a working lifetime, your assertion 
would be that cash balance plans would better serve the 
financial needs of that particular employee.
    Mr. Delaplane. Absolutely.
    Mr. Wu. OK. Having established that, it was my Republican 
law partner when we were looking at our benefits plans and I 
thought that we would have a vesting period of 1, 2, or 3 
years, and it was my Republican law partner who said having an 
employee stick around just to vest is probably the worst idea 
there is and we ought to just vest people on Day One.
    If we do assume that people move around from job to job and 
if hanging on purely to vest is a bad idea, then what is the 
matter with pushing the vesting envelope so that instead of 
vesting at 5 years--we had a discussion in this Committee of 
whether the vesting period should be 1 year or 3 years under 
different legislation. What would be any meaningful problem or 
any significant problem with vesting--with pushing that vesting 
envelope so that instead of 5 years it was 3 or 1, or even 
vesting as Eaton does with its defined contribution plan?
    Chairman Boehner. If the gentleman would yield, as you know 
under the defined contribution plans, the limit, the maximum 
limit is 3 years. It could be zero. For defined benefit plans, 
the maximum vesting period is 5 years. Could be far shorter 
than that at the election of the employer.
    Mr. Wu. I understand, Mr. Chairman. And we have had 
discussions on this topic which I have enjoyed, and the 
question is whether that upper limit should be legitimately 
pushed down from 5 to 3 to 1, perhaps approaching zero. Are 
there any problems with that?
    Ms. Collier. Well, someone mentioned earlier there are only 
so many benefit dollars a corporation has to spend. My fear is 
there is obviously a cost increase there. There is also 
employee retention. We do vest our defined contribution 
participants immediately, but we do have an interest in getting 
the most out of these new recruits. And 3 years does not even 
give enough return on our investment, if you will, for the new 
employees. It is both the cost of the benefits and the ability 
to retain people for those first 5 years, and hopefully then 
they will see that their career path is with Eaton and not 
another company. We do not want to train employees who then go 
on to other companies after a few years.
    Mr. Delaplane. Mr. Wu, as I think you know, many of the--as 
a matter of fact, the vast majority of employers who have 
adopted hybrid plans also offer a defined contribution plan, 
like Eaton does. So we have got a variety of techniques to use. 
And you are seeing, not just as a legislative matter but as a 
voluntary matter, that the vesting schedules in those defined 
contribution plans have been coming down.
    It is a balancing act. You do want to get benefits to 
people quickly, recognizing the patterns in the workplace 
today. But as Ms. Collier referenced, you want to have some 
incentive--not necessarily to be there for 30 years, but to 
stay to 5, to stay to 7, to stay to 10. And it is a balancing 
act and Congress has obviously tried to set that balancing act 
appropriately, as employers do.
    Ms. Collier. And it is also something that I don't hear 
about from my employees. They are not expressing an urgent need 
for it. Congresswoman Woolsey, you were an H.R. professional. 
You hear about aspects of a benefit plan that are not popular 
and we are not hearing it.
    Mr. Wu. Mr. Chairman, since I yielded a part of my time, if 
I could finish this part of the analysis. It seems to me that 
most of the surveys show that pay is an important factor, but 
not the top factor, and probably benefits is behind pay in 
terms of retention and people's decisions about where they 
choose to work.
    And that being the case, this being such an important 
policy arena to provide for secure retirement, you are probably 
not getting that good a leverage from the vesting efforts. At 
least the competitive philosophy that I have always used, that 
I picked up from our high-tech clientele that we used to serve 
before I came here, and the competitive philosophy that we 
still use on the congressional staff is that we want to provide 
the absolute most conducive working environment to give 
satisfaction to our employees in terms of what they want to do 
with their lives. And as long as they are adding value to the 
team and the team is adding value to them, then it makes sense 
for us to stick together. And that some of these other 
considerations get in the way of a secure retirement, but they 
may not be very effective in terms of retention policy.
    And I just want to submit that for your consideration and 
your written comment. And, Professor, if you have something to 
add, I am sure that the Chairman will indulge you.
    Dr. Clark. Well, the only thing I would add out of that is 
I think that if you calculated the present value of a defined 
benefit plan from working 1 year, it would be infinitesimally 
small; so the value to the worker in a traditional defined 
benefit plan of working less than 5 years, like, say, 1 year or 
immediate, would not be that great. You are calculating the 
value way out and discounting it back.
    That is why you don't hear about it from the younger 
workers. They look at it and say, even if I had this it 
wouldn't be worth anything to me today.
    Mr. Wu. I may change my mind as I get older also.
    Dr. Clark. Value to you would be greater if you were older 
and closer to retirement and had more years of service.
    Mr. Wu. Thank you, Mr. Chairman. Thank you to the 
panelists.
    Chairman Boehner. Mr. Payne. The Chair recognizes the 
gentleman from New Jersey.
    Mr. Payne. I am sorry that I missed--this is an area that I 
have had a lot of interest in over the years. Being older, I am 
more familiar with the defined benefit because many, many years 
ago, as all of you know, that was the type of thing that most 
workers had. You knew you were going to work 40 years at one 
place, retire, you were going to get X-amount of dollars and 
that was it. Of course the advent of the 401(k) and the change 
in the way that employers decided to provide for retirement 
security changed a bit. And of course this cash balance plan is 
something that I am less familiar with.
    But I might ask Mr. Hill, I know you are strongly opposed 
to it. And I wonder if you could--I am sure you did in your 
testimony, but in maybe a minute or two, tick off the two or 
three reasons why you feel that this would not be wise to 
advocate this type of plan. I know the discrimination between 
older workers and younger, but if you could just give me a 
thumbnail sketch.
    Mr. Hill. Certainly. One of the concerns at the forefront 
that I have, and it goes to the question of myth or fact: why 
these plans have become popular when they were popular, given 
the warning signs that were out there about the age 
discrimination issues. And I would respectfully submit that a 
significant motivating factor would be what I would call the 
financial accounting issues, the ability to present the company 
in a more attractive financial way as a result of these 
changes.
    If that is the case, then a lot of the things that we are 
talking about here today really become far less significant 
because they are not really what is motivating these changes in 
terms of the employer-employee relationship.
    A second concern I had--and there was a reference back to 5 
years ago when I testified regarding disclosure--even with the 
current disclosure requirements, what has happened is that the 
implementation or the conversion to a cash balance plan, which 
is the most controversial portion of them, has come in an 
environment where they are often masking other changes.
    For example, there has been suggestion that one of the 
impacts has been the elimination of early retirement subsidies 
and a suggestion that perhaps in the future companies will 
simply come out and announce: We are going to eliminate early 
retirement subsidies because we want to keep our older workers.
    I would be more comfortable from an employee's perspective 
if the employer wishing to do that simply did that and said, to 
the extent you have protected rights in these early retirement 
subsidies, I am going to keep them, and to the extent that you 
do not have protected rights in them, I am abolishing them. The 
employees would understand that and understand what is being 
done to them and why it is being done and they could act 
accordingly and make their decisions. They may be disappointed, 
I do not disagree. But at least they would knowledgeably know 
and they can make decisions going forward.
    The same way with regard to more overall benefits levels. 
The fact that you can implement it through a cash balance plan 
and have this, I will say, very positive announcement of this 
wonderful new gadget that has been developed, as opposed to 
coming along and saying--and I have an example where one 
actuary talked about how you could announce these two different 
ways, one in very glowing terms and one in negative terms. 
Obviously the negative term is not used, even under the new 
disclosure requirements. It is still the optimistic terms.
    If we are going to have employers and employees working in 
a free market society making decisions based upon the 
information made available to them, the employees should be 
candidly told what is happening. And I would respectfully 
submit if you take away some of these other motivational 
factors, we wouldn't be seeing the kind of movement to cash 
balance plans that we have seen in the past. And we will not 
see it in the future, no matter what, as the Financial 
Accounting Standards Boards and other entities move to require 
more appropriate accounting for these.
    I always figure I am in good stead when I have got Warren 
Buffet on my side, and it so happens on this issue he has 
sounded the early alarm about pension reporting of income. And 
that is a major issue and I would suggest that is a major 
factor in this issue. So to that extent, I do not disagree. 
That is, there are some employees who have chosen, either 
because of life's necessities or chosen because of lifestyles, 
it might be preferable to have a cash balance plan. And I could 
imagine that Congress should fashion, just as you have 
fashioned to date a defined benefit plan and a defined 
contribution plan, there could be a fashioning of something 
similar to a hybrid or cash balance plan that would be 
appropriate to employees and to which I would not object to on 
a policy assistant point. I don't know if that gives you a 
background from my perspective.
    Mr. Delaplane. In terms of the disclosure requirements that 
Mr. Hill would like to see with regard to early retirement 
subsidies, he is actually describing current law. When Congress 
in 2001 changed the disclosure requirements to require more 
specific and detailed disclosure, they added to the series of 
things that needed to be disclosed by employers any reductions 
in early retirement subsidies.
    So I think you folks have anticipated that concern and the 
current requirement and the current regulations actually 
require employers in that special notice in ERISA to discuss 
the early retirement subsidy issue and the wear-away issue. I 
think we have that issue behind it.
    Mr. Hill. I should add, that was implemented by Congress, I 
believe against Mr. Delaplane and his client's objections. I 
recall testifying the last time on that issue.
    Mr. Delaplane. We certainly support disclosure. We had some 
specific challenges in the hearing that Mr. Hill is referencing 
with the particular bill. That was the not the bill that 
ultimately was enacted into law. We think the disclosure is an 
appropriate response to concerns that employees have been 
raising.
    Ms. Collier. I would like to comment on a couple of things 
Mr. Hill has brought on, that the employers went on despite 
warnings, and they went off on their own and designed these 
plans. Eaton had had some cash balance programs prior to this 
conversion and both of those plans did not receive IRS 
determination letters, as did our cash balance plan that we put 
in in 2002, and we received that prior to finalizing our choice 
process for our employees. Employers do not do this willy 
nilly. We have been seeking the best expert legal advice in 
this area that we could as we embarked on these plans.
    Mr. Payne. Let me thank you all for your--he is going to 
cut me off anyway. I would just like to say before he does cut 
me off that I have noticed that employers have, over the years, 
when you would think that benefits would be improved and that 
companies would become more--I do not want to say liberal, but 
more supportive of their employees, especially long-time 
employees, that we have seen sort of a lessening of employee 
benefits, it seems to me, whether it be protection in the 
workplace in some of our OSHA laws, we have seen a reduction in 
protection. We have certainly seen the stagnation of wages in a 
lot of instances.
    And so as I mentioned in my first remarks is that the 
defined benefit, when 75 years ago a person worked for 
Westinghouse or RCA or a refrigerator company, when the time 
came they knew that there was a defined benefit that they would 
get. And I think that we have actually seen an erosion in 
employers' responsibility to employees over the years. And that 
is, I guess, because the world has become global--it has always 
been global, but business is global, and as we see jobs going 
offshore for companies to remain competitive here, I think this 
is a part of the whole almost ratcheting in the wrong direction 
the employees' benefits.
    But thank you all. Thank you, Mr. Chairman, for allowing me 
the extra time.
    Chairman Boehner. I want to thank our witnesses for your 
excellent discipline, your willingness to shed some light on 
cash balance plans and what they do and do not do, and what 
they mean for workers today and tomorrow. And I can assure all 
of you that the Committee is going to continue to proceed with 
a comprehensive overhaul of our defined benefit rules and will 
act to make clear what the rules are for the cash balance plans 
and the conversions to cash balance plans.
    With that, this hearing is adjourned.
    [Whereupon, at 12:25 p.m., the Committee was adjourned.]
    [Additional material submitted for the record follows:]

