[Senate Hearing 109-165]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-165
 
 A PENSION DOUBLE HEADER: REFORMING HYBRID AND MULTI-EMPLOYER PENSION 
                                 PLANS

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

                                HEARING

                               BEFORE THE

             SUBCOMMITTEE ON RETIREMENT SECURITY AND AGING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON



 EXAMINING REFORMING HYBRID AND MULTI-EMPLOYER PENSION PLANS, FOCUSING 
  ON THE CAUSES OF UNCERTAINTY FOR HYBRIDS AND MULTI-EMPLOYER PLANS, 
   INCLUDING FUNDING PROBLEMS AND PROPOSALS TO RESTORE STABILITY AND 
                                SOLVENCY

                               __________

                              JUNE 7, 2005

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions

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21-771                      WASHINGTON : 2005
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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                   MICHAEL B. ENZI, Wyoming, Chairman

JUDD GREGG, New Hampshire            EDWARD M. KENNEDY, Massachusetts
BILL FRIST, Tennessee                CHRISTOPHER J. DODD, Connecticut
LAMAR ALEXANDER, Tennessee           TOM HARKIN, Iowa
RICHARD BURR, North Carolina         BARBARA A. MIKULSKI, Maryland
JOHNNY ISAKSON, Georgia              JAMES M. JEFFORDS (I), Vermont
MIKE DeWINE, Ohio                    JEFF BINGAMAN, New Mexico
JOHN ENSIGN, Nevada                  PATTY MURRAY, Washington
ORRIN G. HATCH, Utah                 JACK REED, Rhode Island
JEFF SESSIONS, Alabama               HILLARY RODHAM CLINTON, New York
PAT ROBERTS, Kansas

               Katherine Brunett McGuire, Staff Director

      J. Michael Myers, Minority Staff Director and Chief Counsel

                                 ______

             Subcommittee on Retirement Security and Aging

                      MIKE DeWINE, Ohio, Chairman

JOHNNY ISAKSON, Georgia              BARBARA A. MIKULSKI, Maryland
ORRIN G. HATCH, Utah                 JAMES M. JEFFORDS (I), Vermont
JEFF SESSIONS, Alabama               JEFF BINGAMAN, New Mexico
PAT ROBERTS, Kansas                  HILLARY RODHAM CLINTON, New York
MICHAEL B. ENZI, Wyoming (ex         EDWARD M. KENNEDY, Massachusetts 
officio)                             (ex officio)

                   Karla L. Carpenter, Staff Director

              Ellen-Marie Whelan, Minority Staff Director

                                  (ii)

  




                            C O N T E N T S

                               __________

                               STATEMENTS

                         TUESDAY, JUNE 7, 2005

                                                                   Page
DeWine, Hon. Mike, Chairman, Subcommittee on Retirement Security 
  and Aging, opening statement...................................     1
Mikulski, Hon. Barbara, a U.S. Senator from the State of 
  Maryland, opening statement....................................     2
    Prepared statement...........................................     2
Lynch, Timothy P., President and CEO, Motor Freight Carriers 
  Association, Washington, DC; Randy G. DeFrehn, Executive 
  Director, National Coordinating Committee for Multi-Employer 
  Plans, Washington, DC; Jeffrey Noddle, Chairman of the Board, 
  President and CEO, Supervalu, INC., on behalf of The Food 
  Marketing Institute; and John Ward, President, Standard 
  Forwarding Company, East Moline, IL, on behalf of The Multi-
  Employer Pension Plan Alliance.................................     5
    Prepared statements of:
        Mr. Lynch................................................     7
        Mr. DeFrehn..............................................    17
        Mr. Noddle...............................................    24
        Mr. Ward.................................................    29
Enzi, Hon. Michael B., Chairman, Committee on Health, Education, 
  Labor, and Pensions, prepared statement........................    39
Sweetnam, William F., Jr., Attorney, The Groom Law Group, 
  Presenting the testimony of James M. Delaplane, Jr., on behalf 
  of The American Benefits Council, Washington, DC; Ellen 
  Collier, Director of Benefits, Eaton Corporation, Cleveland, 
  OH, on behalf of The Coalition to Preserve The Defined Benefit 
  System; and David Certner, Director, Federal Affairs, AARP, 
  Washington, DC.................................................    47
    Prepared statements of:
        Mr. Delaplane............................................    49
        Ms. Collier..............................................    61
        Mr. Certner..............................................    71

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    The American Society of Pension Professionals and Actuaries..    92

                                 (iii)

  


 A PENSION DOUBLE HEADER: REFORMING HYBRID AND MULTI-EMPLOYER PENSION 
                                 PLANS

                              ----------                              


                         TUESDAY, JUNE 7, 2005

                                       U.S. Senate,
Subcommittee on Retirement Security and Aging, Committee on 
                    Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:06 a.m., in 
Room 430, Dirksen Senate Office Building, Hon. Mike DeWine, 
chairman of the subcommittee, presiding.
    Present: Senators DeWine, Enzi, Isakson, Kennedy, Harkin 
and Mikulski.

                  Opening Statement of Senator DeWine

    Senator DeWine. Good morning. Welcome all of you. I call to 
order this hearing of the Subcommittee on Retirement Security 
and Aging.
    I would like to take this opportunity to express my strong 
support for hybrid pension plans and for multi-employer plans. 
Both types of plans provide valuable retirement security for 
millions of American workers. Both plans, however, are in 
trouble.
    This hearing will explore the causes of uncertainty for 
hybrids and multi-employer plans. For hybrids it is conflicting 
legal opinion. For multi-employer plans the problem is 
financial uncertainty. We must find ways to clear barriers out 
of the way so the plans can in fact survive.
    I am encouraged by the proposals that are being offered to 
address the legal and the economic problems of these plans. At 
the first hearing of this subcommittee in April, in talking 
about the current crisis in the private pension system, I said 
that a taxpayer bailout is really just not an option.
    The witnesses at today's hearing are not coming here hat in 
hand. Rather, they are presenting real life concerns and 
offering real world solutions. In the case of the multi-
employer plans today's witnesses are united, united in their 
commitment to getting the financial affairs in order without a 
taxpayer bailout.
    Let me at this point, before I introduce the panels, turn 
to my partner in this endeavor, my friend who has worked with 
me on so many other issues, Senator Mikulski.

                 Opening Statement of Senator Mikulski

    Senator Mikulski. Good morning. Mr. Chairman, I want to 
thank you for convening this very crucial panel, and I pledge 
to you a bipartisan effort to come to grips with these issues. 
These issues, the pensions that people rely upon, the pension 
guarantee that we need to ensure stability of funding, is too 
important to be engaged in politics.
    America is facing a challenge. Corporations are challenged 
to fulfill their pension responsibilities, and that means 
America is also facing challenges.
    We both come from a manufacturing base and we know how 
challenged many of those are, and we also know how challenged 
the defined benefit plans are. We know that there have been 
transitions. We know the multi-employer plans have challenges 
also.
    We have to make sure we listen to business and to workers 
and protect these pensions without forcing a one-size-fits-all 
solution and to protect all the workers while pensions are 
changing. Many people are losing their sleep over the pension 
issue. It has a tremendous impact on employees and retirees and 
on productivity, especially those who experience reduction in 
their pensions or fear that they will be reduced or eliminated.
    We also need to work with the private sector to protect the 
good guy businesses who still want to offer pensions to their 
employees and to their retirees.
    I know we are going to focus in this first panel on the 
multi-employer pension plans, and we talked about that at the 
pension benefit guaranty corporation hearing we had last month. 
We know that now we are looking at 25 percent of the PBGC fund 
to cover multi-employer plans, everything from grocery clerks 
to people in the building trades. We have to take a look at how 
we reform, but that in an over-exuberance of reform we do not 
have unintended negative consequences.
    The cash balance plans provide an even bigger challenge on 
how we can get ourselves ready for the innovation economy, and 
understand the portability and mobility of younger workers, but 
not discriminate those people who built America's companies, 
and made them great. We need to make sure that plans are 
protected in this transition from a manufacturing economy to a 
more innovation economy.
    Again I look forward to listening to our witnesses, 
learning from our witnesses, and working with you on a 
bipartisan basis.
    [The prepared statement of Senator Mikulski follows:]

                 Prepared Statement of Senator Mikulski

Introduction

    Mr. Chairman, I want to thank you for this important 
hearing. America is facing a challenge. Corporations are unable 
to fulfill their pension responsibilities. That means American 
workers are facing a challenge. That's why I want to work with 
my colleagues in the Senate to help save pension plans that are 
in trouble. Though today we are talking specifically about Cash 
Balance and Multi-Employer pension plans. This is part of the 
larger discussion on how to protect the retirement of America's 
workers.

Retirement Security

    Retirement security is one of the most important issues we 
face today. Everyone wants to retire with dignity and financial 
security, yet, every day I pick up the paper and see another 
article on our pension system in crisis. From the United 
Airlines bankruptcy settlement, to the PBGC funding shortfall, 
we have a real problem on our hands!
    Indeed, many people are losing sleep over this. The morale 
of both employees and retirees is suffering. Especially those 
who have experienced reductions in their pension benefits.
    Promises made must be promises kept but that isn't easy 
given these difficult economic times. We in Congress must work 
to protect both ``good guy'' businesses who still offer 
pensions to their employees and the retirees who rely so 
heavily on their pensions. Though we must protect the older 
worker while pension funds are changing we must keep in mind 
that ``one size does not fit all.'' For example, we must 
remember, young workers like cash balance plans, so any 
solution we design to protect our older workers must ``do no 
harm'' to younger workers as well.

Conclusion

    Though pension funding is not yet in crisis, we need to 
take steps now to prevent our companies from true crisis, our 
workers from true crisis, and shore up the solvency of pension 
plans. It is clear that pension reform is needed. I welcome and 
look forward to hearing from our witnesses today.
    Senator DeWine. Senator, thank you very much.
    Senator DeWine. Today we are going to hear from two panels 
of extremely qualified witnesses. The first panel will focus on 
the funding problems of the multi-employer pension plans, and 
the legislative proposals designed to restore stability and 
solvency.
    First to speak will be Randy DeFrehn. Mr. DeFrehn, thank 
you very much for joining us today.
    He is the Executive Director of the National Coordinating 
Committee for Multi-Employer Plans. Mr. DeFrehn is perhaps the 
most knowledgeable person on the extremely complicated issues 
of multi-employer plans, and we look forward to his clear and 
concise presentation.
    Following his testimony, the next witness will be Mr. Tim 
Lynch, who is the President and CEO of the Motor Freight 
Carriers Association. He will testify to the current funding 
crisis, discuss proposals being offered by a broad coalition of 
management and union groups.
    Next we will hear from Mr. Jeffrey Noddle, Chairman of the 
Board, President and CEO of SUPERVALU, America's largest food 
wholesaler and seventh largest grocery retailer. In Ohio of 
course we know their good work. Senator Mikulski, no doubt, has 
had the occasion to shop at Shoppers Food Warehouse and other 
places. We look to hearing from Mr. Noddle about the views of 
the Food Marketing Institute and how they would have us reform 
the law on multi-employer plans.
    Closing out the first panel will be Mr. John Ward, 
President of Standard Forwarding Company, a trucking firm based 
in East Moline, IL. His firm is perhaps the exception, a 
growing trucking company that is adding new active participants 
to the Teamsters Central States Pension Plan. He will express 
his concerns about some of the proposed multi-employer reforms 
and how they impact small firms. Mr. Ward is appearing on 
behalf of the Multi-Employer Pension Plan Alliance.
    The second panel will discuss the important issue of hybrid 
pension plans. These most typically are cash balance plans or 
pension equity plans.
    The first witness we will hear from will be William 
Sweetnam, an attorney with the Groom Law Group in Washington, 
DC. Mr. Sweetnam will be delivering the testimony of James 
Delaplane, who was supposed to appear today but was called out 
of town for a family emergency. Both Mr. Sweetnam and Mr. 
Delaplane represent the American Benefits Council. It is a 
public policy organization representing principally Fortune 500 
companies and other organizations that assist employers in 
providing benefits to employees.
    We will also hear from Ellen Collier, Director of Benefits 
at the Eaton Corporation in Cleveland. Her company, a 
diversified industrial manufacturer with over 27,000 employees 
in 100 locations in the United States, converted to a hybrid 
pension plan design. She will describe the process and care 
with which the company undertook such a change.
    Finally, we are pleased to have as a witness, David 
Certner, Director of Federal Affairs for AARP. Mr. Certner is 
well known to the members of this committee, and we once again 
appreciate his willingness to testify.
    Let me just make a final comment before we begin the 
testimony. I want to point out that it is my understanding that 
Chairman Enzi, chairman of the full committee, intends to move 
a comprehensive reform bill out of the full HELP Committee this 
summer, sometime before the August recess. Meeting that 
schedule is certainly going to take a lot of hard work and a 
high degree of bipartisan cooperation. The hearing today is 
testimony I think really to the willingness of Republicans and 
Democrats to work together to solve our country's pension 
problems. Both sides want to get these issues out in the open, 
and we want to get them resolved and resolved as quickly as 
possible.
    So let me at this point turn to our witnesses. Mr. DeFrehn, 
we will start with you. We are going to have 5 minute rounds 
and we are going to ask you to keep your statements to 5 
minutes. We have your written testimony in front of us, and if 
we could have everyone follow the 5 minute rule, then we will 
have ample time for questions.
    Thank you very much.

   STATEMENTS OF TIMOTHY P. LYNCH, PRESIDENT AND CEO, MOTOR 
FREIGHT CARRIERS ASSOCIATION, WASHINGTON, DC; RANDY G. DeFREHN, 
 EXECUTIVE DIRECTOR, NATIONAL COORDINATING COMMITTEE FOR MULTI-
EMPLOYER PLANS, WASHINGTON, DC; JEFFREY NODDLE, CHAIRMAN OF THE 
  BOARD, PRESIDENT AND CEO, SUPERVALU, INC., ON BEHALF OF THE 
 FOOD MARKETING INSTITUTE; AND JOHN WARD, PRESIDENT, STANDARD 
  FORWARDING COMPANY, EAST MOLINE, IL, ON BEHALF OF THE MULTI-
                 EMPLOYER PENSION PLAN ALLIANCE

    Mr. DeFrehn. Thank you, Senator. If I might ask your 
indulgence though, if it would be all right for Mr. Lynch to 
lead off, and then I will follow his comments.
    Senator DeWine. You can do that if that is all right with 
Mr. Lynch.
    [Laughter.]
    Senator DeWine. Is that all right with you, Mr. Lynch?
    Mr. Lynch. It is now.
    [Laughter.]
    Mr. Lynch. Thank you, Mr. Chairman and Senator Mikulski for 
having this hearing.
    I am here today as a representative of trucking industry 
employers, who by virtue of their collective bargaining 
agreement are major participants in a number of multi-employer 
pension plans.
    In addition, I was a participant in discussions that began 
last October with other industry and labor representatives, 
resulting in a coalition proposal that we believe addresses 
many of the problems facing multi-employer plans.
    In my written statement I have provided the subcommittee 
with information about recent trends in the trucking industry 
and the relationship between our collective bargaining 
agreement and the pension funds that I would like to submit for 
the record.
    For my oral testimony I would like to focus on a process by 
which we arrived at our recommendations and then summarize 
those recommendations. The coalition proposal represents what I 
believe is a unique opportunity in that it is the only reform 
proposal that has the full support of contributing employers, 
organized labor and those responsible for the governance, 
administration of multi-employer plans, in other words, all of 
the parties most directly affected by the MEPA statute. I would 
respectfully suggest that the effort to bring all those diverse 
interests to common ground is worthy of serious congressional 
consideration.
    When we began our discussions last October, not 
surprisingly, the employer representatives were intent on 
protecting the economic interests of the contributing 
employers. Similarly, the union representatives were intent on 
protecting the benefits of retirees and the future benefits of 
the active employees.
    The underlying equation of multi-employer plans is that new 
employers will replace exiting employers, thus maintaining a 
balance of contributing employers. Unfortunately, for plans in 
the trucking industry, generally referred to as mature plans, 
that equation is seriously out of balance with many more 
bankruptcies than new entering employers. There are only so 
many avenues to pursue to improve the financial condition of 
these plans, more contributing employers, more contributions 
from current employers, benefit modifications, better 
investment returns or some form of Government assistance.
    Our working group quickly concluded that Government 
assistance was unlikely, an increase in the number of 
contributing employers doubtful, and better investment returns, 
while hopefully on the horizon, are nonetheless speculative. 
That left additional contributions and benefit modifications. 
It is to the credit of those in the working group and the 
interests that they represent that we all recognize the risk 
and concern attendant to both additional contributions and 
benefit modifications.
    Any significant increases in employer contributions run the 
very real risk of jeopardizing the large pool of small 
employers typically involved in multi-employer plans. 
Conversely, any significant modifications in the benefit plan 
raises significant issues of labor/management relations, and 
frankly, issues of fundamental fairness with retirees.
    Had I written this proposal myself or in concern with other 
contributing employer representatives, it would look very 
different. I feel confident that the same holds true for our 
union counterparts. But had we abandoned our joint efforts and 
gone our separate ways we very well could have won the 
rhetorical battle but lost the substantive war. We chose to 
compromise and present a package of recommendations that we 
believe will address the problems. With that as background, I 
would like to summarize the main features of our proposal.
    First, because of the diversity of multi-employer plans we 
concluded that a one-size-fits-all approach would not be 
beneficial. Consequently, our proposal categorizes plans as 
healthy, at-risk and severely underfunded, and targets remedial 
programs to fit plans in those categories.
    Second, unlike single-employer plans, multi-employer plans 
function as a quasi PBGC with contributing employers assuming 
plan liabilities and shielding the Federal agency from that 
responsibility, literally to the last-man-standing principle. 
Unfortunately, most of the tools available to address funding 
problems are not available to the plan trustees or are viewed 
as last resort remedies by Federal agencies. The coalition 
proposal gives additional tools to the trustees to address 
short term funding problems as well as the long term objective 
to balance plan assets and liabilities.
    Third, all parties to the plans deserve more timely and 
meaningful disclosure of information about the status of the 
plans and the coalition proposal does that. Additionally, the 
proposal establishes an early warning system for those at risk 
plans. Under our proposal the most difficult and controversial 
remedies, additional employer contributions and benefit 
modifications, are reserved for those plans that face the most 
severely underfunded problems. This is in part designed as a 
strong incentive to plan trustees to do all they can to solve 
the problems before entering what we call the ``Red Zone.''
    Finally, with respect to withdrawal liability for the 
remaining contributing employers in the trucking industry, this 
is the proverbial between a rock and a hard place issue. These 
employers have no ability to control the extent of their 
potential liability when other contributing employers withdraw 
from the plan.
    I have about 20 seconds?
    Senator DeWine. That will be fine.
    Mr. Lynch. Thank you. Withdrawal liability was intended to 
address that problem. However, that has not been the case. From 
a public policy perspective it is difficult to justify a denial 
or reduction of benefits to these nonsponsored participants. 
However, if that remains Government policy, it is equally 
difficult to justify allowing withdrawing employers to fully 
escape or significantly limit their liability responsibilities.
    The coalition proposals attempts to strengthen and clarify 
withdrawal liability rules to protect the remaining 
contributing employers from assuming a disproportionate and 
unfair burden from nonsponsored participants.
    Thank you.
    Senator DeWine. Good. Thank you very much.
    [The prepared statement of Mr. Lynch follows:]

                 Prepared Statement of Timothy P. Lynch

    Mr. Chairman and members of the committee, good morning. My name is 
Timothy Lynch and I am the President and CEO of the Motor Freight 
Carriers Association (MFCA). I want to begin by thanking Chairman 
DeWine and the other members of the Subcommittee on Retirement Security 
and Aging for holding this hearing to discuss suggestions for securing 
the long term viability of the multi-employer pension system.
    I am here today as a representative of an association of trucking 
industry employers who by virtue of their collective bargaining 
agreement are major participants in a number of multi-employer plans. 
Their companies are key stakeholders in these funds. The employers I 
represent are concerned about the current framework for multi-employer 
plans and strongly believe that if not properly addressed, the problems 
will increase and possibly jeopardize the ability of contributing 
employers to finance the pension plans. The end result could put at 
risk the pension benefits of their employees and retirees.
    While we were supportive of Congressional efforts last year to 
address short term relief for multi-employer plans under the Pension 
Funding Stability Act, we believed then, and continue to hold the view, 
that significant reform needs to occur if we are to secure the long 
term viability of these plans. The financial difficulties facing the 
Central States pension fund are well known to this committee, but 
Central States is not alone. Nor are the factors contributing to the 
problems of Central States unique. The challenges facing these pension 
funds need immediate attention.
    In my testimony today, I will outline a series of recommendations 
that are the result of many months of discussion and negotiation among 
the parties most directly affected by the MPPAA statute. These 
recommendations represent a unique opportunity in that they are the 
only reform proposal that has the full support of contributing 
employers, organized labor, and those responsible for the governance 
and administration of multi-employer plans. I would respectfully 
suggest that the effort to bring all these diverse interests to common 
ground is worthy of Congressional consideration.

                   MOTOR FREIGHT CARRIERS ASSOCIATION

    MFCA is a national trade association representing the interests of 
unionized, general freight truck companies. MFCA member companies 
employ approximately 60,000 Teamsters in three basic work functions: 
local pick up and delivery drivers, over-the-road drivers and 
dockworkers. All MFCA member companies operate under the terms and 
conditions of the Teamsters' National Master Freight Agreement (NMFA), 
one of three national Teamster contracts in the transportation 
industry.
    Through its TMI Division, MFCA was the bargaining agent for its 
member companies in contract negotiations with the Teamsters for the 
current National Master Freight Agreement (April 1, 2003--March 31, 
2008). Under that agreement, MFCA member companies will make 
contributions on behalf of their Teamster-represented employees to 90 
different health & welfare and pension funds. At the conclusion of the 
agreement, MFCA companies will be contributing $12.39 per hour per 
employee for combined health and pension benefits, or a 33 percent 
increase in benefit contributions from the previous contract. This is 
in addition to an annual wage increase.

                          DESCRIPTION OF PLANS

    MFCA member companies, along with UPS, car-haul companies and food 
related companies are typically the largest contributing employers into 
most Teamster/trucking industry sponsored pension plans. The Teamster/
trucking industry benefit plans vary widely in size, geographic scope 
and number of covered employees. The two largest plans--the Central 
States Pension Fund and the Western Conference of Teamsters Pension 
Fund--have reported assets of $18 and $24 billion respectively and 
cover over 1 million active and retired employees in multiple States.
    As Taft-Hartley plans, these pension funds are jointly-trusteed (an 
equal number of labor and management trustees) and provide a defined 
benefit (although some plans offer a hybrid defined benefit/defined 
contribution program). MFCA member companies are represented as 
management trustees on most of the plans to which they make 
contributions. In an effort to help improve the management of the 
plans, MFCA member companies have made a concerted effort to nominate 
as management trustees individuals with backgrounds in finance, human 
resources, and employee benefits.

    RELATIONSHIP BETWEEN COLLECTIVE BARGAINING AND THE PENSION PLANS

    In a report to Congress last year, the General Accounting Office 
(GAO) stated that multi-employer plans ``contribution levels are 
usually negotiated through the collective bargaining agreement'' and 
that ``[b]enefit levels are generally also fixed by the contract or by 
the plan trustees.'' In our case, that is only partially correct: the 
NMFA only establishes a contribution rate. It does not set a pension 
benefit level. It is worth reviewing for the committee the relationship 
between collective bargaining and the multi-employer pension plans.
    Like most multi-employer plans, our plans are maintained and funded 
pursuant to collective bargaining agreements. During each round of 
bargaining, the industry and union bargain agree on the per-hour 
contribution rate required to be paid by employers to the plans for 
pension and health benefits. Once the rate is established, however, the 
role of the collective bargaining process and of the collective 
bargaining parties with respect to the plans--in terms of the level of 
benefits, the administration of delivering those benefits, management 
of plan assets, etc.--is over. For employers, the only continuing role 
in the plans is to make the required contractual contributions. That 
is, unless the plan, over which the employers have no control, runs 
into financial crisis. I will talk more about that in a moment.
    Each multi-employer pension plan is a separate legal entity managed 
by an independent board of trustees. It is not a union fund controlled 
by the union. Nor is it an employer fund, over which the employer has 
control. Rather, by law, the plans are managed independently by their 
trustees under a complex set of statutory and regulatory requirements. 
Although the trustees are appointed half by the union and half by the 
employer each trustee has a legal obligation to act not in the interest 
of the union or employer that appointed them, but rather with a 
singular focus on the best interests of the plans participants. 
Trustees who do not act in the best interest of participants may be 
held personally liable for breach of their fiduciary duty.
    As noted earlier, employers' role with respect to multi-employer 
pension plans is limited to making contributions unless the plan runs 
into financial difficulty. Under current law, employers are ultimately 
responsible for any funding deficiency that the multi-employer plan may 
encounter. Specifically, if a multi-employer plan hits a certain 
actuarially calculated minimum funding level, employers in the fund are 
assessed a 5 percent excise tax and their pro-rata share of the funding 
shortfall or face a 100 percent excise tax on the deficiency.

                       HOW WE GOT TO WHERE WE ARE

    1980 was a watershed year in the history of the trucking industry. 
In that year Congress passed two major legislative initiatives--the 
Motor Carrier Act (MCA) and the Multi-Employer Pension Plan Amendments 
Act (MPPAA)--that radically altered the profile of the industry and the 
landscape for industry sponsored pension plans. The first brought about 
deregulation of the trucking industry and ushered in an era of 
unprecedented market competition. The second, while perhaps not 
recognized at the time, upset the essential balance between exiting and 
entering employers that is key to maintaining a viable multi-employer 
pension program.
    To put this in some perspective, I have included in my statement 
(Appendix A), a list of the top 50 general freight, LTL carriers who 
were operating in 1979, the year just prior to enactment of MCA and 
MPPAA. Of those 50, only 7 are still in operation and of those 7 only 5 
are unionized. Virtually all of the 43 truck companies no longer in 
business had unionized operations, and consequently were contributing 
employers to industry sponsored pension plans. There have been no 
subsequent new contributing employers of similar size to replace these 
departed companies. And beyond the top 50 there were literally 
hundreds, perhaps thousands, of smaller unionized truck operators who 
also have fallen by the wayside. The simple fact is that since 1980 
there has not been a single trucking company of any significant size to 
replace any of the departed companies on the Top 50 list.
    And what happens when these companies leave the plans? Their 
employees and retirees become the responsibility--not of the PBGC--but 
of the plans and their remaining contributing employers. In short, the 
remaining contributing employers function as a quasi-PBGC ensuring the 
full pension benefit.
    One of the key elements of the MPPAA statute was the ability to 
recover assets from withdrawing employers or withdrawal liability. 
Unfortunately, that has not been the case. One of the largest trucking 
industry plans reports that bankrupt (withdrawing) employers ultimately 
pay less than 15 percent of their unfunded liability. And what happens 
when these liabilities are not fully recovered? They become the 
responsibility of the remaining contributing employers. This represents 
one of major differences between the treatment of liabilities of single 
versus multi-employer pension plans.
    Nothing highlights the inequity of this situation more than the 
bankruptcies of two contributing employers: Consolidated Freightways 
(CF) and Fleming Companies. Both companies were in the top 10 category 
of contributing employers to the Central States plan. They also 
sponsored their own company, single-employer plan for their non 
collective bargaining covered employees. The PBGC has assumed 
responsibility for the CF plan with a potential liability in excess of 
$250 million and the Fleming plan with a projected liability in excess 
of $350 million or a combined liability for PBGC of over $600 million.
    Conversely, the Fleming and CF employees/retirees covered under 
multi-employer pension plans like Central States will now be the 
responsibility of the remaining contributing employers (less whatever 
these plans can recover in withdrawal liability payments). These 
beneficiaries will be entitled to a guaranteed full pension benefit. 
This will only add further cost to what is already one very stark 
financial fact of life for the Central States fund: half of its annual 
benefit payments now go to beneficiaries who no longer have a current 
contributing employer.
    MEPPA delineates a very different role for PBGC with respect to 
single-employer versus multi-employer plans. The GAO report identifies 
four: monitoring, providing technical assistance, facilitating 
activities such as plan mergers, and financing in the form of loans for 
insolvent plans. In contrast to PBGC's more aggressive role with 
single-employer plans, these are relatively passive activities. It was 
not until the recent Congressional debate over whether to provide 
limited relief to multi-employer plans that attention was focused on 
the need to have a better understanding of the true financial condition 
of these plans. And underlying that need was a concern whether the 
relief would provide assistance for a truly short-term issue or mask a 
more fundamental, long-term problem.
    Furthermore, the remedies available to multi-employer plans in the 
form of amortization relief, short fall methodology or waivers are 
often viewed as ``last resort'' solutions. There are no intermediate 
steps that can assist a plan well before it reaches this point.