 Committee on Education and the Workforce, Fact Sheets, Submitted for 
                               the Record

[GRAPHIC] [TIFF OMITTED] T4751.003

[GRAPHIC] [TIFF OMITTED] T4751.004

[GRAPHIC] [TIFF OMITTED] T4751.005

[GRAPHIC] [TIFF OMITTED] T4751.006

[GRAPHIC] [TIFF OMITTED] T4751.007

[GRAPHIC] [TIFF OMITTED] T4751.008

[GRAPHIC] [TIFF OMITTED] T4751.009

[GRAPHIC] [TIFF OMITTED] T4751.010

[GRAPHIC] [TIFF OMITTED] T4751.011

[GRAPHIC] [TIFF OMITTED] T4751.012

     Letter from U.S. Chamber of Commerce, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.013

[GRAPHIC] [TIFF OMITTED] T4751.014

[GRAPHIC] [TIFF OMITTED] T4751.015

[GRAPHIC] [TIFF OMITTED] T4751.016

  Statement of the ERISA Industry Committee, Submitted for the Record

Introduction
    The ERISA Industry Committee (``ERIC'') is pleased to submit this 
statement to the Committee on Education and the Workforce for the 
Committee's consideration in connection with its hearing on cash 
balance pension plans.
    ERIC commends Chairman Boehner, Ranking Minority Member Miller, and 
all the members of the Committee for holding this hearing. This hearing 
is a welcome step toward developing an informed understanding of what 
cash balance and pension equity plans (``hybrid plans'') are, the 
benefits they provide, and the people who benefit from them. We 
strongly support the Committee's effort to get at the facts and to 
distinguish myth from reality.
    The issues are vital. The future of the private defined benefit 
plan system is at stake.
    The defined benefit plan system is already in decline. Employers 
that have converted traditional defined benefit plans to hybrid plans 
have determined that a traditional defined benefit formula does not 
work for them or their employees. These employers are not likely to 
return to a traditional pension formula. If Congress errs in its 
treatment of hybrid plans, employers will have additional incentives to 
abandon defined benefit plans in greater numbers and at an accelerated 
rate, disrupting the lives and financial security of the millions of 
working Americans and their families who now rely on these plans and 
placing even greater strains on Social Security and other public 
programs. The consequences will be tragic and unnecessary--not only for 
the participants and beneficiaries involved but for the Nation as a 
whole.
    Only by carefully studying the issues can Congress avoid 
potentially irrevocable and calamitous results. We look forward to 
working with the Committee and its staff as they study these critical 
issues

Executive Summary
      When Congress considers legislation regarding hybrid 
plans, it has a responsibility to understand fully how the legislation 
will affect employers'' willingness and ability to sponsor these plans 
and the benefits that employees will receive from them. We look forward 
to working with the Committee to expand the knowledge base regarding 
hybrid plans.
      Voluntary defined benefit retirement plans meet critical 
retirement security and economic needs.
      In recent years, federal law has not fostered the 
formation, continuation, and expansion of voluntary defined benefit 
retirement plans. Future legislation should insure that the formation, 
continuation, and expansion of voluntary defined benefit plans are 
viable options for employers.
      It is imperative that an employer's ability to make 
prospective changes in benefit plan design be preserved if defined 
benefit plans are to flourish in the future. If employers lose the 
ability to change their benefit plans in order to respond to changing 
business circumstances, they will have an even greater incentive to 
abandon their benefit plans.
      Hybrid plans respond to the needs of a changing economy. 
They work well for many employers, employees, and the entire Nation.
      Hybrid plans do not invariably reduce benefits.
      Hybrid plans are not age discriminatory.
      Treasury Department guidance has confirmed the lawfulness 
of hybrid plans.
      ERIC looks forward to working with the Committee on 
proposals to ensure that defined benefit plans, including hybrid plans, 
remain a viable retirement security option for employees and retirees 
in the future.