                 RECOMMENDATIONS FOR LEGISLATIVE ACTION

    Last October, we began participating in a small working group of 
trucking company and union representatives to try to develop 
recommendations that would be acceptable to multi-employer plans, 
unions and contributing employers. The objective was to develop a 
legislative proposal that would alleviate the short-term consequences 
of funding deficits and promote long-term funding reform for multi-
employer plans. As a representative of contributing employers, I 
entered those discussions with a clear mission to protect the economic 
interests of my membership. My union counterparts entered with a 
similar mission to protect the interests of their membership.
    Early on in those discussions, we agreed on several fundamental 
issues that ultimately formed the basis for our recommendations.
     Because of the diversity of multi-employer plans, a one-
size-fits-all approach would not be productive. Instead remedial 
programs would be targeted to those plans facing the greatest financial 
problems.
     Multi-employer plans function as a quasi-PBGC, with 
contributing employers assuming plan liabilities and shielding the 
Federal agency from that responsibility until plan bankruptcy. 
Unfortunately, plan trustees don't have all the tools available to the 
PBGC to address funding problems.
     Furthermore, most of the tools available to address 
funding problems become available too late in the process and are often 
viewed as ``last-resort'' remedies by Federal agencies.
     All parties to the plans deserve more timely and 
meaningful disclosure of information about the status of the plans.
     The need to establish an early warning system for ``at 
risk'' plans and a separate category for ``severely underfunded'' 
plans.
     The burden to fix the problem of severely underfunded 
plans should not be borne disproportionately by any one party to the 
plans. To do otherwise would, in fact, jeopardize the continued 
viability of the plan and its defined benefits.
    This process ultimately was expanded to include employer and union 
representatives from other industries. The result is a coalition 
proposal that has the support of a wide range of business and labor 
organization interests.
    From the contributing employer perspective, the key elements of the 
coalition proposal are the following.

                             FUNDING RULES

    Under the proposal, multi-employer plans will be required to have 
strong funding discipline by accelerating the amortization periods, 
implementing funding targets for severely underfunded plans and 
involving the bargaining parties in establishing funding that will 
improve plan performance over a fixed period of time. In addition, the 
proposal limits the ability for plan benefit enhancements unless the 
plan reaches certain funding levels.

                           FUNDING VOLATILITY

    By virtue of their collective bargaining agreements, contributing 
employers must make consistent payments regardless what gains are 
achieved in the financial markets. (This is in contrast to single-
employer plans that may avoid contribution payments in lieu of above 
average market returns). However, the volatility of these plans occurs 
in the form of funding deficiencies. The coalition proposal addresses 
this situation by allowing the plans to use existing extension and 
deferral methods to permit time for the bargaining process to address 
the underfunding over a rational period of time.

                         EARLIER WARNING SYSTEM

    The coalition proposal establishes a ``yellow zone'' or early 
warning system. The goal of the yellow zone concept is to make sure 
plans are cautious in the ability to have affordable benefit levels. 
Additionally, plans in the yellow zone must improve their funded status 
in a responsible manner, one that does not put extreme pressure on the 
benefits provided or eliminate the ability for employers to operate in 
a highly competitive marketplace. The coalition proposal strikes a 
reasonable balance through creation of a bright line standard for an 
improving funded status but not one that creates an insurmountable and 
unreasonable financial burden on contributing employers. While it is 
important that yellow zone plans develop a program for funding 
improvement, the burden to do so should be commensurate with the 
ability to recover over a rational period of time.

                   PLANS WITH SEVERE FUNDING PROBLEMS

    Under the coalition proposal, plans facing severe funding problems 
are in a ``red zone'' or essentially reorganization status. When a plan 
is in reorganization status, extraordinary measures will be necessary 
to address the funding difficulties. It is here that the concept of 
shared responsibility for balancing plan assets and liabilities fully 
comes into play. Reorganization contemplates a combination of 
contribution increases--above those required under the collective 
bargaining agreement--and benefit reductions--though benefits at normal 
retirement age are fully protected--to achieve balance.

                      TRANSPARENCY AND DISCLOSURE

    The Pension Funding Stability Act of 2004 greatly improved the 
transparency of multi-employer plans. The coalition proposal expands 
those disclosures and places additional disclosure requirements for 
plans that are severely underfunded in the red zone.

                          WITHDRAWAL LIABILITY

    For the remaining contributing employers in the trucking industry, 
this is the proverbial ``between a rock and a hard place'' issue. These 
employers have no ability to control the extent of their potential 
liability when other contributing employers withdraw from the plan. 
Withdrawal liability was intended to address that problem. However, as 
I indicated earlier, one large trucking industry plan estimates it 
recovers on average less than 15 percent of assets required to cover 
the benefit liabilities. Non-sponsored participants now make up 50 
percent of the benefit pool in Central States.
    From a public policy perspective, it is difficult to justify a 
denial or reduction of benefits to these non-sponsored participants. 
However, if that remains Government policy it is equally difficult to 
justify allowing withdrawing employers to fully escape or significantly 
limit their liability responsibilities. The coalition proposal attempts 
to strengthen and clarify withdrawal liability rules to protect the 
remaining contributing employers from assuming a disproportionate and 
unfair burden from non-sponsored participants.
    Mr. Chairman, thank you for giving me the opportunity to present 
the views of the Motor Freight Carriers Association. I look forward to 
working with the members and staff of this committee to develop a long 
term solution to the problems facing multi-employer pension plans. I 
would be happy to answer any questions you may have.

                      TOP 50 LTL CARRIERS IN 1979

    1. Roadway Express; 2. Consolidated Freightways; 3. Yellow Freight 
System (Yellow Transportation); 4. Ryder Truck Lines; 5. McLean 
Trucking; 6. PIE; 7. Spector Freight System; 8. Smith's Transfer; 9. 
Transcon Lines; 10. East Texas Motor Freight; 11. Interstate Motor 
Freight; 12. Overnite Transportation; 13. Arkansas Best Freight (ABF 
Freight System); 14. American Freight System; 15. Carolina Freight 
Carriers; 16. Hall's Motor Transit; 17. Mason & Dixon Lines; 18. Lee 
Way Motor Freight; 19. TIME-DC Inc.; 20. Wilson Freight Co.; 21. 
Preston Trucking Co.; 22. IML Freight; 23. Associated Truck Lines; 24. 
Central Freight Lines; 25. Jones Motor-Alleghany; 26. Gateway 
Transportation; 27. Bowman Transportation; 28. Delta Lines; 29. Garrett 
Freightlines; 30. Branch Motor Express; 31. Red Ball Motor Freight; 32. 
Pilot Freight Carriers; 33. Illinois-California Exp.; 34. Pacific Motor 
Trucking; 35. Central Transport; 36. Brown Transport; 37. St. Johnsbury 
Trucking; 38. Commercial Lovelace; 39. Gordons Transports; 40. CW 
Transport; 41. Johnson Motor Lines; 42. System 99; 43. Thurston Motor 
Lines; 44. Watkins Motor Lines; 45. Santa Fe Trail Transportation; 46. 
Jones Truck Lines; 47. Merchants Fast Motor Lines; 48. Murphy Motor 
Freight; 49. Maislin Transport; 50. Motor Freight Express.
    Bold = Still Operating on 4/1/04

[Exhibit 1 can be found in committee files.]




    Senator DeWine. Are you ready, sir?
    Mr. DeFrehn. Yes, I am. Thank you.
    Senator DeWine. Very good.
    Mr. DeFrehn. Mr. Chairman, Senator Mikulski, thank you for 
inviting me to participate in today's hearing on this important 
topic. I appear before you on behalf of the nearly 10 million 
participants of multi-employer defined benefits plans, both in 
my capacity as Executive Director of the National Coordinating 
Committee for Multi-Employer Plans, and as a member of a broad 
based coalition of employers and employee organizations who 
recognize the important role such plans play in the lives of 
our participants, their families and the communities in which 
they live.
    You have just heard how all of the major trucking industry 
employer associations, large individual employers, and the 
Teamsters have been full partners in the development of the 
coalition proposal. Given the size and complexity of their 
plans and the problems they currently face, it is entirely 
appropriate they should be fully involved. However, this 
represents far more than a trucking industry initiative. The 
coalition represents the interests of funds in virtually all 
aspects of the economy, including construction, service, 
garment, hospitality, long shore, mining, paper, chemical, 
aerospace and trucking industries.
    The construction industry, which makes up more than half of 
all multi-employer plans, is the largest block of coalition 
members, including the Associated General Contractors, Bechtel 
Corporation, the Washington Group, all of the major specialty 
contractor associations and all 15 of the construction trade's 
unions. The entertainment industry is also represented by both 
employer and labor groups, and although FMI has expressed 
reservations that the coalition proposal does not go far enough 
for some of their members in certain areas, the major labor 
groups representing their employees, the United Food and 
Commercial Workers and the Teamsters, participate in the 
development of and fully endorse the proposal.
    Last, two other groups not usually associated with multi-
employer issues, the U.S. Chamber of Commerce and the American 
Benefits Council, also support the proposal.
    The proposal itself embodies several important 
propositions. First, funding rules should be strengthened to 
help plans avoid problems over which they have some control. 
Second, plans should receive relief from situations over which 
they have no control. Third, the stakeholders must share the 
burden presented when the unavoidable occurrence threatens the 
long term viability of the plans. Fourth, these plans are a 
creation of the collective bargaining process and the process 
is best equipped for finding solutions acceptable to all the 
stakeholders. Fifth, the future of the plans will be 
jeopardized when active employees no longer derive any benefit 
from continued participation, and sixth, reduction of accrued 
benefits should only occur as an alternative to more 
significant reductions that would occur if the plans were to 
fail and go to the PBGC guaranty levels.
    The proposal focuses on three broad areas of reform based 
on the relative funding health of the plans. Plans that are 
currently well funded are required to amortize plan 
improvements more quickly than under current rules. Also, tax 
laws that have forced the plans to increase cost to protect 
contributing employers' tax deductions should be changed to 
provide a buffer against the unexpected.
    Plans that begin to see an erosion in their funded 
position, a funded ratio below 80 percent, must implement a 
benefit security plan that requires the funding level to be 
improved over time. Any amendment to the plan of benefits must 
have offsetting contribution increases that exceed the cost of 
that amendment.
    Plans with severe funding problems would be placed in 
reorganization under revised rules, and the plan fiduciaries 
and bargaining parties would be provided with additional tools 
to bring the plan assets and liabilities into balance. Once in 
reorganization, notice would be given to all stakeholders. The 
employers would be subjected to all surcharges in lieu of being 
assessed extra contractual contributions and excise taxes. 
Certain restrictions would apply immediately to benefit 
payments that expedite the depletion of the fund. Trustees 
would be required to develop and distribute to all stakeholders 
a plan or reorganization to bring the plan out of 
reorganization within roughly three bargaining cycles.
    Options to current benefit and contribution structures, 
including possible amortization extensions and mergers, but 
which would also include possible elimination of certain 
benefits that are currently protected under anti-cutback rules, 
would be developed by the trustees and submitted to the 
parties. Schedules showing the amount of benefit modifications 
necessary to bring the plan out of reorganization would be 
presented to the bargaining parties who would then bargain over 
the appropriate combination of modifications and contribution 
increases. The plan or reorganization and schedules would be 
revised and distributed to stakeholders at least annually.
    Other provisions include withdrawal liability statutes, 
changes to the withdrawal liability statutes to make it more 
difficult for contributing employers to shift their 
responsibility to remaining employers upon withdrawal from the 
fund.
    Clearly the provisions in this proposal, quite different 
than would have been included in a document drafted 
independently by either employer or employee representatives, 
nevertheless, it represents an excellent compromise and a 
responsible way to address the current problems. As with any 
carefully negotiated compromise, however, its strength and 
indeed that of the coalition itself, lies in preserving the 
elements of the proposal as closely as possible to the 
original. The more changes that are introduced into the 
substance of the proposal, the greater the likelihood that 
certain groups will withdraw their support. For that reason, we 
recommend the document to you in its entirety, and request your 
help in seeing it enacted into law.
    In closing, I would like to thank you for your attention 
and for the invitation to participate in this discussion and 
look forward to your questions.
    Senator DeWine. Thank you very much.
    [The prepared statement of Mr. DeFrehn follows:]

                 Prepared Statement of Randy G. DeFrehn

    Mr. Chairman and members of the committee, I am pleased to be here 
today to discuss the subject of reforming multi-employer defined 
benefit pension plans. I appear here on behalf of a broad coalition of 
plans, employers, employer associations and labor organizations that 
sponsor multi-employer plans which has put forth a carefully 
negotiated, balanced proposal for multi-employer pension plan reform. 
The coalition proposal has evolved through the efforts of many of the 
system's largest stakeholders since the Pension Funding Equity Act of 
2004 failed to provide meaningful relief to even a single multi-
employer plan, despite the laudable efforts of a majority of the 
Members of this Chamber. A list of those groups who are participants in 
the coalition is enclosed with my written remarks, but it is important 
to note that they represent the overwhelming majority of employers and 
virtually all of the unions in the construction, trucking, 
entertainment, service and food industries and the membership of the 
National Coordinating Committee for Multi-Employer Plans (NCCMP) which 
directly represents over 600 jointly managed pension, health, training 
and other trust funds and their sponsoring organizations across the 
economy. The NCCMP is a non-profit, non-partisan advocacy organization 
formed in 1974 to protect the interests of plans and their participants 
following the passage of ERISA and the increasingly complex legislative 
and regulatory environment that has evolved since then.