ERIC
    ERIC is a nonprofit association committed to the advancement of the 
employee retirement, health, welfare benefit, and incentive plans of 
America's largest employers. ERIC's members provide comprehensive 
retirement, health care coverage, incentive, and other economic 
security benefits directly to some 25 million active and retired 
workers and their families. ERIC has a strong interest in proposals 
affecting its members'' ability to deliver those benefits, their cost 
and effectiveness, and the role of those benefits in the American 
economy.
    ERIC has played a leadership role in advocating responsible 
solutions to the critical retirement and health care coverage issues 
that face our Nation. ERIC has published policy papers and studies that 
have received wide acclaim and have been instrumental in the 
formulation of legislative and regulatory policy. These include, among 
others--
    -  The Vital Connection: An Analysis of the Impact of Social 
Security Reform on Employer-Sponsored Retirement Plans,
    -  Getting the Job Done: A White Paper on Emerging Pension Issues, 
and
    -  Policy Statement on Health Care Quality and Consumer Protection.
    ERIC and its members have worked for approximately 30 years to 
resolve important policy questions and to devise practical solutions to 
the often vexing problems facing the Committee and the country.

Voluntary Defined Benefit Retirement Plans Meet Critical Retirement 
        Security And Economic Needs.
    Before we address the specific subject of this hearing--cash 
balance and plans and pension equity plans--it is important to 
emphasize the important role of voluntary defined benefit retirement 
plans in our Nation's economy.
    It is also important to emphasize that the strength of the 
employer-sponsored benefit plan system depends on the system remaining 
voluntary. Employers are not required to provide retirement plans for 
their employees. Employers provide retirement plans voluntarily because 
it is in both their employees'' interest and their own interest to do 
so.
    Defined benefit retirement plans have played a critical role in 
helping to meet many employees'' retirement security needs, a role that 
differentiates defined benefit plans from defined contribution plans:
      They provide a reliable source of retirement income to 
plan participants and their beneficiaries.
      They act as a form of automatic savings: benefits accrue 
automatically under most defined benefit plans.
      Employees are sheltered from investment and other risks 
that can reduce individual retirement savings.
      Once vested, the employee is virtually guaranteed 
whatever benefit he or she has earned under the plan.
      The employer is responsible for funding the plan. If the 
employer becomes bankrupt, the Pension Benefit Guaranty Corporation 
(``PBGC'') guarantees payment of most benefits.
      Defined benefit plans make benefits available as an 
annuity. If a retiree takes an annuity, the plan, not the retiree, 
bears the risk that the retiree will outlive his or her life 
expectancy.
    Defined benefit plans also help many employers to attract, retain, 
and motivate employees. In addition, defined benefit plans are major 
investors in the economy and make major contributions to national 
savings, investment, and economic growth.\1\
---------------------------------------------------------------------------
    \1\ As of December 31, 2001, private-sector defined benefit plans 
held assets valued at $1.81 trillion. Staff, Joint Committee on 
Taxation, Present Law and Background Relating to Employer-Sponsored 
Defined Benefit Plans, at 33-34 (JCX-71-02) (June 18, 2002).
---------------------------------------------------------------------------
The Decline in Defined Benefit Plan Coverage.
    Although defined benefit plans provide valuable retirement security 
benefits to the millions of employees who participate in them, the 
coverage of these plans is declining:
      Between 1979 and 1998, the number of defined benefit plan 
participants fell by over 22%, from 29.4 million to 22.9 million.\2\
---------------------------------------------------------------------------
    \2\ U.S. Dep't of Labor, Pension & Welfare Benefits Administration, 
Private Pension Plan Bulletin: Abstract of 1998 Form 5500 Annual 
Reports No. 11, at Table E8 (Winter 2001-2002).
---------------------------------------------------------------------------
      Between 1985 and 2000, the number of active participants 
in PBGC-insured defined benefit plans fell by about 15%, from almost 27 
million to less than 23 million--notwithstanding the expansion of the 
total workforce during this period.\3\
---------------------------------------------------------------------------
    \3\ Pension Benefit Guaranty Corporation, 2002 Annual Report, at 14 
(``The number of active workers PBGC insures actually fell from almost 
27 million in 1985 to less than 23 million in 2000. Meanwhile, the 
labor force has grown. Now only about 20 percent of private-sector wage 
and salaried workers are covered by PBGC-insured defined benefit 
pension plans, down from 30 percent in 1985. If the trend continues, 
active participants will constitute less than half of PBGC-insured 
participants in 2003.'').
---------------------------------------------------------------------------
    Why has this happened? From the early 1980s until 1994, Congress 
piled law on top of law in an effort to meet Congressional budgetary 
targets by squeezing as much ``tax revenue'' out of defined benefit 
plans as it could. Through these laws, Congress created a regulatory 
climate that not only micro-managed these plans, but also strangled 
employers'' ability to fund these plans for the future. The result was 
to subject defined benefit plans to a bewildering array of complex, 
rigid, and inconsistent legal requirements.
    The resulting legal regime has been excessive, oppressive, and 
convoluted. Its primary effect has been a decline in retirement 
security, as employees have found the rules to be bewildering and as 
employers have found sponsoring a plan to be increasingly burdensome 
and unwieldy. It has discouraged employers from adopting new plans and 
encouraged many to terminate their existing plans. For example:
      Restrictive, complex, and frequently amended legal 
requirements, including compensation and benefit limits and 
distribution rules have required plans to invest a substantial portion 
of their resources in legal compliance and plan administration, rather 
than in providing benefits to participants and beneficiaries.
      New short-sighted funding rules have subjected employers 
to unrealistic funding assumptions, ignored the long-term nature of 
pension obligations, and limited employers'' ability to fund their 
defined benefit plans until late in their employees'' careers.
      Rigid restrictions on the use of pension assets have 
converted a defined benefit plan into a ``black hole'' from which 
contributions cannot emerge--even if the plan's assets vastly exceed 
the amount required to fund the plan's benefits.
    This regime has weakened retirement security by restricting funding 
opportunities when employers are most able to fund, by increasing 
funding requirements when employers are least able to fund, by 
subjecting employers to highly volatile funding requirements that are 
difficult, if not impossible, for employers to predict, by subjecting 
plans to excessive administrative costs, by confusing employees, and, 
in the aggregate, by making it less attractive for employers to 
maintain and contribute to defined benefit plans. It is difficult to 
imagine a regime less likely to encourage the establishment and 
continuation of defined benefit plans.
    The decline in defined benefit plan coverage has substantially 
weakened the retirement security of our Nation's workforce.