                               BACKGROUND

    There are nearly 1,600 multi-employer defined benefit pension plans 
in the country today. They provide benefits to active and retired 
workers and their dependents and survivors in virtually every area of 
the economy. Because of their attractive portability features, multi-
employer plans are most prevalent in industries, like construction, 
which are characterized by mobile workforces. According to the latest 
information from the Pension Benefit Guaranty Corporation, multi-
employer plans cover approximately 9.7 million participants, or about 
one in every four Americans who still have the protection of a 
guaranteed income provided by a defined benefit plan. With few 
exceptions, these are mature plans that were created through the 
collective bargaining process 50 to 60 years ago and have provided 
secure retirement income to many times that number of participants 
since their inception. Although some mistakenly refer to them as 
``union plans'' the law has required that these plans be jointly 
managed with equal representation by labor and management on their 
governing boards since the passage of the Labor Management Relations 
(Taft-Hartley) Act in 1947. This active participation by both 
management and labor representatives (most of whom are participants in 
the plans) provides a clear distinction between single-employer and 
multi-employer plans. They are more extensively regulated under both 
labor and employee benefits laws and regulations and the watchful eyes 
of the Department of Labor, the Internal Revenue Service and the 
Pension Benefit Guaranty Corporation. Most important among these laws 
and regulations, Taft-Hartley requires that the fiduciaries who serve 
on these joint boards must manage these plans for the ``sole and 
exclusive benefit'' of plan participants, and ERISA imposes fiduciary 
obligations on plan fiduciaries that put at risk the personal assets of 
those who fail to meet their obligations.
    It is estimated that there are over 65,000 employers that 
contribute to multi-employer plans. The vast majority of which are 
small employers. For example, in the construction industry, which makes 
up more than 50 percent of all multi-employer plans (but just over one-
third of the participants), it is estimated that as many as 90 percent 
of all such employers employ fewer than 20 employees. By sponsoring 
these industry plans, employers are able to ensure that their employees 
have access to comprehensive health and pension benefits and, through 
the jointly managed training and apprenticeship plans, the employers 
have access to a readily available pool of highly skilled labor, none 
of which could be feasible for individual employers to provide.
    Funding for multi-employer plans comes from the negotiated wage 
package agreed to in the collective bargaining process. For example, if 
the parties agree to an increase in the wage package of $1.00 per hour 
over 3 years, the $1.00 may be allocated as $.40 to the health benefit 
plan, $.20 to pensions, $.05 to the training fund and the remaining 
$.35 taken in increased wages. Although for tax purposes, contributions 
to employee benefit plans are considered to be employer contributions, 
the funding comes from monies that would otherwise be paid to the 
employee in the form of wages. For the overwhelming majority of such 
employers, their regular involvement with the plans is limited to 
remitting their monthly payments to the trust funds as required 
pursuant to their collective bargaining agreements. For most 
contributing employers, these funds are the perfect substitute for a 
large financial commitment to human resources functions, providing 
administrative services and meeting today's complex compliance 
requirements while providing economies of scale that would otherwise 
make such benefit plans unaffordable for small business.
    Since the passage of the Multi-Employer Pension Plans Amendments 
Act of 1980, participants of multi-employer plans have been covered by 
the benefit guarantee provisions of the PBGC. Unlike single-employer 
plans, however, the PBGC is the insurer of last resort for multi-
employer plans. Instead, the employers who contribute to these plans 
self-insure against the risk of failure of another. Under the multi-
employer rules, employers who no longer contribute, or cease to have an 
obligation to contribute to the plan, must pay their proportionate 
share of any unfunded vested benefits that exist at the time of their 
departure. This obligation, known as withdrawal liability, recognizes 
the shared obligations of employers in maintaining an industry wide 
skilled labor pool in which employees may move among contributing 
employers dozens of times during their career. This system of shared 
risk has protected both the participants and the PBGC, as evidenced by 
the fact that it has had to intervene in fewer than 35 cases over the 
past 25 years. The reduced risk to the PBGC is also reflected in a much 
lower premium--$2.60 per participant per year, versus $19 per 
participant per year plus a variable premium for single-employer plans. 
The PBGC guarantees a much lower benefit for multi-employer plans--a 
maximum of $12,700 per year for a participant who retires at normal 
retirement age after 30 years of service (adjusted proportionally for 
greater or less service), compared with a maximum benefit under the 
single-employer guarantee of approximately $44,000 annually. As of the 
latest PBGC annual report, the multi-employer guaranty program showed a 
projected deficit of approximately 1 percent of that projected for the 
single-employer guaranty fund.
    This system of pooled risk has been both one of the greatest 
strengths and major weaknesses of the multi-employer system. In the 
early 1980s, the presence, or even the threat of withdrawal liability 
produced a chilling effect on the growth of multi-employer plans that 
has persisted in several industries despite the fact that most have had 
no unfunded benefits for most of that time. On the other hand, for 
many, the threat of unfunded liabilities provided an incentive to plan 
fiduciaries to adopt and follow conservative funding and investment 
policies that, in combination with a robust economy, led the plans to 
become fully funded.
    Nevertheless, rather than being able to build a buffer against 
future economic downturns, this success led plans to experience 
problems at the top of the funding spectrum. In the late 1980s and 
throughout the 1990s, plans began to hit the full funding limits of the 
tax code. Under these provisions, employers that contribute to plans in 
excess of these limits were precluded from receiving current deductions 
for their contributions to the plans. Compounding the situation, 
employers who continued to make their contributions also faced an 
excise tax for doing so, despite the fact that the collective 
bargaining agreements to which they were signatory obligated them to 
continue to make them. Although in rare instances the bargaining 
parties negotiated ``contribution holidays,'' timing considerations and 
the fact that in most cases the plan fiduciaries and bargaining parties 
were different people meant that plan trustees had no choice other than 
to increase plan costs by improving benefits to bring plan costs up to 
the level of plan income to protect the deductibility of employer 
contributions. Further, once adopted, many of the actions taken to 
improve the plan of benefits cannot be rescinded under the anti-cutback 
provisions of the law which have evolved since ERISA was first passed. 
It is estimated that over 75 percent of multi-employer defined benefit 
pension plans were forced to make these benefit improvements as a 
result of the maximum deductible limits. Overall, multi-employer plans 
were very well funded as the plans approached the end of the 
millennium, with the average funded position for all multi-employer 
plans at 97 percent (see The Segal Company Survey of the Funded 
Position of Multi-Employer Plans--2000).
    In the 3 years that followed, however, these same plans suffered 
significant losses as the crisis of confidence over the accounting 
scandals and corporate excesses exemplified by Enron, Tyco, and 
WorldCom, sent the markets into a deep and prolonged contraction. For 
the first time since the ERISA funding rules were adopted in 1974; in 
fact, for the first time since before the beginning of World War II, 
the markets experienced 3 consecutive years of negative performance. 
Not only were plans unable to meet their long-term assumed rates of 
return on their investments, virtually all institutional investors saw 
the principal of their trusts decline. For many of these mature multi-
employer plans that depend on investment income for as much as 80 
percent of their total income, the loss of significant portions of the 
trust caused a rapid depletion of what for most had been significant 
credit balances in their funding standard accounts. Although the most 
recent report showing the funded position of multi-employer plans shows 
a significant decline from the 97 percent in 2000, the average funded 
position is still relatively healthy at 84 percent. Nevertheless, these 
investment losses have left a number of plans at all levels of funding 
facing credit balances approaching zero, meaning these plans face a 
funding deficiency in the near future (see The Segal Company Survey of 
the Funded Position of Multi-Employer Plans--2004). According to the 
most recent estimates, as many as 15 percent of all plans are projected 
to have a funding deficiency by the year 2008 and an additional 13 
percent face the same fate by 2012 (assuming benefit levels and 
contribution rates remain unchanged).
    The implications of a funding deficiency for contributing 
employers, the plans and their participants are potentially 
devastating. Once a plan's credit balance drops below zero, 
contributing employers are assessed by the plan trustees for additional 
contributions in an amount equal to their proportionate share of the 
amount necessary for the plan to meet its minimum funding requirements. 
This is above the amounts they have contributed pursuant to their 
collective bargaining agreements. In addition, they are required to pay 
an excise tax by the IRS equal to 5 percent of that assessment. In the 
event that all contributing employers fail to make up the shortfall in 
a timely fashion, the excise tax may be increased to 100 percent of the 
shortage.
    For many of the contributing employers, especially those in 
industries (like, but not limited to, construction) which traditionally 
have small profit margins, they have bid their work throughout the year 
based on their fixed labor costs (including the negotiated pension 
contributions). For them, receiving an assessment for what could be 
multiples of the total contributed for the year, could be enough to 
drive them into bankruptcy. In this instance, the concept of pooled 
risk among contributing employers means that the shortage amounts as 
well as the excise taxes owed by the bankrupt employers would be 
redistributed among the remaining employers, invariably pulling some at 
the next tier into a similar fate. As more and more employers fail, 
those companies that are more financially secure begin to worry about 
being the ``last man standing.'' The result is that they will also seek 
ways to abandon the plan before all of their assets are at risk. When 
all of the employers withdraw, the assets of the plan will be 
distributed in the form of benefit payments until the assets on hand 
are sufficiently depleted to qualify for assistance from the PBGC. At 
that point, participants' benefits will be reduced to the maximum 
guaranteed levels, as noted above, which are likely to represent only a 
fraction of the amount to which they would otherwise be entitled at 
normal retirement age.

             A BALANCED, NEGOTIATED INDUSTRY-WIDE RESPONSE

    Trustees of most plans faced with the prospects of an impending 
funding deficiency have already taken action to address the problem to 
the extent possible. For the most part, that has involved reducing 
future accrual rates or ancillary benefits that have not yet been 
accrued, as the current anti-cutback regulations prohibit reducing 
benefits that have already been accrued. In many cases, this has 
involved substantial reductions (e.g. 40 percent by the Western 
Conference of Teamsters, 50 percent by the Sheet Metal Workers National 
Pension Plan and the Central States Teamsters Pension Plan, and 75 
percent in the case of the Plumbers and Pipefitters National Pension 
Plan). But because the financial impact of adjusting only future 
benefits can be limited, these actions on their own may be insufficient 
to avoid a funding deficiency. Additionally, the modest recovery of the 
investment markets experienced in 2004 is only marginally helpful. For 
example, a $1 billion fund in 2000 that suffered a 20 percent decline 
in assets through 2003 would have to realize an annualized rate of 
return of 15 percent every year for the remainder of the decade to get 
to the financial position by 2010 it would have had it achieved a 
steady rate of 7.5 percent for the full 10 year period. Other relief, 
including funding amortization extensions under IRC section 412(e) or 
the use of the Shortfall Funding Method, have been effectively 
precluded as options by the IRS. Consequently, the only alternative 
available requires a legislative solution.
    Following the failed attempt at relief in the Pension Funding 
Equity Act of 2004, various groups began to evaluate alternatives that 
might help plans get by avoidable situations, while attempting to help 
plans that were placed at risk by unavoidable external forces. The 
objective was to find ways to provide additional tools to the plan 
fiduciaries and bargaining parties for plans that face imminent funding 
deficiencies to bring liabilities and resources into balance. From 
April 2004 through early May 2005 a broad cross section of groups, 
including those that were on different sides in the earlier debate, 
entered into extensive negotiations to develop a set of specifications 
for reform that the full group could agree on. The specifications for 
reform that resulted from those negotiations reflect a carefully 
conceived compromise between employer and labor groups, undoubtedly 
quite different from what either group would have designed 
independently, but reflective of a desire by all parties to preserve 
the plans and the maximum benefits payable to plan participants today 
and in the future. That initial group was expanded through meetings 
with numerous employer and labor groups and the result was the current 
coalition proposal, a copy of which is included as an addendum to this 
testimony. A summary of that proposal is as follows:

                     SUMMARY OF COALITION PROPOSAL

    The proposed specifications for multi-employer reform is comprised 
of three major components and supplemented with several clarifying and 
remedial changes intended to make the system work more effectively for 
plans, their participants and sponsors.
    The first component is applicable to all plans and has two major 
provisions geared to strengthening funding requirements for plan 
amendments that increase or decrease plan costs (specifically unfunded 
actuarial accrued liabilities) related to past service and to shorten 
the amortization of costs for improvements that are to be paid out over 
a shorter period to the payment period.
    The other major provision would allow plans to build a ``cushion'' 
against future contractions in the plan's funded position by increasing 
the maximum deductible limit to 140 percent of the current limits and 
would repeal the combined limit on deductions for multi-employer 
defined benefit and defined contribution plans.
    The second component applies to plans that have potential funding 
problems, defined in the coalition proposal as being plans that have a 
funded ratio of less than 80 percent using the market value of assets 
compared to the actuarial value of its actuarial accrued liability. 
Such plans would be required to develop and adopt a ``benefit security 
plan'' that would improve the plan's funded status. Plans in this 
category would not be able to adopt amendments to improve benefits 
unless the additional contributions related to such amendment more than 
offset the additional costs to the plan. Amendments that violate that 
restriction would be void, the participants would be notified and the 
benefit increase would be cancelled.
    To provide additional tools to plans to avoid funding problems, 
plans would have ``fast track'' access to 5 year amortization 
extensions and the Shortfall Funding Method if certain criteria were 
met. IRS authorization could be withheld only in certain circumstances 
and applications would need to be acted upon within 90 days or the 
approval would be automatic. Additional restrictions that currently 
apply to plans with amortization extensions would also apply.
    The third and most critical component involves plans that have 
severe funding problems or will be unable to pay promised benefits in 
the near future. The clear intent of this provision is to prevent a 
funding deficiency that could trigger a downward spiral of the plan and 
its contributing employers and a reduction in the ultimate benefit 
payable to the PBGC guarantee levels. This is accomplished by providing 
the bargaining parties with additional tools beyond those currently 
available to bring the plan's liabilities and resources back into 
balance.
    The proposal modifies the current reorganization rules to provide a 
meaningful option to plan sponsors, much like a Chapter 11 bankruptcy 
reorganization. ERISA currently has reorganization rules governing 
plans that are nearing insolvency, but those rules were adopted at a 
time when the major concern was a plan's ability to meet its payment 
obligations to current pensioners. Today, even those plans with the 
most severe funding problems have sufficient assets to meet their 
obligations to current pensioners. The coalition proposal suggests 
several new triggers to reorganization that reflect the problems of 
mature plans, recognizing that funding ratios below 65 percent, a 
plan's short term solvency and a plan's demographic characteristics 
(i.e. the relationship between the present value of benefits earned by 
inactive vested and retired participants to that of currently active 
participants) can play an important role in a plan's ability to meet 
its obligations to all participants, current and future.
    Once a plan is in reorganization, notice would be given to all 
stakeholders and the Government Agencies with jurisdiction over the 
plans that the plan is in reorganization and describing the possible 
consequences. Once in reorganization, plans would be prohibited from 
paying out full or partial lump sums, social security level income 
options for people not already in pay status, or other 417(e) benefits 
(except for the $5,000 small annuity cash outs). Within 30 days, 
contributing employers would be required to begin paying a surcharge of 
5 percent above their negotiated contribution rates. If the bargaining 
agreement covering such contributions expires more than 1 year from the 
date of reorganization, the surcharge would increase to 10 percent 
above the negotiated rate and remain there until next round of 
bargaining. Once in reorganization, the normal funding standard account 
continues to run, but no excise taxes or supplemental contributions 
will be imposed if the plan encounters a funding deficiency.
    Not later than 75 days before the end of the 1 year of 
reorganization, the plan fiduciaries must develop a rehabilitation plan 
to take the plan out of reorganization within 10 years. The plan would 
set forth the combination of contribution increases, expense reductions 
(including possible mergers), benefit reductions and funding relief 
measures (including amortization extensions) that would need to be 
adopted by the plan or bargaining parties to achieve that objective. 
Annual updates to the plan of rehabilitation would need to be adopted 
and reported to the affected stakeholders. Although the proposal 
anticipates the loosening of the current anti-cutback rules with 
respect to ancillary benefits (such as subsidized early retirement 
benefits, subsidized joint and survivor benefits, and disability 
benefits not yet in pay status), a participant's core retirement 
benefit at normal retirement age would not be reduced. Additionally, 
with one minor exception which follows current law regarding benefit 
increases in effect less than 60 months, no benefit for pensioners 
already in pay status would be affected. Finally benefit accruals for 
active employees could not be reduced below a specified ``floor'' as a 
means of ensuring that the active employees whose contributions support 
all plan funding, remain committed to the plan.
    The proposal anticipates that these ancillary benefits become 
available as part of a menu of benefits that can be modified to protect 
plans from collapsing under the weight of previously adopted plan 
improvements that are no longer sustainable, but that cannot be 
modified under the current anti-cutback restrictions. Without such 
relief participants would receive lower overall benefits on plan 
termination and the plan would be eliminated for future generations of 
workers. Within 75 days of the end of the first year a plan is in 
reorganization, the plan trustees must provide the bargaining parties 
with a schedule of benefit modifications and other measures required to 
bring the plan out of reorganization under the current contribution 
structure (excluding applicable surcharges). If benefit reductions 
alone are insufficient to bring the plan out of reorganization, the 
trustees shall include the amount of contribution increases necessary 
to bring the plan out of reorganization (notwithstanding the floor on 
benefit accruals noted above). The trustees shall also provide any 
other reasonable schedule requested by the bargaining parties they deem 
appropriate.
    The bargaining parties will then negotiate over the appropriate 
combination from among the options provided by the trustees. Under this 
proposal, benefits for inactive vested participants are subject to 
reduction to harmonize the impact on future benefits for this group as 
well as for active participants.
    The proposal includes suggestions for: bringing the current rules 
on insolvency in line with the proposed reorganization rules; 
strengthening withdrawal liability provisions; and providing 
construction industry funds with additional flexibility currently 
available to other industries to encourage additional employer 
participation. It also addresses recent court rulings, with one 
amendment that allows trustees to adjust the rules under which retirees 
can return to work and still receive their pension benefits and another 
that permits plans to rescind gratuitous benefit improvements for 
current retirees adopted after the date they retired and stopped 
generating employer contributions.

                               CONCLUSION

    For more than half a century, multi-employer plans have provided 
benefits for tens of millions of employees who, using standard 
corporate rules of eligibility and vesting, would never have become 
eligible. They offer full portability as workers move from one employer 
to another in a system that should be held out as a model for all 
defined benefit plans. More importantly, the system of collective 
bargaining and the checks and balances offered by joint employer--
employee management has enabled the private sector to take care of its 
own without the need for Government support.
    Yet the current funding rules, previously untested under the 
unprecedented unfavorable investment climate experienced in recent 
years, have the potential not only to undermine the retirement income 
security of millions of current and future workers and their 
dependents, but to force large numbers of small businesses out of 
business and eliminating participants' jobs.
    The United States Senate and House of Representatives have been 
presented with an ideal opportunity to enact meaningful reform 
supported by both the employer and employee community who have 
coalesced behind a responsible proposal that will enhance plan funding 
and provide safeguards to plans, participants, sponsoring employers and 
the PBGC, without adding to the already burgeoning debt. Although the 
proposal includes certain provisions that are distasteful to both 
parties, it is a compromise product of careful negotiations by 
employers and the employees' legally recognized representatives. The 
alternative is not the continuation of the status quo, but a much worse 
fate that includes: the loss not only of accrued ancillary benefits, 
but a substantial portion of a participant's normal retirement benefit 
as plans are assumed by the PBGC; the demise of potentially large 
numbers of small businesses and the loss, not only of pension benefits, 
but the jobs from which such benefits stem; and an increase in taxpayer 
exposure at the PBGC, an agency that is already overburdened.
    We urge the committee to wholeheartedly support this proposal and 
look forward to working with you to see it enacted into law.
    In closing, I would like to thank you for taking the time to engage 
in this important discussion and for the opportunity to be with you 
here today.

    Senator DeWine. Mr. Noddle?
    Mr. Noddle. Chairman DeWine, Senator Mikulski, thank you 
for allowing me to testify. As you put it, I am Chairman of the 
Board, President and Chief Executive Officer of SUPERVALU. I am 
also Chairman of the Board of the Food Marketing Institute, 
which represents 26,000 retail food stores, and I am also a 
Board member of the IGA Independent Grocers Alliance.
    SUPERVALU is a Minnesota based Fortune 100 company with 
58,000 employees in 41 States. As you pointed out, we are the 
largest publicly held food wholesaler and the seventh largest 
food company in the United States. SUPERVALU participates in 17 
defined benefit multi-employer plans, providing retirement 
benefits to approximately 22,000 of our SUPERVALU employees.
    Overall, supermarkets employ 3.5 million Americans. About 
1.33 million of these are covered by collective bargaining 
agreements. While the industry provides a variety of single-
employer and multi-employer retirement plans, most of the union 
workforce participates in multi-employer pension plans. In 
total, multi-employer pension plans cover about 9.7 million 
people. They are governed by ERISA like their single-employer 
plan counterparts. Unlike single-employer plans, however, 
multi-employer plans are also governed by the Multi-Employer 
Pension Plan Amendment Act of 1980 and the Taft-Hartley Act, 
which requires plans' boards of trustees to have equal 
representation by both union and management.
    Multi-employer plans are funded by employer contributions 
and governed by joint boards of trustees. They are not union 
plans. Two of the biggest differences between single-employer 
and multi-employer plans are the funding mechanisms that are 
used and the manner in which benefit levels are established. In 
a single-employer plan, companies generally establish a benefit 
level first with the contribution level increasing or 
decreasing each year. Multi-employer plans generally work in 
the opposite manner. Contributions are almost always 
established first through the collective bargaining process. 
Then benefit levels are set by a plan's joint board of 
trustees.
    Given this background, I ask you to support FMI's pension 
reform proposals. We believe they provide a reasonable 
framework for multi-employer plans to work through the problems 
now facing all pension plans. We are not asking for a 
Government bailout. Rather, we ask you to help us establish a 
framework to solve our own pension problems without putting 
financial pressure on the PBGC.
    First, we seek greater transparency of information from 
multi-employer plans. Employers have great difficulty in 
obtaining current financial information unless they serve on 
the board of trustees. We believe plans should be required to 
provide the most current financial information upon request to 
both contributing employers and plan participants. Without 
current financial information, companies cannot engage in 
collective bargaining in an informed manner and work with the 
plan trustees to address any underfunding problems.
    In the case of SUPERVALU, as I mentioned, we have 17 plans, 
but we only have trustees on 7 of those so the transparency 
issue is quite vital to us on the balance of those plans.
    Second, we ask Congress to adopt mechanisms to allow boards 
of trustees to better manage their funding. Our proposals 
dovetail well with the coalition proposal that includes a 
stoplight system of identification for plan funding. Green Zone 
plans are more than 80 percent funded, Yellow Zone plans are 65 
to 80 percent, and Red Zone plans are less than 65 percent. The 
FMI proposal focuses on Yellow Zone plans providing a more 
specific mechanism to address funding concerns. Allow me to 
applaud the coalition efforts of employees and labor to tackle 
these very important issues in hopes of a meaningful reform.
    Our proposal creates an early warning system that requires 
plan actuaries and boards of trustees to look at both the 
plan's current funding level and 7 years into the future. As a 
result, future funding problems are recognized early when there 
is time to correct them before the plan reaches a crisis stage. 
When a plan falls within the Yellow Zone the trustees must 
prepare a funding improvement plan using quantifiable 
benchmarks to improve the plan's funding. The trustees must 
also adopt a schedule of solutions to allow employers and 
unions engaged in collective bargaining to agree to 
contribution levels that are appropriate for the benefits 
provided by the plan.
    We believe this mechanism addresses the unique nature of 
multi-employer plans where collective bargaining agreements fix 
contribution rates for several years into the future.
    Again, Chairman DeWine, Senator Mikulski, I thank you for 
the opportunity to testify on this topic, and I will be glad 
later to answer questions.
    [The prepared statement of Mr. Noddle follows:]