Federal Law Should Ensure That The Formation, Continuation, And 
        Expansion Of Voluntary Defined Benefit Retirement Plans Are 
        Viable Options For Employers.
    Federal law must create an environment that is conducive to plan 
formation, continuation, and expansion. If federal law makes it too 
costly or impractical to maintain a plan, or subjects plans to 
irrational or counterproductive rules, employers will refrain from 
creating new plans and will be encouraged to terminate or curtail the 
growth of existing plans. If federal law makes it difficult or 
impossible for an employer to modify an existing plan--if adopting a 
voluntary plan locks an employer into a permanent commitment to 
maintain the plan without change--employers will be loathe to adopt 
these plans. If an employee benefit plan becomes a straight jacket from 
which there is no escape, employers will respond by not adopting plans. 
The drafters of ERISA understood this well. As the late Senator Jacob 
Javits (R-N.Y.) observed:
        ``The problem, as perceived by those who were with me on this 
        issue in the Congress, was how to maintain the voluntary growth 
        of private plans while at the same time making needed 
        structural reforms in such areas as vesting, funding, 
        termination, etc., so as to safeguard workers . . . [T]he new 
        law represents an overall effort to strike a balance between 
        the clearly-demonstrated needs of workers for greater 
        protection and the desirability of avoiding the homogenization 
        of pension plans into a federally-dictated structure that would 
        discourage voluntary initiatives for further expansion and 
        improvement.'' \4\
---------------------------------------------------------------------------
    \4\ Address by Senator Jacob K. Javits, Briefing Conference on 
Pension and Employee Benefits, New York State School of Industrial and 
Labor Relations, Cornell University and Federal Bar Association, 
Washington, D.C. (Sept. 19, 1974).
---------------------------------------------------------------------------
The Employer's Ability To Change The Design Of Its Retirement Plan Must 
        Be Preserved.
    One of the great strengths of our Nation's retirement security 
system is the flexibility it currently provides to an employer to 
design and adjust its plans to respond to changing business 
circumstances and to the changing needs of the employer and its 
employees.
    The rapid emergence of new technologies and the obsolescence of old 
products and services are reshaping many industries, forcing companies 
in those industries to adapt quickly or--like buggy whip manufacturers 
in the age of internal combustion engines--die. Businesses change their 
ways of doing business, move into new businesses, merge, form joint 
ventures, acquire other companies or are themselves acquired, and 
divest old lines of business or are themselves divested as they adjust 
to challenges and opportunities in today's highly competitive 
international marketplace. New global competition and competition from 
emerging companies have made it essential for employers to change their 
employee rewards programs.
    If employers lose the right to change their retirement plans to 
respond to changing business conditions, the consequences will be 
disastrous for employers, employees, and the U.S. economy.

Employees And The Economy As A Whole Will Be Harmed If Employers Are 
        Prevented From Changing Their Plans To Respond To Changing 
        Business Circumstances.
    Under current law, employers may not amend their plans to reduce 
benefits that have already accrued. But employers have always had the 
right to change their plans prospectively--to change the terms 
governing benefits that have not yet been earned.
    The employer's right to make prospective changes in benefits is 
essential to the vitality of the U.S. economy and to new and expanded 
employment opportunities. It is also essential to our voluntary benefit 
system. As we have explained, elimination of the right to make 
prospective benefit changes will deter employers from adopting benefit 
plans. If the right to make prospective changes is eliminated, the 
principal victims will be employees and their families--who will no 
longer receive the critical benefits that these plans provide. The 
harmful consequences are predictable: less retirement savings, less 
retirement security, greater poverty among the elderly, greater 
pressure on older employees to continue working, increased financial 
catastrophes for workers of all ages, greater demands on public 
assistance programs, greater demands on Social Security, and less 
investment capital for the economy.
    Moreover, if employers lose the right to change the terms on which 
benefits will be earned in the future, employers that have benefit 
plans will have their options severely limited. When subject to 
financial pressures, employers will not be able to reduce costs by 
reducing future benefit levels and will be forced to adopt alternative 
measures such as reductions in pay levels, cutbacks in health benefits, 
layoffs, and outsourcing. Under these conditions, employers with 
retirement plans will be at a severe competitive disadvantage vis a vis 
employers that do not have them. The impact on these employers, their 
employees and retirees, and the economy as a whole will be devastating. 
Many employers will decide to terminate their plans rather than allow 
themselves to be in this position.

Most Traditional Defined Benefit Plans Focus Most Of Their Benefits On 
        A Small Group Of Employees.
    Under most traditional defined benefit plans, employees earn most 
of their benefits only after completing 20 to 30 years of service with 
the same employer. The value of their benefits spikes after they 
qualify for subsidized early retirement benefits, typically in their 
mid-50's or later, but then declines if they choose not to retire and 
keep working. Although the dollar amount of the plan's monthly 
retirement benefit typically does not decline, the economic value of 
the retirement benefit does decline if the employee delays retirement; 
this is because the value of the plan's early retirement subsidy 
declines as the employee approaches the plan's normal retirement age.
    As a result, traditional defined benefit plans are most 
advantageous to the relatively small group of employees who work for 
the same employer for 20 to 30 years and retire at the plan's early 
retirement age. They are far less beneficial for others--for employees 
who change jobs or interrupt their careers and for older employees who 
continue to work after early or normal retirement age.\5\ Indeed, this 
has been a major criticism of defined benefit plans for many years.
---------------------------------------------------------------------------
    \5\ ``Overall, defined benefit pension wealth--the present value of 
the expected future stream of [traditional] pension benefits--grows 
slowly early on in an individual's career, increases rapidly near the 
end, and then declines at older ages.'' Johnson & Uccello, Urban 
Institute, Can Cash Balance Plans Improve Retirement Security for 
Today's Workers?, at 2 (2002). ``[T]raditional DB pensions have imposed 
large benefit cuts on employees who left the firm prior to retirement 
age. This is because most traditional DB formulas usually link 
retirement payments to final pay at the company . . . .'' Mitchell & 
Mulvey, Pension Research Council, Wharton School, University of 
Pennsylvania, Possible Implications of Mandating Choice in Corporate 
Defined Benefit Plans, at 3 (2003). ``[P]ension accruals in traditional 
DB plans are minimal at younger ages, grow rapidly in the later 40s and 
50s as workers approach retirement age, and then become negative as 
workers lose pension wealth when they remain at work past the plan's 
retirement age. For workers in their early 60s who have participated in 
the DB plan since age 25, for example, pension wealth declines on 
average by about 14 percent of annual salary each year.'' Johnson & 
Steurle, Pension Research Council, Wharton School, University of 
Pennsylvania, Promoting Work at Older Ages: The Role of Hybrid Pension 
Plans in an Aging Population, at 21 & Fig. 12 (2003).
---------------------------------------------------------------------------
    Although traditional defined benefit plans are appropriate for some 
employers and some work forces, they do not meet the needs of many 
employers and employees.

Hybrid Plans Respond To A Changing Economy.
    Many workers in changing industries no longer look forward to a 
lifetime career with one employer. They expect to change employers more 
frequently than their parents and grandparents did. A retirement plan 
that requires workers to stay with the same company and wait for a big 
bump-up in the value of their pension benefits in the last few years of 
employment penalizes workers who, for one reason or another, leave an 
employer early or in mid-career and offers little incentive to join an 
employer recruiting for top talent.
    Recently, new hybrid plan designs, such as cash balance defined 
benefit plans and pension equity plans, have been embraced by employers 
and employees alike who need benefit plans that match the new 
environment in which they work. In contrast to traditional defined 
benefit plans, hybrid plan designs have stimulated great interest in 
retaining and expanding defined benefit plans.\6\
---------------------------------------------------------------------------
    \6\ ``During the middle and late 1990s, hybrid plans, primarily 
cash balance plans, became a growing percentage of the plans PBGC 
insures. . . . In 2000, hybrid plans contained an estimated 20 percent 
of all PBGC-insured single-employer plan participants.'' Pension 
Benefit Guaranty Corporation, 2002 Annual Report, at 14.
---------------------------------------------------------------------------
    The growth and popularity of these new defined benefit arrangements 
is supported by the findings of numerous independent analysts, as 
illustrated by the following conclusions:
        ``[G]iven the emergence of vehicles such as 401(k) plans and 
        hybrid plans, retirement plans today match the reality of the 
        work experience for most Americans better than at any time in 
        the past.'' \7\
---------------------------------------------------------------------------
    \7\ Yakoboski, Employee Benefits Research Institute, Debunking the 
Retirement Policy Myth: Lifetime Jobs Never Existed for Most Workers, 
at 1 (1998).
---------------------------------------------------------------------------
                                  ***
        ``[W]orkers employed by more than one employer during their 
        career can receive more retirement income under multiple cash 
        balance plans than under multiple traditional defined benefit 
        plans. . . . [In one example, the] benefit earned by the worker 
        who changed employment under multiple cash balance plans will 
        accrue a retirement benefit that is almost 22 percent larger 
        than the benefit received by the workers under multiple [final 
        average pay] plans.'' \8\
---------------------------------------------------------------------------
    \8\ General Accounting Office, Cash Balance Plans: Implications for 
Retirement Income, at 26-27 (2000).
---------------------------------------------------------------------------
                                  ***
        ``Median lifetime pension wealth would increase under cash 
        balance plans because these new plans distribute pension wealth 
        more equally across the covered population.'' \9\
---------------------------------------------------------------------------
    \9\ Johnson & Uccello, Urban Institute, Can Cash Balance Pension 
Plans Improve Retirement Security for Today's Workers?, at 3 (2002).
---------------------------------------------------------------------------
    See also Appendix.