                  Prepared Statement of Jeffrey Noddle

    Chairman DeWine, Senator Mikulski and members of the committee, 
good morning. My name is Jeff Noddle and I am the chairman of the 
board, president and chief executive officer for SUPERVALU INC. I am 
currently chairman of the board for the Food Marketing Institute (FMI), 
as well as a board member for the Independent Grocers Alliance, Inc. 
(IGA) and chairman of its governance committee, as well as other 
corporate, civic and industry organizations. In addition, I serve on 
the board of the Food Industry Center at the University of Minnesota 
and the Academy of Food Marketing at Saint Joseph's University, 
Pennsylvania.
    I want to thank you for the opportunity to testify on behalf of the 
26,000 retail food stores represented by FMI regarding legislation to 
achieve comprehensive pension reform and retirement security. We would 
like to share our concerns about the future of multi-employer plans and 
some suggestions we have for better management of these plans.
    Before I proceed, I would like to take a moment to tell you about 
my company. SUPERVALU INC., is a Fortune 100 company, based in 
Minneapolis, MN. We are the largest publicly held food wholesaler in 
the United States and this country's 7th largest grocery retailer. 
SUPERVALU manages a well-rounded portfolio of national and regional 
grocery retail banners that we constantly refine to address dynamic 
customer preferences and trends in the market. Since 1870, the enduring 
mission of our 58,000 employees is to serve our customers better than 
anyone else could serve them.
    Each week, SUPERVALU serves over 10 million customers in its more 
than 1,500 corporately owned stores in 41 States. Our corporate retail 
stores include Cub Foods in Minnesota, Wisconsin and Illinois, Bigg's 
in Ohio, Shopper's Food Warehouse in Virginia and Maryland, Shop-N-Save 
in Missouri, Illinois and Pennsylvania, and Save-A-Lot throughout the 
country. We operate 41 distribution centers, which supply more than 
3,200 independent stores, in addition to our corporate banners.
    SUPERVALU participates in 17 defined benefit multi-employer plans, 
providing retirement benefits to approximately 22,000 SUPERVALU 
employees throughout the United States.
    Industry-wide, supermarkets employ approximately 3.5 million 
Americans, providing employees with good wages and excellent benefits, 
so employment in the industry is a proven path to success for the 
American worker. The industry provides a variety of retirement plans 
among the wide range of benefits it provides. Supermarkets offer 
benefits to associates and management alike through almost every 
conceivable type of pension plan, including defined benefit, defined 
contribution--profit sharing and 401(k), hybrid, cash balance and 
employee stock ownership plans. The industry's defined benefit pension 
plans include both single-employer plans (those sponsored by an 
individual company and common in the steel, automotive and airline 
industries) and multi-employer plans, in which many companies join 
together to fund and operate the plans (common in the grocery and 
construction industries).
    Multi-employer plans are governed, in part, by ERISA, like their 
single-employer plan counterparts. Unlike single-employer plans, 
however, multi-employer plans are also governed by the Taft-Hartley 
Act, which mandates that their Boards of Trustees have equal 
representation by Union and Management Trustees. They are also governed 
by the Multi-Employer Pension Plan Amendments Act of 1980, which 
amended ERISA and provided special rules for multi-employer pension 
plans.
    Approximately 1.33 million people in the supermarket workforce are 
covered by collective bargaining agreements (labor contracts). 
Unionized associates who work in the stores are primarily represented 
by the United Food & Commercial Workers Union. Warehouse workers and 
drivers are generally represented by the International Brotherhood of 
Teamsters. Most of these employees are participants in multi-employer 
pension plans.
    Multi-employer pension plans are an important part of the Nation's 
private sector retirement system, providing pension benefits for 
approximately 9.7 million workers and retirees in the United States. As 
I mentioned earlier, in 1980, Congress recognized some of the funding 
and operational differences between single-employer pension plans and 
multi-employer pension plans. As a result, Congress amended ERISA and 
established separate and distinct rules for multi-employer plans under 
the Multi-Employer Pension Plan Amendments Act of 1980. Multi-employer 
plans provide retirement coverage for unionized employees of multiple 
employers within an industry or trade. The multi-employer plans are NOT 
union plans.
    Two of the biggest differences between single-employer pension 
plans and multi-employer plans are the funding mechanism used and the 
manner in which benefit levels are established. In a single-employer 
plan, companies generally establish a benefit level first, with the 
contribution level increasing or decreasing each year depending upon 
changes in a plan's demographics as well as investment gains or losses 
during each plan year. Conversely, contributions to multi-employer 
plans are almost universally set at fixed rates established through 
collective bargaining by contributing employers and Unions representing 
the companies' employees. Benefit levels are then set by a plan's Board 
of Trustees, which, as I stated earlier, must consist of an equal 
number of representatives of Employers and Unions.
    This funding mechanism and the tax laws existing under ERISA in the 
late 1990s contributed to some of the funding problems multi-employer 
plans currently encounter. In the late 1990s, these plans' investment 
gains caused many plans to become overfunded to the point at which 
contributing companies' contributions (which were fixed by collective 
bargaining agreements) would not be treated as deductible contributions 
under the Internal Revenue Code if benefits were not increased (known 
as the full funding limit). A host of multi-employer plans attempted to 
reward long-term participants by increasing benefit levels 
retroactively under the theory that the long-term participants should 
be rewarded for the prior contributions made on their behalf and the 
resulting investment gains from those contributions. When the stock 
markets suffered huge losses from 2000-2002, these plans were unable to 
decrease the benefits granted for past service due to restrictions 
under ERISA. Even plans that did not increase benefits for past service 
suffered greatly from the 2000-2002 bear market.
    Another difference between single-employer plans and multi-employer 
plans is the amount of control any one employer has over the operation 
of a multi-employer plan. As I stated earlier, the Board of Trustees of 
multi-employer plans are required by law to be managed by Boards of 
Trustees equally represented by Unions and Employers. Most Boards of 
Trustees consist of 3-4 Union representatives and 3-4 Employer 
representatives. Unless a company employs a large percentage of the 
plan's participants, it generally does not have a representative on the 
Board of Trustees. Furthermore, in many cases, employers do not even 
have the ability to vote on who represents them on the Board of 
Trustees. As a result, many employers who bargain in good faith with 
Unions to contribute to these plans and make contributions in good 
faith to these plans have no say in the operation of the plans and, in 
fact, receive little or no information concerning the plans' operations 
or funding levels.
    Chain supermarket companies generally participate in several local, 
regional or national plans, depending on the company's size and area of 
operation. Some companies participate in as many as 50 multi-employer 
pension plans. So, it is common for even large employers to contribute 
to many multi-employer plans on which they do not have a Trustee seat. 
For example, while SUPERVALU contributes to 17 multi-employer pension 
plans, we have a Trustee seat on only 7 of these plans.
    A third difference between single-employer plans and multi-employer 
plans is in the amount of Government intervention with plans supported 
by companies that go bankrupt. In the single-employer plan arena, 
pension plans of bankrupt companies generally are taken over by the 
Pension Benefit Guarantee Corporation, which guarantees a reduced 
benefit to plan participants and is financially responsible to pay this 
benefit. This results in a financial burden on the PBGC. Conversely, 
when a contributing employer to a multi-employer plan goes bankrupt, 
the plan absorbs the loss, the company's employees continue to receive 
unreduced pension benefits, and the remaining contributing employers 
are required to bear the burden of paying these pension benefits. In 
fact, even when a multi-employer plan has a withdrawal liability claim 
against the bankrupt employer it rarely, if ever, collects the full 
amount of the claim because withdrawal liability claims are treated as 
general unsecured claims under the current bankruptcy laws. The Pension 
Benefit Guarantee Corporation is rarely called upon to assist multi-
employer plans due to these rules. Even if the PBGC is needed to assist 
a multi-employer plan that, as a whole, becomes insolvent, the PBGC 
assistance is only in the form of a loan and solvent contributing 
employers are called upon to increase contributions to the plan, over 
and above any amounts they agreed to contribute through collective 
bargaining.
    As an example, a food industry company, Fleming Companies, filed 
for bankruptcy in 2003. Fleming had a single-employer pension plan that 
was taken over by the PBGC, which is required to shoulder the financial 
burden of paying benefits to the plan's participants. As part of the 
law under which the PBGC operates, plan participants and retirees may 
have their retirement benefits reduced. Fleming Companies also 
contributed to several multi-employer pension plans on behalf of its 
unionized employees. The PBGC did not step in to provide financial 
assistance for these multi-employer plans and unionized employees did 
not have their retirement benefits reduced. Rather, other employers 
contributing to the multi-employer plans are required by law to absorb 
any funding deficiency. In the case of Fleming, we estimate this 
amounts to over $100 million dollars spread throughout several multi-
employer plans. Finally, even though these multi-employer plans were 
able to file claims for withdrawal liability with the bankruptcy court, 
we understand the plans received only 5-10 cents on the dollar for 
their claims because, under bankruptcy law, the plans are unsecured 
creditors.
    Given this background, I am here today to ask you to support the 
supermarket and food distribution industry's proposals to modify the 
laws governing multi-employer pension plans. We believe these proposals 
will provide a reasonable and rational framework for multi-employer 
pension plans to work through the problems now facing all pension plans 
(both single-employer and multi-employer). We are not asking for a 
Government bail out; rather, we are asking you to help us establish a 
framework that will allow us to solve our own pension problems without 
monetary intervention by the Government and without putting financial 
pressures on the Pension Benefit Guarantee Corporation. We believe 
that, if Congress acts now, multi-employer plans can solve their own 
problems so they do not become a burden on the Federal Government.
    Our proposed reform focuses on two areas. First, we seek greater 
transparency of information from multi-employer plans. Second, we ask 
Congress to adopt mechanisms to allow Boards of Trustees to manage 
their own funding situations in a better manner.
    As for transparency, the supermarket and food distribution industry 
is very concerned about the lack of transparency in multi-employer 
plans. Some of these plans are seriously underfunded, but employers 
have had considerable difficulty in obtaining current financial 
information about the funding deficiency. We believe there should be 
rules requiring these plans to provide the most current financial 
information, upon request, to both contributing employers and plan 
participants. In a single-employer plan, the employer has direct and 
continual involvement in the financial management of their pension 
plan; there is no such direct involvement by employers in multi-
employer plans. Without this current information, it is difficult to 
engage in collective bargaining in an informed manner and to work with 
the plan trustees to address the underfunding problem.
    Our industry's second area of proposed reform attempts to provide a 
mechanism for underfunded plans to work through their funding issues. 
It is a proposal that would dovetail well with a proposal put forth by 
the trucking industry. Earlier this year a group within the trucking 
industry, including, United Parcel Service, YellowRoadway, the Motor 
Freight Carriers Association, the International Brotherhood of 
Teamsters, the National Coordinating Committee on Multi-Employer Plans 
(NCCMP) and Central States Teamsters Pension Plan, came together and 
negotiated a proposal to address funding reforms. Their proposal 
focused on plans with funding levels below 65 percent. It also included 
a proposal for plans that are between 65 percent and 80 percent funded. 
At the same time, FMI and members of its Pension Task Force were 
independently developing long-term pension reform proposals. Earlier 
this year, FMI met with the trucking industry to discuss our respective 
visions of multi-employer pension plan reform.
    FMI applauds the trucking industry's efforts. Due to philosophical 
differences, we came out of our discussions with different, but 
complimentary policy proposals. The trucking industry proposal includes 
a stop-light system of identification for multi-employer pension plan 
finding, which includes Green Zone plans (above 80 percent funded), 
Yellow Zone plans (65 percent-80 percent funded), and Red Zone plans 
(less than 65 percent funded).
    FMI's Task Force focused on the Yellow Zone plans, providing what 
we believe is a more specific mechanism to allow Yellow Zone plans to 
address their funding concerns. As a result, the FMI member companies 
drafted ideas for benchmarks, transparency, and funding reform that we 
believe will wrap around the trucking industry's proposals and provide 
comprehensive funding reform that will serve all multi-employer plans 
well into the future.
    The FMI Task Force formulated its proposals in meetings with top 
actuaries and pension attorneys, where it became evident that the 
requirements of today's laws encourage plans to take a short-term, 
``snapshot'' approach to determine their benefit formulas and funding 
requirements at the expense of sound long-term funding projections. The 
FMI Yellow Zone proposal attempts to create a mechanism whereby multi-
employer plan actuaries are required to look at both the plan's current 
funding level and far ahead into the future (7 years) to make sure the 
plan will remain at an appropriate funding level. As a result, 
potential future funding problems are recognized early, when there is 
time to correct them in a reasonable and timely manner. This time is 
needed to allow the Boards of Trustees to act to adopt objective 
measures to improve a Yellow Zone plan and prevent it from becoming a 
Red Zone plan.
    Once a Yellow Zone plan is identified as such, the plan's Board of 
Trustees will be required to prepare a Funding Improvement Plan that 
will improve the plan's funding ratio (within specified guidelines) and 
will postpone any deficiency in the plan's funding standard account. 
The trustees will also be required to adopt a schedule of solutions 
that will allow employers and unions engaged in collective bargaining 
in the future to agree to contribution levels that are appropriate for 
the benefits provided by the plan. The schedule of solutions in the FMI 
Yellow Zone proposal ranges from employer contribution increases to 
reductions in future employee benefit accruals, or a combination of 
both.
    We believe that creating this mechanism will accurately address the 
unique nature of multi-employer plans, in which collective bargaining 
agreements fix contribution rates for several years into the future and 
where, under ERISA, trustees are prohibited from retroactively reducing 
the benefit levels for plan participants. As a result, all parties 
(contributing employers, unions, and trustees) will have the ability to 
act responsibly on behalf of employees by providing an accurate measure 
of expected liabilities over a longer time-frame and by providing a 
schedule of solutions to correct any funding problems on the horizon 
before they reach a crisis stage. We believe the FMI Yellow Zone 
proposal provides these solutions in a manner that will also maintain 
the collective bargaining rights of all the parties.
    While many of the multi-employer plans in our industry are well 
funded, the funding standard account in some of these plans could reach 
a crisis state in 4 to 6 years if some of the laws governing these 
plans are not changed. Even plans that are currently 100 percent funded 
could have a significant deficiency in their standard funding account 
in future years. Therefore, we urge Congress to act now so defined 
benefit multi-employer pension plans can remain an important part of 
the Nation's retirement system well into the future.
    In summary, we in the retail food industry are very concerned about 
the Nation's pension funding and retirement funding problems. Those of 
us who contribute to and participate in multi-employer pension plans 
are asking Congress to recognize the ways in which these plans differ 
from single-employer pension plans and to enact amendments to existing 
laws that will establish mechanisms to help us correct our problems 
ourselves. Multi-employer pension plans have not, in the past, been a 
burden to the Federal Government or the PBGC, and we are not now asking 
for any financial assistance from the Government. Rather, we ask for 
your help now, so we can continue to provide great retirement benefits 
for our millions of employees and retirees well into the future without 
ever becoming a burden on the Federal Government.
    Again, Chairman DeWine, Senator Mikulski and members of this 
committee, I thank you for the opportunity to testify on this important 
topic. I am glad to answer any of your questions.
    (Food Marketing Institute (FMI) conducts programs in research, 
education, industry relations and public affairs on behalf of its 1,500 
member companies--food retailers and wholesalers--in the United States 
and around the world. FMI's U.S. members operate approximately 26,000 
retail food stores with a combined annual sales volume of $340 
billion--three-quarters of all food retail store sales in the United 
States. FMI's retail membership is composed of large multi-store 
chains, regional firms and independent supermarkets. Its international 
membership includes 200 companies from 50 countries).

    Senator DeWine. Mr. Ward?
    Mr. Ward. Chairman DeWine, Senator Mikulski, thank you for 
having me. My name is John Ward, and I am the President of 
Standard Forwarding Company, a small, family owned union 
trucking company located in East Moline, IL. I appear before 
you today both on behalf of my company and the members of the 
Multi-Employer Alliance.
    Our alliance was formed in 2004 to represent the interests 
of smaller, family owned businesses. All our members 
participate in the Teamsters Central States Plan, which is now 
severely underfunded by 11 to 15 billion and incurred a funding 
deficiency last year.
    Significant underfunding of these plans will result in 
deficiency penalties being imposed upon us, imperiling our 
businesses and our employees.
    Despite never missing a pension contribution, and despite 
having no say in who or how the plans are run, our share of the 
plans unfunded liability now significantly exceeds the net 
worth of our small businesses.
    Standard Forwarding is typical of the firms that make up 
the alliance. Our company was founded in 1934 and provides 
transportation services to Midwestern firms. We employ 440 
people and generate in excess of 50 million in annual revenue. 
Standard Forwarding has been a union firm for the majority of 
our 71 years. We believe that our Teamster employees are among 
the best in the industry. As demand for our services has grown, 
we have expanded our workforce with union employees.
    Unfortunately, every additional employee that I hire 
increases our portion of the unfunded pension liability. In 
2001 our company employed 211 Teamsters and had a withdrawal 
liability of $3.2 million. Three years later we employed 290 
Teamsters and had a withdrawal liability of $20 million. The 
liability exceeded our net worth by $16 million, and mind you, 
this is a successful, profitable company.
    Ironically, the Multi-Employer Act of 1980 severely 
penalizes companies like ours for growing union jobs. The 
alliance recommends various reforms to current law that are 
urgently needed to protect the benefits of workers and save our 
companies. The most pressing need is to repeal current law that 
imposes excise taxes and additional contributions on employers 
when a plan reaches funding deficiency. These potential costs 
are beyond our ability to pay. We support much of the funding 
deficiency reforms in the UPS Teamsters legislative proposal.
    However, it is vital that we secure additional safeguards 
to prevent the plans from imposing unlimited additional 
contributions which could bankrupt our companies. Congress 
should resist proposals to impose withdrawal liability on a 
company that uses independent contractors or driver leasing 
companies. Controlled group rules should be limited so that 
withdrawal liability is confined to the contributing employer 
or when entities are solely created to avoid liability.
    We support establishing objective funding standards that 
would prohibit benefit increases when there is insufficient 
income and assets to fund them. Congress should also permit 
funding of plans up to 140 percent without penalty. More timely 
and accurate disclosure of financial information by the plans 
is obviously necessary.
    Last, we urge Congress to restore the provisions of ERISA 
that existed prior to the passing of MEPA in 1980. At that time 
a company's portion of the unfunded liability was limited to 30 
percent of its net worth. It is patently unfair and contrary to 
the principles of the American dream that any employer should 
lose all of the equity built up over generations. There has 
been a steady decline in the number of multi-employer plans, 
from 2,200 in 1980 to 1,700 in 2003. It is no coincidence that 
this decline occurred with the passing of MEPA.
    In 1982, George Lehr, the Executive Director of the Central 
States pension plan, said, and I quote, ``In the long run, 
employer liability is the single most damaging thing pension 
funds will be facing. In theory, it's a wonderful law; in 
practice, it doesn't work.'' History has proven Mr. Lehr right.
    Congress must create an environment that encourages 
existing and new employers to participate in these plans. 
Current law has created an iron curtain that simply drives 
employers away. Our suggested reforms provide balance to the 
UPS Teamsters proposal. They would protect workers' benefits 
and the vitality of the small companies that employ them.
    Thank you very much for the opportunity to appear, and I 
would be happy to answer any questions.
    Senator DeWine. Good.
    [The prepared statement of Mr. Ward follows:]

                    Prepared Statement of John Ward

                           EXECUTIVE SUMMARY

    Chairman DeWine, Senator Mikulski and members of the subcommittee, 
I thank you for the opportunity to testify on multi-employer pension 
plans. My name is John Ward and I am the President of Standard 
Forwarding Company which is a small, family owned union trucking 
company located in East Moline, Illinois. I appear before this 
subcommittee both on behalf of my company and the other trucking 
company members of the Multi-Employer Pension Plan Alliance (MEPA 
Alliance).
    The MEPA Alliance was formed last year in response to the financial 
crisis that arose in the Central States pension plan to which we all 
are long time contributing employers. It is an understatement to say we 
were shocked to learn that this plan had become so severely underfunded 
that it reached a deficiency in 2004 that would trigger Federal excise 
tax penalties and additional contributions that our companies could not 
afford to pay.
    Unless significant reform is enacted multi-employer plans will 
ultimately lose the fight. Rather than creating an environment that 
encourages employers to grow their businesses and participate in these 
plans, the law has created a death spiral with traps and penalties that 
will forever drive current and prospective employers away. In fact, in 
a March 5, 1982 Wall Street Journal article, George Lehr, the Executive 
Director of the Central States pension plan said in a reference to 
withdrawal liability: ``In theory, it's a wonderful law; in practice, 
it doesn't work. In the long run, employer liability is the single most 
damaging thing pension funds will be facing.''
    [Exhibit 1--See Editors note after the conclusion of this 
statement.]
    The smaller businesses that have participated in the Central States 
pension plan were kept in the dark about its financial deterioration; 
neither the plan administrator nor the trustees informed us of the dire 
financial condition until they needed our assistance in seeking 
legislation that would allow them to postpone this deficiency. At that 
time, we realized that we needed to seek our own representation and 
make our case for meaningful reform of these plans and the governing 
law.
    The alternative of doing nothing places in jeopardy the future of 
smaller, family owned companies, such as Standard Forwarding, that have 
been built up and have operated over several generations. Substantive 
legislative reform of multi-employer pension laws is the single most 
important legislative issue now confronting the unionized trucking 
industry.
    Unless Congress addresses this year the chronic and now dire 
underfunding in many of the Teamster multi-employer plans, many smaller 
union firms will be forced into bankruptcy. We face a classic case of 
double jeopardy. We cannot afford current law on funding deficiency 
that mandates additional contributions and excise tax penalties. We 
also cannot afford the portion of the UPS/Teamsters reform proposal 
which permits the Funds to establish unlimited levels of pension 
contributions and then expel companies for not paying. If we are 
expelled from the Central States pension plan, our companies will be 
forced to pay a withdrawal liability that has grown so large that it 
now substantially exceeds the net worth of our companies. Obviously, 
this means immediate bankruptcy.
    We desperately need the assistance of Congress and we need it soon. 
We appreciate that Congress is willing to address not only reforms to 
the single-employer defined benefit system, but also to the multi-
employer pension plan system. Both are at risk today.
    The MEPA Alliance members recommend that this subcommittee focus on 
the following critical areas:
     Repeal of the current tax law that imposes punitive excise 
taxes and additional contributions on employers in severely underfunded 
plans. We generally support some aspects of the reform proposals 
developed by other groups, but with a safeguard so that plans may not 
expel smaller employers and impose withdrawal liability if they cannot 
bear the cost of the plan-imposed additional pension contributions. 
Plan-imposed contributions should be capped at 15 percent above the 
employer's contributions under its prior collective bargaining 
agreement.
     Ideally, the withdrawal liability rules should be 
repealed, rather than tightened. Short of this, we support reenactment 
of the law prior to the Multi-Employer Pension Plan Amendments Act of 
1980 (MPPAA) that properly and fairly held that no more than 30 percent 
of any employer's net worth can be taken when it withdraws from an 
underfunded plan. It is patently unfair that a family owned company can 
be stripped of all of the assets it has built up over generations 
notwithstanding that the company has made all its required pension 
contributions.
     Refrain from making the withdrawal liability rules even 
more onerous as UPS/Teamsters have proposed. That proposal would impose 
withdrawal liability when a company uses independent contractors or 
third party driver leasing companies to meet customer needs. The 
trucking industry rule should not be repealed and the current rule that 
reduces liability for a company in liquidation should be maintained. As 
will be discussed, the withdrawal liability rules established in 1980 
have discouraged new employers from entering these plans and have 
sealed the fate of these plans by causing a declining participation 
base.
     Limit the controlled group rules so that withdrawal 
liability is confined to the contributing employer and any related, 
fractionalized entities that were separated out from the contributing 
employer to avoid withdrawal liability. We also support repealing the 
``pay now and dispute later'' provisions of MPPAA.
     Establish objective funding standards for all plans that 
would prohibit benefit increases when there is insufficient income and 
assets to fund those benefit promises. Benefit increases should not be 
allowed in plans that have a funding ratio below 90 percent. As early 
as 1996, the Multi-Employer Plan Solvency Coalition reported that 
trustees of the Central States plan had imprudently increased benefits 
beyond the means to pay for them and that it would exacerbate the 
underfunding crisis. Benefit promises should be made only when they can 
be paid. Similarly, the Alliance believes that Congress should move to 
eliminate or substantially increase any high end caps on funding of the 
plans and permit funding up to 140 percent of full funding without 
penalty.
     Require timely and accurate disclosure of the key 
financial information by the plans to all participating employers, 
their employees and the PBGC. There needs to be sunshine in the dark 
rooms of these plans that have withheld information from contributing 
employers and plan participants in the past. Too much is at stake to 
tolerate the nondisclosure of this financial and actuarial data to all 
but the union and the employer companies that have trustees on these 
plans.
     Create an objective Congressional Commission to study and 
make recommendations on how to fairly apportion and pay for the huge 
underfunding that has arisen in these plans, and in particular the 
benefits being paid to retirees that no longer have an employer 
contributing to these plans. The Central States plan currently pays 
approximately $1 billion annually to 100,000 retirees that lack a 
contributing employer. Those benefits consume nearly 100 percent of the 
annual contributions received by the plan from all the remaining 
employers. Contributing employers can no longer shoulder this entire 
burden which is mounting each year.
    The Alliance members are committed to achieving these legislative 
reforms for multi-employer plans to promote plan solvency, preserve 
pension benefits and save our smaller companies through a fair 
realignment of pension responsibilities and liabilities.

       THE PLIGHT OF SMALLER BUSINESSES LIKE STANDARD FORWARDING

    Standard Forwarding is typical of the transportation firms that 
make up the Alliance members. Our company, based in East Moline, 
Illinois, was founded in 1934 and provides transportation services to 
companies over the five State area of Iowa, Illinois, Indiana, 
Minnesota and Wisconsin. Our dedicated employees deliver a high quality 
of service that has been a factor in the success of our customers which 
in turn has driven our expansion. We now employ 440 employees, generate 
over $50 million in revenue annually, operate 250 tractors and 700 
trailers, and use the latest information technology found in the 
trucking industry.
    Standard Forwarding has been a union-represented trucking company 
for the majority of our 71 years in business. We believe our Teamster 
employees are among the best trucking employees in the industry. As 
demand for our services has grown, Standard Forwarding, unlike many 
contributing employers to the Central States pension plan, has expanded 
our union workforce. Unfortunately, every additional union employee I 
hire only increases our portion of the unfunded pension liability in 
this plan. This liability has increased at a cruel pace that exceeds 
any profitability or equity growth that our company could ever hope to 
generate. Consider that in 2001, Standard Forwarding employed 211 union 
employees and had a withdrawal liability of $3.2 million. This was $2 
million more than our corporate equity. A mere 3 years later, in 2004, 
we had increased our union employees to 292 and our withdrawal 
liability had mushroomed to $20 million, which exceeded our equity by 
$16 million!
    As hard as it may be to believe, the Federal pension law created by 
the Multi-Employer Pension Plan Amendment Act of 1980 severely 
penalizes our company, and other companies like it, for growing union 
jobs.
    In fact, that law has also made it impossible to sell our company. 
No prudent investor is willing to inherit the mounting liabilities that 
come with acquiring a unionized firm that participates in an 
underfunded plan, such as the Central States plan.
    Contrary to the principles of the American dream, growing our 
company significantly increases our liability and wipes out any stake 
that we may have built up in our businesses. Sadly, MPPAA even 
precludes us from applying our expertise to other business ventures. 
Under the so-called controlled group regulations, the assets of an 
affiliated company are also at risk to pay for withdrawal liability if 
the owners have controlling interest in both Standard Forwarding and 
the affiliated company.
    Many of you on this subcommittee may be or once may have been 
owners of small businesses or worked in a family owned business. 
Consider for a moment what you would do if your family business were 
faced with a decision to participate in a multi-employer pension plan 
like Central States? Would you do it knowing that one day you could 
wake up and your family's life work was wiped out because of it? That 
is the stark reality I face with Standard Forwarding. It is a nightmare 
that I share with all the Alliance members. Only Congress has the 
ability to rectify the problem.
    Smaller businesses lack both the capital and diversification to 
weather much longer the financial crisis in these multi-employer 
pension plans. We have absolutely no control over the negotiation or 
setting of benefits or contributions in these plans and, as mentioned 
earlier, it is difficult for us to even obtain timely and accurate 
financial information from them. The trustees are not accountable to 
us. They represent either the Teamsters union or one of the major 
national companies that pay their salary. We also lack the leverage at 
the collective bargaining table of those national companies. In sum, we 
cannot reform or change these plans from within, or at the bargaining 
table. We need your assistance.

  THE DETERIORATING FINANCIAL CONDITION OF THE MAJOR TEAMSTER PENSION 
                                 PLANS

    Much of the discussion in this testimony focuses on the Central 
States pension plan. That is because all the Alliance members 
participate in that multi-employer pension plan and it is the second 
largest Teamster pension plan with over $17 billion in assets. However, 
financial information on several other significant Teamster plans, 
which are also severely underfunded or at risk, is attached to this 
testimony. [Exhibits 2-4]. Central States may be one of the worst 
plans, but it is not alone.
    The deteriorating financial condition of these plans is widespread 
because no new employers are willing to join and be exposed to 
withdrawal liability. Deregulation of the trucking industry and the 
passing of MPPAA in 1980 commenced the slow, but steady, decline of the 
unionized trucking industry. Many unionized employers have ceased 
operations and the Teamsters have lost over 100,000 jobs in the freight 
sector. This in turn has dwindled the contribution base of these plans.
    For example, there are now more retirees drawing pensions from the 
Central States plan than active workers on whose behalf employers are 
making contributions. [Exhibit 5]. The plan is experiencing a 2 percent 
decline annually in the contribution base. With more and more workers 
reaching retirement age, the situation worsens each year. The average 
age of a union truck driver is approximate 55 years old.
    Consequently, the Central States pension plan has an annual 
negative cash flow of over $1 billion. It must rely on the returns on 
its investments each year to cover this expanding shortfall in revenue. 
For a while the rapid increases in the stock market masked these 
problems. But the stock crash in 2001 caused these plans assets to 
plummet and they are unlikely to change in the near or long-term 
future. The Central States plan, which reached a funding deficiency in 
2004, is experiencing another bad year in 2005. It is projecting 
another $1.2 billion loss; for the first quarter 2005, it lost $461 
million and had a negative return on investments.
    Since the passage of the Multi-Employer Pension Plan Amendments Act 
of 1980, there has been a steady decline in these multi-employer plans. 
There were approximately 2,200 plans in 1980 and fewer than 1,700 
remained by 2003. Only five new plans have been created since 1992. The 
number of active participants in these plans has decreased by 1.4 
million since 1980. Thus, Central States is not alone in this financial 
struggle; it is however on the front burner having already reached a 
funding deficiency.
    The seven largest Teamster plans were collectively underfunded by 
$16-23 billion in 2002, depending on the method of calculating the 
assets. In 2003, the Central States plan alone was underfunded by $11.1 
billion. It has been estimated that underfunding in this plan has 
further increased in 2004 to $15 billion. Many of these other plans are 
as financially strapped as the Central States plan, based on the 2002 
data. These Teamster plans account for one quarter of the $100 billion 
in total multi-employer pension plan underfunding.
    However well intentioned, the changes made to the pension laws in 
1980 have exacerbated the financial problems of these plans rather than 
strengthened them. These plans cannot continue to exist without new 
employers and more active participants. MPPAA shut the door on future 
participation by imposing withdrawal liability on all employers for 
plan underfunding. The problems confronting these multi-employer plans 
are systemic and they will not solve themselves.
    It is both shortsighted and patently unfair to propose an alleged 
solution which could force smaller contributors out of business rather 
than a solution that encourages them to grow their businesses, increase 
union jobs and continue to make plan contributions.

         THE IMPACT OF PLAN UNDERFUNDING ON SMALLER BUSINESSES

    Underfunding in multi-employer plans creates serious financial 
problems for all employers in the plans, but especially for smaller 
firms that lack access to capital that is available to publicly-traded 
companies.
    First, there is a cash flow problem when a plan, like Central 
States, reaches a funding deficiency. The employers, by law, are 
obligated to pay for this deficiency to put the plan back within the 
minimum funding standards of ERISA. Compounding the funding deficiency 
payments are excise tax penalties that are imposed.
    Exhibits 6-8 illustrate how the combination of additional 
contributions and excise tax penalties would destroy the finances of a 
smaller company with 100 employees. A funding deficiency of 
approximately $400 million, an amount consistent with the Central 
States plan's estimates for 2004, would increase this company's pension 
contributions by 40 percent. It would incur an additional 5 percent 
excise tax penalty that goes not to the plan but the general treasury 
and therefore does not help plan solvency. This company may be able to 
survive the first year of the funding deficiency. However, in the 
second year, it will be forced out of business because the additional 
contributions then would increase to 135 percent of current 
contributions to the plan, and the excise tax penalty would be an 
additional 100 percent of the prior year's deficiency.
    The second way in which plan underfunding harms employers is when a 
withdrawal from a plan occurs. While a cessation of operations is the 
most common way in which withdrawal liability results, it can also 
arise through a change in operations, a terminal shutdown, a decline in 
union workers, involuntarily by strike or decertification of a union by 
the employees, expulsion by the pension fund, or disclaimer of 
continued representation of the bargaining unit by the union.
    The financial impact of withdrawal liability is now overwhelming. 
The amounts of liability, which are calculated on a pro-rata share of 
underfunding, now far exceed the ability of most companies to pay; it 
exceeds their entire net worth. The withdrawal liability of Standard 
Forwarding for 2004 is $20 million which is well beyond our means. 
Bankruptcy would be our only recourse.
    For the MEPA Alliance members, the costs associated with withdrawal 
liability that would be owed the Central States plan can be as high as 
5 times their net worth and 10 times the profits in their most 
profitable year.
    While the MEPA Alliance has focused on the harsh financial reality 
of underfunding on employers, ultimately it will impact the employees' 
pensions and the Federal Government through the PBGC. If these plans 
cannot regain solvency, they face termination. The employees are only 
guaranteed payments of approximately $1,000 per month, which is far 
below the $3,000 a month maximum benefit under the Central States plan. 
Therefore, they could lose up to two-thirds of their benefits. The PBGC 
would be obligated to pay that amount, if plan assets were 
insufficient.
    Therefore, employers, employees and their Union representatives, 
and the Federal Government all have a vested interest in solving this 
problem promptly.

                    THE NEEDED CONGRESSIONAL REFORMS

1. Full and Timely Disclosure of Plan Financial Information

    The time is long overdue for complete, timely and accurate 
disclosure of the key financial information by these plans. The 
financial condition of the Central States plan has been a guarded 
secret, with only the union and four major transportation companies 
privy to the most up-to-date information.
    Under current law the multi-employer pension plans provide annual 
reports almost 9 months after the end of the current fiscal year. 
Therefore, the Central States plan will release its 2004 information in 
September of this year. There is simply no reason why this annual 
report information in the Form 5500 cannot be disclosed much sooner, 
such as within 3 months after the end of the fiscal year. The key 
financial information, including the annual actuarial reports, should 
be released to all participating employers and employees, by written 
communication or posting it on the plan's Web site. The Alliance 
members also believe that these pension funds, like mutual funds, 
should be required to provide quarterly updates. These updates are now 
provided by the Central States plan to the court overseeing the fund, 
so this would not be a new or burdensome requirement.
    Consideration should also be given to mandating a change in the 
make-up of the Board of Trustees, which is now controlled by the union 
and largest transportation companies. A rotation of employer 
representation, to allow for participation by smaller employers, may be 
appropriate.

2. Repeal of the Federal Excise Tax and Current Funding Deficiency 
                    Rules is Essential

    Under current law, the combination of Federal excise tax penalties 
and additional mandated payments under the minimum funding standards 
will drive smaller trucking companies out of business within 1 to 2 
years. They simply lack the cash to pay an additional 135 percent of 
contributions. These rules should be replaced with new reorganization 
procedures that apply to any plan that is severely underfunded or at 
risk of becoming severely underfunded. A severely underfunded plan 
should be defined as one that has a funding ratio of assets to 
liabilities of 65 percent. An at-risk plan should be defined as one 
with a funding ratio below 80 percent. It is simply imprudent to wait 
for a plan to become severely underfunded, or near terminal, before 
remedial, reorganization measures are imposed.
    While the Alliance members support the general framework of the 
legislative proposal made by UPS/Teamsters and the national LTL 
carriers, safeguards need to be built into that proposal to protect 
smaller employers. Under their proposal, when a plan goes into 
reorganization, additional contributions can be imposed on employers up 
to 10 percent of the existing contribution rate of the employer. This 
10 percent cap remains until the next collective bargaining agreement 
is negotiated. At that time, the pension plan will become involved in 
the collective bargaining process by submitting schedules to the 
parties based on the funding needs of the plans. The pension plan could 
submit a schedule that requires a 40 to 100 percent, or more, increase 
in pension contributions that a smaller employer cannot afford to pay. 
Under their proposal, the employer could be expelled from the plan, 
withdrawal liability then would be imposed, forcing bankruptcy upon the 
company. This unprecedented delegation of power to the plan to impose 
additional contributions needs to be restrained for the good of all 
employers. The Alliance members believe that a cap on additional 
contributions should be set at 15 percent above the rate under the 
prior collective bargaining agreement.