Hybrid Plans Meet Employee Needs.
    Benefits Are Understandable: Unlike traditional defined benefit 
plans, cash balance plans provide an easily understood account balance 
for each participant. Employees--who are accustomed to dealing with 
bank account balances, Sec. 401(k) account balances, and IRA balances--
are comfortable with a retirement plan that provides a benefit in the 
form of an account balance.
    Savings Accrue Automatically: Unlike Sec. 401(k) plans, amounts are 
added automatically to the accounts of all employees eligible to 
participate in a hybrid plan. The employee does not have to make an 
affirmative choice to participate or make often difficult decisions 
about how much of his or her current income to defer.
    The Employer Bears The Risk: Like traditional defined benefit 
plans, but unlike defined contribution plans (e.g., Sec. 401(k), money 
purchase plans, or profit sharing plans), investment risks are borne by 
the employer. Sudden or even prolonged downturns in the equity or bond 
markets do not affect the defined benefit promised to the participant.
    Benefits Are Guaranteed: Like traditional defined benefit plans, 
but unlike defined contribution plans, benefits are insured by the 
PBGC, a government agency.
    Greater Benefits For Short-Service Employees: An employee typically 
earns most of his or her benefit under a traditional defined benefit 
plan in the last few years before retirement. By contrast, a hybrid 
plan delivers benefits more evenly over the employee's career, and an 
employee who leaves before retirement can roll over his or her benefit, 
on a tax-deferred basis, to an IRA or a new employer's plan. Thus, 
hybrid plans are especially attractive in new industries that tend to 
attract highly talented, mobile workers as well as in industries that 
are undergoing significant changes.
    Women Benefit: Hybrid plan designs offer significant advantages to 
women (who are most threatened by impoverishment in old age) and others 
who tend to move in and out of the workforce. In fact, all mobile 
workers--not just women--are more likely to accrue a significant and 
secure retirement benefit under cash balance plans than under many 
other plan designs.\10\
---------------------------------------------------------------------------
    \10\ ``Compared with traditional pensions, cash balance plans 
generate retirement wealth more evenly over time for a couple of 
reasons: Contributions made early on earn interest for many years, and 
lifetime earnings rather than final earnings determine benefits. 
Consequently, a worker changing jobs incurs only a small penalty. For 
women, who tend to have higher turnover rates than men, the ability to 
change jobs without jeopardizing pension wealth may be particularly 
important.'' Johnson & Uccello, Urban Institute, Can Cash Balance 
Pension Plans Improve Retirement Security for Today's Workers?, at 2 
(2002).
---------------------------------------------------------------------------
    Older Workers Benefit: The advantages of a hybrid balance plan 
design are not limited to mobile workers, however. For example, the 
value of the benefit for an older worker participating in a hybrid plan 
increases at the same rate both before and after normal retirement age 
(and , in some plans, increases at a higher rate as the employee 
accrues additional years of age or service). By contrast, under a 
traditional defined benefit plan, particularly those that offer 
subsidized early retirement benefits, the economic value of an 
employee's benefit actually declines when an employee works past the 
plan's early or normal retirement age.\11\
---------------------------------------------------------------------------
    \11\ ``[P]ension accruals in traditional DB plans are minimal at 
young ages, grow rapidly in the late 40s and 50s as workers approach 
retirement age, and then become negative as workers lose pension wealth 
when they remain at work past the plan's retirement age. For workers in 
their early 60s who have participated in the DB plan since age 25, for 
example, pension wealth declines on average about 14 percent of annual 
salary each year. . . . In effect, DB plans favor a select group of 
longer-term employees, often in late middle-age, but disfavor both 
younger and older workers. Unlike traditional DB plans, hybrid pension 
plans, such as cash balance plans and pension equity plans, often 
reward work at older ages at least as much as work at younger ages, 
because workers in hybrid plans do not forgo a year of benefits for 
every year they remain on the job past the retirement age.'' Johnson & 
Steurle, Pension Research Council, Wharton School, University of 
Pennsylvania, Promoting Work at Older Ages: The Role of Hybrid Pension 
Plans in an Aging Population, at 21, 24 & Fig. 12 (2003).
---------------------------------------------------------------------------
    Portability: Hybrid plans provide portable benefits that can be 
rolled over to another employer's plan or an IRA, on a tax-deferred 
basis, for continued retirement savings. In addition, when companies 
are merged, acquired, or form joint ventures, the benefits are easily 
transferred to a new plan, making continuity more attractive to the new 
employer and making it more likely that affected employees will achieve 
retirement security.
    Employee Control: Since the amounts payable under hybrid plan 
benefits are more easily understood by employees than are the benefits 
under many traditional defined benefit plans, employees are more likely 
to take responsibility for their retirement and their future, resulting 
in greater personal and national savings.
    No Penalties: Unlike many traditional defined benefit plans, hybrid 
plans do not penalize employees who wish to move on to other jobs 
before reaching retirement eligibility:
        ``Traditional DB plans generally encourage early retirement, by 
        offering early retirement subsidies and delayed retirement 
        penalties. As a result, DB plan sponsors seeking to keep their 
        older workers on the job found that their traditional plans did 
        not serve business objectives. By contrast, hybrid plans 
        eliminate early retirement incentives and do not have a 
        ``spike'' in accrual rates shortly before normal retirement 
        age. Thus workers who leave early are not penalized as was the 
        case of most DB plans, which provided larger accruals for 
        longer tenured employees close to retirement.'' \12\
---------------------------------------------------------------------------
    \12\ Mitchell & Mulvey, Pension Research Council, Wharton School, 
University of Pennsylvania, Possible Implications of Mandating Choice 
in Corporate Defined Benefit Pension Plans, at 4 (2003) (citation 
omitted).
---------------------------------------------------------------------------
    Annuities Are Available: Since annuities must be offered by a 
hybrid pension plan, participants who want to receive their retirement 
benefit as a stream of income avoid the increased cost and difficulty 
of purchasing annuities in the individual market. By contrast, if an 
employee who participates in a defined contribution plan wishes to 
receive the balance in his or her defined contribution account as an 
annuity, the employee must approach one or more insurance companies and 
purchase an annuity on whatever terms are then available to an 
individual purchaser in the annuity market.
Hybrid Plans Meet Employer Needs.
    Appropriate Employment And Retirement Incentives: Because hybrid 
plans deliver benefits evenly throughout an employee's career, they do 
not provide undue incentives for employees to keep working for the same 
employer until reaching retirement age or to retire immediately when 
they do qualify for retirement.
    Improved Employee Communication: Because benefits in hybrid designs 
are more understandable, retirement benefits and the need to save are 
more easily and effectively communicated to all employees, including 
those who ordinarily do not pay much attention to retirement issues.
    Improved Employee Recruitment and Retention: Hybrid plans are an 
effective tool for attracting new employees and retaining and rewarding 
current employees.
    Enhanced Benefit Coordination: Hybrid plans are easily coordinated 
with the employer's savings or profit-sharing plan.
    Neutral Impact On Enterprise Decisions: Because cash balance and 
hybrid plan designs of different companies can be coordinated 
relatively easily, they offer a stable ``platform'' to retain employees 
for companies engaged in mergers and acquisitions.
Hybrid Plans Benefit The Nation.
    Capital Accumulation: Defined benefit plans--which include hybrid 
designs--have for decades been an engine of capital accumulation, 
making available secure sources of capital for business start-ups and 
economic expansion that have been responsible for the outstanding 
success of the American economy.
    More Efficient Retirement Savings: Because of the longer investment 
horizon available under a defined benefit plan, a hybrid plan can 
invest its assets more aggressively and can better withstand market 
downturns while still providing a full benefit than can an individual 
participating in a defined contribution plan, who must bear all of the 
investment risk under the plan.
    Increased Retirement Savings: Under hybrid plans, more workers 
build larger savings earlier in their careers, increasing their 
opportunity to accumulate significant retirement savings and reducing 
the pressure on government programs in their retirement years.
    Increased Pension Participation: All eligible employees 
automatically accrue benefits under hybrid defined benefit plans. 
Because benefit accrual does not depend on an employee's election to 
participate, more employees whose employers provide a defined benefit 
pension plan will actually benefit from the plan.
    More Compatible Workplace For Women: The design of a hybrid plan 
can enable an employer to offer a total compensation package that 
allocates value more equitably between long-service employees and women 
and others who tend to move in and out of the workforce. Hybrid plans 
will help to address the phenomena of the considerable number of 
elderly poor women with insufficient pension resources and the 
resulting pressure to increase targeted entitlements.
    Less Pressure On Government Programs: By providing a reliable 
source of retirement income, defined benefit plans, including hybrid 
plans, reduce pressure on government entitlement programs for the 
elderly.

Employers Have Always Reserved The Right To Revise Their Benefit Plans.
    Employers have always had the right to change the retirement plans 
they provide to their employees. It is a fundamental principle of 
ERISA. Although current law protects an employee's accrued benefit 
(including early retirement rights related to the employee's accrued 
benefit), the law has always allowed an employer to change the terms on 
which retirement benefits will be earned in the future. As we have 
explained, if an employer did not have the right to make such changes, 
employers would be deterred from voluntarily adopting retirement plans 
in the first place.
    Employers frequently make changes in their retirement plans--both 
major and minor--to accommodate changing employee preferences, to 
respond to changing competitive, financial, and other conditions, and 
to achieve specific business objectives. Employees are well aware of 
the employer's right to change the plan, and have frequently benefited 
from those changes.
    Employees are adequately protected by current law. The law not only 
prohibits an employer from amending a plan to reduce the pension 
benefits that employees have already earned, but also requires the 
plan, after it has been amended, to continue to give employees credit 
for their service for purposes of qualifying for any early retirement 
subsidy that applies to the pension benefits that the employees had 
earned at the time of the plan amendment. For example, if an employer 
amends a pension plan to provide that pension benefits earned in the 
future will not include an early retirement subsidy, employees are 
still entitled, after the amendment, to continue to earn service credit 
for purposes of qualifying for any early retirement subsidy that 
applies to the pension benefits they have already earned.
Hybrid Plans Do Not Inherently Reduce Benefits.
    Some critics of hybrid plans have claimed that employees will earn 
retirement benefits under these plans that are less than the benefits 
that those employees would have earned if the prior plan formula had 
remained in effect without change. However, independent studies debunk 
this claim:
        ``. . . [I]t does not appear that most firms are seeking to 
        reduce benefit generosity. . . . Cash balance conversions 
        appear to be largely driven by labor market conditions. . . . 
        [T]he move toward DC-like pensions is likely the result of 
        increased worker mobility.'' \13\
---------------------------------------------------------------------------
    \13\ Coronado & Copeland, Pension Research Council, Wharton School, 
The University of Pennsylvania, Cash Balance Pension Plan Conversions 
and the New Economy, at 23 (2003).
---------------------------------------------------------------------------
    Ultimately, any comparison between the benefits provided by a 
hybrid plan and the benefits provided by a traditional defined benefit 
plan depends on the terms of the plans. Hybrid plans do not inherently 
provide benefits that are greater or less than the benefits provided by 
traditional plans. Also, as explained earlier, current law prevents a 
plan amendment from causing an employee to lose any part of the accrued 
benefit that he or she has already earned.
    In addition, hybrid plans tend to distribute the benefits accrued 
by plan participants more evenly among employees than do traditional 
defined benefit retirement plans:
        ``By distributing pension wealth more equally across the 
        population than [traditional defined benefit] plans, cash 
        balance plans would increase median lifetime pension wealth in 
        the total covered population and more people would gain pension 
        wealth than lose.'' \14\
---------------------------------------------------------------------------
    \14\ Johnson & Uccello, Urban Institute, The Potential Effects of 
Cash Balance Plans on the Distribution of Pension Wealth at Midlife, at 
29 (2001).
---------------------------------------------------------------------------
Hybrid Plans Are Not Age Discriminatory.
    Claims have been made that hybrid plans invariably violate the Age 
Discrimination in Employment Act (``ADEA''). These claims lack merit.
    Of the four federal district courts that have considered the issue, 
three have rejected the claim that hybrid plans are age discriminatory. 
Although one court reached a contrary conclusion, that court's 
conclusion was subsequently rejected by another federal district court 
last month.\15\
---------------------------------------------------------------------------
    \15\ Compare Tootle v. ARINC, INC., Civ. Act. No. CCB-03-1086 
(D.Md. June 10, 2004) (rejecting age discrimination claim), Engers v. 
AT&T, Civ. Act. No. 98-CV-3660 (NHP) (D.N.J. June 6, 2001) (same), and 
Eaton v. Onan Corp., 117 F. Supp. 2d 812 (S.D. Ind. 2000) (same), with 
Cooper v. IBM, 274 F. Supp. 2d 1010 (S.D. Ill. 2003) (accepting age 
discrimination claim). See also Campbell v. BankBoston, N.A., 327 F.3d 
1, 10 (1st Cir. 2003) (recognizing problems with age discrimination 
theory) (dictum).
---------------------------------------------------------------------------
    On its face, a cash balance plan is not age-discriminatory. Each 
participant, regardless of age, receives the same percentage-of-
compensation pay credit--except for the many plans that provide higher 
pay credits to older workers. The rate at which interest credits are 
calculated on the participant's cash balance account is age-
neutral.\16\ Under a pension equity plan, an employee's rate of benefit 
accrual commonly increases with additional years of age or service.
---------------------------------------------------------------------------
    \16\ ``By contrast, many employers today prefer hybrid plans 
because they smooth compensation differentials by age and soften the 
incentives for early retirement. As a consequence of the new plan 
elements, hybrid plans are in fact less age discriminatory than many 
traditional DB plans.'' Mitchell & Mulvey, Pension Research Council, 
Wharton School, University of Pennsylvania, Possible Implications of 
Mandating Choice in Corporate Defined Benefit Plans, at 18 (2003) 
(emphasis original).
---------------------------------------------------------------------------
    Claims that hybrid plans are age-discriminatory are based on the 
theory that because a younger employee will benefit, when the employee 
reaches retirement age, from a longer period of interest-compounding on 
his or her account balance than will an older employee, the plan 
discriminates in favor of the younger employee. What these claims gloss 
over is that the younger employee must wait longer in order to receive 
the benefit of the longer period of interest-compounding. The 
accumulation of interest credits for a longer period of time merely 
compensates the employee for having to wait longer to collect a benefit 
from the plan at retirement age.
    Cash balance plans are not age-discriminatory for the same reason 
that Social Security is not age-discriminatory. Both plans index 
employees'' pension benefits prior to retirement: cash balance plan 
benefits are indexed with interest, while Social Security benefits are 
indexed for increases in average national wages and the cost of living. 
These pre-retirement indexing features protect employees against 
inflation; they are not age-discriminatory.
    Some have claimed that when a traditional defined benefit 
retirement plan is converted to a hybrid plan design, the ``wear-away'' 
feature used to transition from the old formula to the hybrid plan 
formula discriminates against older workers. Where wear-away occurs, an 
employee who participates in the plan at the time of conversion 
typically receives the greater of two benefits: (1) the employee's 
accrued benefit under the old formula at the time of conversion or (2) 
a benefit based solely on the plan's new hybrid plan formula plus 
interest.
    Depending on the details of the two formulas, an employee with a 
very substantial accrued benefit under the plan's old formula might 
find that he or she has no increase in benefits, especially early 
retirement benefits, for some period of time, while a more recently-
hired employee might begin to accrue additional benefits immediately. 
However, this is not the result of age discrimination. If neither the 
plan's old formula nor the plan's new formula is age-discriminatory, 
there is no basis for claiming that a plan that provides an employee 
with the greater of the benefits provided by the two formulas is age-
discriminatory. Indeed, in the past, Congress and the Treasury 
Department have both required and permitted plans to provide 
participants with the greater of their previously accrued benefits 
under the old plan formula or the benefits they accrued under a new 
plan formula.\17\
---------------------------------------------------------------------------
    \17\ See, e.g., Tax Reform Act of 1986, Pub. L. No. 99-514, 
Sec. 1106(i)(3), 100 Stat. 2085, 2425-26 (1986); Tax Equity and Fiscal 
Responsibility Act of 1982, Pub. L. No. 97-248, Sec. 235(g)(4), 96 
Stat. 324, 508-09 (1982); ERISA, Pub. L. No. 93-406, Sec. 2004(d)(2), 
88 Stat. 829, 987 (1974); S. Rep. No. 575, 98th Cong., 2d Sess. 29 
(1984) (a participant who meets the criteria for an early retirement 
subsidy that was previously eliminated by a plan amendment is entitled 
to the greater of the portion of the subsidy attributable to service 
before the plan amendment or the retirement benefit provided under the 
plan as amended); Treas. Reg. Sec. Sec. 1.401(a)(4)-13(c)(4) (listing 
permissible ``fresh-start'' formulas), 1.401(a)(17)-1(e) (applying 
``fresh-start'' formulas where Code Sec. 401(a)(17) limits were 
reduced); Notice 88-131, 1988-2 C.B. 546 (Alternative IID) (providing 
that certain participants may be entitled to the greater of the benefit 
accrued under pre-existing plan provisions or benefits accrued under 
amendments adopted to comply with the Tax Reform Act of 1986); Rev. 
Rul. 81-12, 1981-1 C.B. 228 (addressing changes in actuarial 
assumptions).
---------------------------------------------------------------------------
Treasury Department Guidance Has Confirmed The Lawfulness of Cash 
        Balance Plans.
    Hybrid plans have been on the scene for nearly 20 years, and the 
Government has indicated on numerous occasions that hybrid plans are 
lawful. Employers have reasonably relied on Government guidance in 
adopting hybrid plans:
    Preamble to the Final Sec. 401(a)(4) Regulations: In the preamble 
to the final regulations creating a safe harbor for cash balance plans 
from the restrictions on discrimination in favor of highly compensated 
employees, the Internal Revenue Service stated unequivocally that cash 
balance plans were not age-discriminatory:
        ``The fact that interest adjustments through normal retirement 
        age are accrued in the year of the related hypothetical 
        allocation [i.e., the pay credit] will not cause a cash balance 
        plan to fail to satisfy the requirements of [Code] section 
        411(b)(1)(H), relating to age-based reductions in the rate at 
        which benefits accrue under a plan.'' \18\
---------------------------------------------------------------------------
    \18\ 56 Fed. Reg. 47,528 (Sept. 19, 1991).
---------------------------------------------------------------------------
    Regulatory Safe Harbor for Cash Balance Plans: The IRS safe harbor 
for cash balance plans strongly implied that such plans were lawful. 
Surely, the IRS would not have created a safe harbor for cash balance 
plans unless it believed that these plans were lawful.\19\ In fact, as 
the preamble explained, the IRS had concluded that cash balance plans 
were lawful.
---------------------------------------------------------------------------
    \19\ See Treas. Reg. Sec. 1.401(a)(4)-8(c)(3).
---------------------------------------------------------------------------
    Notice 96-8: The Internal Revenue Service announced its intention 
to propose regulations regarding lump-sum distributions from cash 
balance plans.\20\ Because it contemplated the issuance of guidance on 
how lump-sum benefits from cash balance plans should be calculated, 
Notice 96-8 gave employers every reason to believe that cash balance 
plans were lawful.
---------------------------------------------------------------------------
    \20\ 1996-1 C.B. 359.
---------------------------------------------------------------------------
    Determination Letters: The Internal Revenue Service has issued 
favorable determination letters to many hybrid plans, including both 
cash balance plans and pension equity plans. Indeed, the Service today 
continues to issue favorable determination letters to cash balance 
plans that were not the subjects of conversions. Surely, the Service 
would not have done this in the past or be doing this today if it 
believed that these plans violate the Internal Revenue Code's age 
discrimination provisions.

    We are currently working on the development of a legislative 
proposal that will address the issues relating to hybrid plans. We will 
be pleased to share our proposal with the Committee when our work on 
the proposal is completed.
    We very much appreciate the opportunity to submit this statement, 
and hope that it will be helpful to the Committee. We look forward to 
working with the Chairman, the members of the Committee, and the 
Committee staff on the issues addressed at this hearing.
    For more information on cash balance plans and pension equity 
plans, we invite you to visit ERIC's web site at www.eric.org.

            APPENDIX

    ``To show how DB and cash balance pension wealth would be 
influenced by job changing, we posit two hypothetical workers, one of 
whom holds three jobs over his career, and another who remains with an 
employer for his entire career. . . . [In our hypothetical example, 
the] DB normal retirement benefit, payable as an annuity from age 65, 
is worth 1.1 percent of his final five-year average salary, times his 
years of service at termination (retirement). If the worker were to 
retire early, the benefit would be reduced by 2 percent per year 
between ages 62 and 65, 4 percent from 60 to 62, and 5 percent for 
retirement from age 55 to 60. Since this formula embodies an early 
retirement reduction rate that is smaller than the actuarially fair 
rate (which would be around 6-8 percent per year) , the DB plan 
embodies an early retirement subsidy. By contrast, the cash balance 
plan [in our hypothetical example] has a much smoother accrual rate, 
with pay credits of 4 percent per year during the worker's first decade 
of service, 5 percent for the next ten years, and 5.75 percent for 
service of 20 years or more. There were no early retirement reductions, 
and contributions are credited with a 7 percent interest credit per 
year.

                                  ****

    ``. . . . . If a young worker knew that he would remain with a 
single employer his entire career and retire at age 65, his anticipated 
accumulation in the DB plan would be one-third higher than the cash 
balance plan. But certainty regarding the mobility prospects is 
unlikely since the average American holds several jobs over his career. 
In fact, using data from personnel files from 65 large companies we 
found that only 7 percent of workers were likely to stay with one 
employer for their entire career. Thus, when we compute the expected 
value of the two plans based on the likelihood of a worker actually 
staying to full retirement and receiving the full defined benefit 
plan[,] the expected value of the benefit from the hybrid plan is 11 
percent higher than the expected value of the defined benefit plan. 
Beyond the expected value of the benefit, for those employees who 
changed jobs three times over their work life, their pension wealth 
from the hybrid plan would be nearly 18 percent higher than what they 
would have received from three different DB plans.''
    Mitchell & Mulvey, Pension Research Council, Wharton School, 
University of Pennsylvania, Possible Implications of Mandating Choice 
in Corporate Defined Benefit Plans, at 5-6 (2003) (citations omitted & 
emphasis added).

                                 ______
                                 

  Statement of Hon. Jon Porter, a Representative in Congress from the 
                            State of Nevada

[GRAPHIC] [TIFF OMITTED] T4751.017

 Statement of Hon. Charlie Norwood, a Representative in Congress from 
                          the State of Georgia

[GRAPHIC] [TIFF OMITTED] T4751.018

[GRAPHIC] [TIFF OMITTED] T4751.019

[GRAPHIC] [TIFF OMITTED] T4751.020

[GRAPHIC] [TIFF OMITTED] T4751.021

[GRAPHIC] [TIFF OMITTED] T4751.022

[GRAPHIC] [TIFF OMITTED] T4751.023

 Statement of the National Association of Manufacturers, Submitted for 
                               the Record

[GRAPHIC] [TIFF OMITTED] T4751.024

  Statement of The Principal Financial Group, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.025

[GRAPHIC] [TIFF OMITTED] T4751.026

[GRAPHIC] [TIFF OMITTED] T4751.027

[GRAPHIC] [TIFF OMITTED] T4751.028

[GRAPHIC] [TIFF OMITTED] T4751.029

[GRAPHIC] [TIFF OMITTED] T4751.030

         Watson Wyatt, Press Releases, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.031

[GRAPHIC] [TIFF OMITTED] T4751.032

[GRAPHIC] [TIFF OMITTED] T4751.033

[GRAPHIC] [TIFF OMITTED] T4751.034

[GRAPHIC] [TIFF OMITTED] T4751.035

     Statement of the American Federation of Labor and Congress of 
          Industrial Organizations, Submitted for the Record 

[GRAPHIC] [TIFF OMITTED] T4751.036

               Letter from AARP, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.037

[GRAPHIC] [TIFF OMITTED] T4751.038

          Statement of Larry Cutrone, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.039

          Statement of Janet Krueger, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.040

         Statement of Janice Winston, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.041

          Statement of Jimmy Tarlau, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.042

[GRAPHIC] [TIFF OMITTED] T4751.043

                  Tax Notes, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.044

[GRAPHIC] [TIFF OMITTED] T4751.045

[GRAPHIC] [TIFF OMITTED] T4751.046

[GRAPHIC] [TIFF OMITTED] T4751.047

[GRAPHIC] [TIFF OMITTED] T4751.048

[GRAPHIC] [TIFF OMITTED] T4751.049

[GRAPHIC] [TIFF OMITTED] T4751.050

[GRAPHIC] [TIFF OMITTED] T4751.051

 U.S. Treasury Department, Office of Public Affairs, Submitted for the 
                                 Record

[GRAPHIC] [TIFF OMITTED] T4751.052

[GRAPHIC] [TIFF OMITTED] T4751.053

[GRAPHIC] [TIFF OMITTED] T4751.054

[GRAPHIC] [TIFF OMITTED] T4751.055

[GRAPHIC] [TIFF OMITTED] T4751.056

[GRAPHIC] [TIFF OMITTED] T4751.057

[GRAPHIC] [TIFF OMITTED] T4751.058

[GRAPHIC] [TIFF OMITTED] T4751.059

Companies That Have Converted to Cash Balance Pension Plans, Submitted 
                             for the Record

[GRAPHIC] [TIFF OMITTED] T4751.060

[GRAPHIC] [TIFF OMITTED] T4751.061

[GRAPHIC] [TIFF OMITTED] T4751.062

  Employers Awaiting IRS Determination Letters Under the Cash Balance 
                  Moratorium, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.063

[GRAPHIC] [TIFF OMITTED] T4751.064

[GRAPHIC] [TIFF OMITTED] T4751.065

[GRAPHIC] [TIFF OMITTED] T4751.066

 Bureau of Labor Statistics, U.S. Department of Labor, Table Submitted 
                             for the Record

[GRAPHIC] [TIFF OMITTED] T4751.067

[GRAPHIC] [TIFF OMITTED] T4751.068

  Statement of the National Committee to Preserve Social Security and 
                   Medicare, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.069

[GRAPHIC] [TIFF OMITTED] T4751.070

   Committee on Education and the Workforce, Democratic Staff, Press 
                   Release, Submitted for the Record

[GRAPHIC] [TIFF OMITTED] T4751.071

[GRAPHIC] [TIFF OMITTED] T4751.072

                                 ______
                                 

  The Following Items Have Been Placed in the Permanent Archive Files:

    1.  Hewitt, Survey Findings, Current Retirement Plan Challenges: 
Employer Perspectives, 2003
    2.  Possible Implications of Mandating Choice in Corporate Defined 
Benefit Plans, Olivia S. Mitchell and Janemarie Mulvey, Pension 
Research Council Working Paper, The Wharton School, University of 
Pennsylvania, PRC WP 2003-25
    3.  An Empirical Analysis of the Transitions to Hybrid Pension 
Plans in the United States, Robert L. Clark North Carolina State 
University, and Sylvester J. Schieber, Watson Wyatt Worldwide, 
Sponsored by The Brookings Institution, Stanford Institute for Economic 
Policy Research and TIAA-CREF Institute, Washington, D.C., 9/21/00
    4.  Dan C. Tootle v. ARINC, Inc. et al., Civil Action No. CCB-03-
1086, In The United States District Court For The District of Maryland, 
6/10/04
    5.  Eaton v. Onan Corporation, Cause No. IP97-0814-C-H/G, United 
States District Court Southern District of Indiana, Indianapolis 
Division, 9/29/00
    6.  E-mail from Jane Banfield, 7/6/04, with newspaper clipping from 
The Reporter
    7.  E-mail from Brian D. McCarthy, 2/26/04
    8.  GAO Report, September 2000, GAO/HEHS-00-185, Private Pensions, 
Implications of Conversions to Cash Balance Plans
    9.  U.S. Department of Labor, Office of Inspector General, PWBA 
Needs to Improve Oversight of Cash Balance Plan Lump Sum Distribution, 
Report No. 09-02-001-12-121, 3/29/02
    10.  Congressional Research Service, Memorandum to Hon. Bernie 
Sanders, Estimated Benefit Under A Cash Balance Plan, 2/11/03
    11.  Testimony of J. Mark Iwry, Subcommittee on Employer-Employee 
Relations, Committee on Education and the Workforce, 7/1/03
    12.  H.R. 1677, 108th Congress, lst Session
    13.  Cooper, Harrington and Hillesheim, et al. v. The IBM Personal 
Pension Plan and IBM Corporation, Civil No. 99-829-GPM, U.S. District 
Court for the Southern District of Illinois, 7/31/03
    14.  The Wall Street Journal, Ellen Schultz with permission, (1) 
Ins and Outs of Cash-Balance Plan-Employees will need to Know What 
Effects the New Setup Could Have on their Pensions, 12/4/98, (2) Some 
Workers Facing Pension Hit-Longtime Employees May Find Themselves on 
Long ``Plateau'' As Companies Make Switch, 12/18/98, (3) Older Workers 
Fight ``Cash Balance'' Plans, 2/11/99, (4) Your Pension May Be 
Changing; Go Figure How If You Can, 3/3/99, (5) New Pensions May Hurt 
Young Professionals, 12/16/99, (6)Pension Paternity: How A Single 
Sentence By IRS Paved the Way To Cash-Balance Plans-Age Bias Was No 
Concern, It Said, Offering Comfort To Firms and Consultants-Treasury 
Official's Key Role, 12/28/99

                                 