3. Re-establishment of Limitations on Employer Liability

    Nothing could be more unfair or more anti-business than a law that 
provides that even though you have made all of the pension payments 
agreed to with your union, you still can lose all of your company's 
assets if a plan becomes underfunded resulting from the actions of 
others outside your control. Essentially, the changes made to the 
Federal multi-employer pension laws in 1980, made all contributing 
employers bear the burden for the pensions of workers who never 
performed any jobs for their company and for the pension obligations of 
their competitors who have gone out of business. That violates the most 
basic American principle, that a person and business should be allowed 
to prosper from the fruits of their labor.
    The Alliance members believe that Congress should restore the law 
in effect prior to 1980 that limited the liability of an employer in an 
underfunded plan to 30 percent of the employer's net worth. Ideally, 
the concept of joint liability of all employers for plan underfunding 
should be repealed. It has only served to deter new employers from 
joining these plans and it has not improved the financial condition of 
the plans which was the main rationale behind the concept of withdrawal 
liability.
    Even unions recognize this plight. As stated as early as 1982: 
``The International Ladies Garment Workers Union hopes the PBGC will 
permit its multi-employer plan to exempt the small entrepreneur who 
simply wants to sell his business and retire. `He's tired, he wants to 
quit or he has a few bad seasons and feels another bad season would 
wipe him out,' observes the union's president, Sol Chaikin. `My own 
feeling is that it would be cruel and unusual punishment for our union 
pension fund to demand his unfunded liabilities going back 20 years. 
That would leave him without a penny. '''
    The plans will tell the subcommittee that they generally only 
collect 10 percent of the amount owed when an employer withdraws 
because few assets are left when an employer ceases operations. The 
PBGC has testified that they collect a comparable 10 percent amount 
when a single-employer goes into bankruptcy.
    Just as the Federal Government has found it intolerable that 90 
percent of these costs in single-employer plans are passed on to the 
PBGC, the employers in multi-employer plans find it intolerable that 
they are made to bear this huge expense. In fact, they can no longer 
shoulder this cost. No company should have all it's assets on the line 
for an obligation it never made to workers who were never employed by 
them. The 30 percent net worth standard needs to be restored by 
Congress.

4. Withdrawal Liability Rules Should Be Eliminated Not Made More 
                    Onerous

    The current law is extremely onerous on contributing employers to 
multi-employer pension plans. First, they are made liable for plan 
underfunding that they had no part in the making. Then, they are 
required to pay the withdrawal liability assessed by a plan before they 
have the right to contest it in arbitration. Moreover, the plan's 
determination and calculation of withdrawal liability is presumed 
correct until proven otherwise by the employer. It is patently unfair 
and contrary to normal rules of American jurisprudence to require 
employers to pay this alleged liability before the liability is even 
established.
    Likewise, the fund can sue all the affiliated companies and 
individuals that have majority ownership interest in the participating 
company and affiliated companies and seek to make them jointly liable 
for the withdrawal liability. All employers would be well served by 
repealing these ``pay now and dispute later'' rules and controlled 
group liability regulations.
    Further, it is wholly inappropriate to tighten the withdrawal 
liability rules, as proposed by UPS/Teamsters. No company should be 
exposed to withdrawal liability when it uses owner operators, 
independent contractors or third party leasing companies to perform 
transportation services at its facilities. That is contrary to Federal 
labor law and labor policy. It will only harm trucking companies and 
their customers. It will provide a basis for these plans to expel 
employers and drive them into bankruptcy.
    The trucking industry rule should also not be repealed. This rule 
is one of the few beneficial exceptions to withdrawal liability that 
Congress created in 1980. More trucking employers will only enter these 
plans if they have an assurance that they will not be on the hook for 
past underfunding. Congress must resist attempts to tighten the noose 
of these withdrawal liability rules.

5. Pension Promises Should Be Made Only When They Can Be Paid

    In 1992, the PBGC became aware that the alarming rise in pension 
plan underfunding was due in part to benefit increases that could not 
be sustained by the income to these plans. It is neither fair to the 
employers nor to the employees to increase benefit levels that cannot 
be sustained by the contributions to the plan and the return on the 
investments. Yet that is what has occurred. Consequently, these plans 
have had to make recent changes to future benefit accruals and in other 
areas permitted under current law.
    What is needed is an objective standard that governs future benefit 
increases. In the past, bills have been introduced in Congress that 
would allow a plan to increase benefits only when it is at least 90 
percent funded. Such an approach makes sense and the Alliance members 
support it to ensure that future benefits can be paid. Otherwise, they 
are only false promises that increase the withdrawal liability of 
employers.

6. The Need For A Congressional Study On Long Term Solutions To Plan 
                    Underfunding

    While all the above reforms are vital to the short-term viability 
of these plans and their contributing employers, there remains a need 
for Congress to address the significant past underfunding in these 
plans. The Central States plan has $11-15 billion in accumulated 
underfunding. Our recommended reforms will prevent this plan from 
becoming worse, but it will not solve the ills created in the past.
    At best, we project that the plan, which is now about 65 percent 
funded, may become 75 percent funded with our suggested changes. The 
reason for this modest improvement is that cost of the benefits to the 
retirees, who have no contributing employer, is consuming all the 
contributions to the plan, a situation that is getting worse each year. 
It is unsustainable over the long-term. We believe that an objective 
study is necessary to remedy the problem. A Congressional study 
commission is an appropriate method to develop meaningful and fair 
solutions for employers, retirees and the Government. We therefore ask 
that Congress fund such a study and require a report back, with 
recommendations, within 1 year.
                               conclusion
    The Alliance members recognize that defined benefit plans, both 
single-employer and multi-employer plans, once were the pillars for 
creating a sound retirement income for workers in this country. The sad 
reality today, however, is that countless numbers of businessmen and 
women will not offer them to their workers because of the onerous rules 
and liabilities that attach to them under ERISA and MPPAA.
    The basic elements of opportunity and incentives are missing from 
the equation. Meaningful reforms of the law, as discussed above, can 
revitalize these plans. Without change, the plans will continue to 
decline in numbers, in financial strength and as retirement vehicles 
for workers.
    The Alliance sincerely appreciates the opportunity to address this 
important issue with the Senate Subcommittee on Retirement Security and 
Aging. We will do all we can to assist you in this difficult, but 
critical, decision making process. This is the single most important 
legislative issue confronting unionized trucking companies. It is not 
an overstatement to say change is necessary for the very survival of 
the smaller, family-owned, union trucking company members of the 
Alliance.
    [Editors Note--Due to the high cost of printing, previously 
published materials submitted by witnesses are not reprinted. Exhibit 1 
can be found in committee files. See prepared statement of Mr. Lynch 
for Exhibits 2-8.]

    Senator DeWine. Very interesting comments from all of you. 
Let me ask the whole panel this question. We have consistently 
heard that trustees of multi-employer plans will not produce 
information about funded status, projections about shortfalls, 
other relevant information that contribute to an employer's 
need for planning purposes, and participants really need to be 
confident about their retirement plans. How do you respond to 
these criticisms about multi-employer plans? Are some plans 
more secretive than others, and are they the exception rather 
than the rule? Mr. Ward?
    Mr. Ward. I can only speak with regard to Central States' 
plan, but it is very difficult to get information from them. 
Our withdrawal liability for a particular year, for instance, 
is not available until around September of the following year, 
9 to 10 months after the year is closed. Likewise, finding out 
that it is in severe trouble was not information that was 
shared until it was almost too late.
    Senator DeWine. Mr. Noddle?
    Mr. Noddle. Generally almost all the plans are difficult to 
get information from, but it is also the timeliness of them. It 
takes about a year to 2 years to understand the exact financial 
condition of any of the plans, and in this day and age, with 
the technology that we have, there is no reason that there 
should not be quicker information and more transparency in 
these numbers.
    Senator DeWine. Mr. Lynch?
    Mr. Lynch. In my testimony I indicate that the members of 
my association by and large do have trustees on these plans, 
and consequently the thought is that they would have more 
access to information. The fact of the matter is, that is 
marginally true. It is a difficult process, and I agree with 
the other witnesses, that in our view it is really an issue of 
timing. Waiting for information that is a year and a half old--
and let us face it, if you have good news to report, you are 
probably not going to wait until the very last date of the 
filing. If you do not have such good news to report, you will. 
And typically that results in a situation where some of the 
steps that could be taken are perhaps a little too late.
    Now, I am a trustee on a plan. In response though on the 
other side, from the trustee perspective, I am a trustee on a 
plan, and the day I was sworn in, if you will, the first 
question I got was, you have your trustee liability insurance 
paid up, right? You are constantly reminded by the attorneys in 
these plans of your fiduciary responsibilities and the amount 
of information, the type of information you are allowed to 
discuss, and frankly, not discuss if it has not been publicly 
disclosed.
    Senator DeWine. Mr. DeFrehn?
    Mr. DeFrehn. I guess my experience is a little bit 
different than what the others have had. I have had extensive 
experience with dozens if not hundreds of plans over the years, 
and the simple fact of the matter is that the timing on 
releasing of information, particularly withdrawal liability, is 
in part a function of the way that the code is designed and the 
information that has to go into the complex calculations that 
take place.
    On the other hand, for the most part, I think that you will 
find that the willingness of most plans to share information 
that is available is fairly high. There are notable exceptions 
to that. One thing that should be noted by the committee is 
that in last year's Pension Funding Equity Act, there were 
significant disclosure requirements added that will become 
effective at the beginning of next year, and I think that a 
large part of the concerns of most contributing will in fact be 
remedied because it requires additional information on current 
financial status to be provided to them as well as participants 
and the sponsoring unions.
    Senator DeWine. Mr. DeFrehn, let me ask you another 
question. What actions have been taken to stabilize their 
funding?
    Mr. DeFrehn. The funding of?
    Senator DeWine. Multi-employer plans.
    Mr. DeFrehn. If you look back over the years, I guess I try 
to take a historical perspective on withdrawal liability. I 
would agree with the comments that everyone has made here, that 
it is both a good thing and a bad thing, and I think both 
parties look at it that way. In some ways it has created 
financial burdens for smaller employers, as it has for larger 
employers, and there is certainly, room for improvement there.
    On the other hand the fact that there is withdrawal 
liability, unfunded liabilities, has caused the trustees of the 
plans to adopt more conservative funding policies over the 
years, and if you look back to the funding levels of most 
plans, most multi-employer plans, it was quite high. In 1999 
the average funded position of multi-employer plans was 97 
percent. In fact, it caused--the funding level of those plans 
caused plans to have to adopt benefit improvements they would 
not otherwise have in order to protect contributions to the 
deductibility of contributions made by contributing employers.
    So the problem is simply that there is a disconnect here 
between the funding levels, the reliance of mature funds on 
investment income, and what has happened over the last 3 years 
in particular.
    Senator DeWine. Senator Mikulski?
    Senator Mikulski. Thank you very much, Mr. Chairman. First 
of all, thank you for this selection of witnesses. I think we 
have covered quite a broad base. Mr. Noddle, my father was a 
small grocer. He was a member of the Independent Grocers 
Association before the family closed its business in the late 
1970s. So we have an understanding. I think what has been 
instructive for me is how many different plans many of you have 
to be members of, and, Mr. Ward, you have your own challenges 
as a small business, and just complying with this must be 
really a challenge. And for the men in the freight forwarding 
business, you got rising gasoline prices, you got rising 
pension costs, you got rising heartburn.
    [Laughter.]
    I see certain consensus emerging: No. 1, more transparency 
in the process; No. 2, the right to know in a timely way; No. 
3, some type of risk assessment because one size does not fit 
all, and really a prevention mechanism so there is the Green 
Zone, regardless of how you parse it, Mr. Noddle, you have one 
viewpoint, Mr. Lynch, you have another, but by and large you 
are talking about an early warning system; and then a rating of 
the Green Zone, Yellow Zone and Red Zone. Would you say that 
those are the four or five items on which there is a consensus 
around which we could begin to build some of the first--kind of 
first tier reforms. Mr. Lynch, would you say that is the 
consensus?
    Mr. Lynch. I would agree. I would add maybe one other one, 
and that is the requirement that plans really do develop a 
funding plan for the next 10 years to show improvement in the 
funded status of the plan. It would almost seem, why do we have 
to have a law to do that? But in many cases, until a plan hits 
a severe funding problem, there is really no requirement for 
that so----
    Senator Mikulski. Is that in the reforms that have been 
recommended through the various----
    Mr. Lynch [continuing]. Yes, they are.
    Senator Mikulski. --things that I have read, the so-called 
10 year amortizing?
    Mr. Lynch. That is another issue, but a 10 year plan that 
shows an improvement in the funded status of the plan.
    Senator Mikulski. Mr. Noddle, Mr. Ward, were those the 
consensus items, or did you have another item to either 
disagree--we welcome any disagreement.
    Mr. Noddle. I would just offer two things, Senator. First 
of all, yes, I think those are the basic pillars of a very 
cooperative agreement that most parties I think would adhere 
to. The thing we feel very strongly about is that there should 
be certain measurable, quantifiable benchmarks along the way, 
and that should be a component of it. If it is left to judgment 
at times the outcome might not be strong.
    Senator Mikulski. You mean real criteria for Green, Yellow; 
is that what you are talking about?
    Mr. Noddle. Yes, and within those also very clear 
benchmarks within those zones. The other concern that we have 
is that in the Yellow Zone, we think a lot of the plans, a lot 
of the ideas that are being focused on the red areas or those 
under 65 percent. What we were trying to focus on in those 
plans in the 65 to 80, not that the under 65 does not need a 
lot of attention here, but we want to get ahead of this. We do 
not want these to become--once you are faced with a crisis it 
is almost too late.
    Senator Mikulski. Yeah. So you get late information, which 
means that they have been in the Red Zone or Yellow going to 
Red, but you are waiting 18 months for dated information, which 
you know because it is dated and not good. Then you are really 
into a bailout. And then the good-guy employers, from what you 
are saying, are left holding the bag for everybody else. And so 
who in the heck wants to get into this. I mean is that it in a 
nutshell?
    Mr. Noddle. Yes, it is. And within the plan, if you are in 
a Yellow Zone plan and you create a plan over a long period of 
time, you would have benchmarks within that plan that both 
labor and employers would understand what those benchmarks are, 
and so that the collective bargaining process then could go 
forward knowing what those benchmarks are.
    Senator Mikulski. And everybody, including as the union or 
the employer comes to the table, you would then have accurate 
information so you know that when you are bargaining what 
essentially the situation is, the adequate. What is the fiscal 
situation? In other words, you can bargain for a pension of 
$50,000 a year, but if there is only a pension funding for 38--
--
    Mr. Noddle. Senator, there should be no debate over what 
the numbers are. The debate should be over how to solve the 
problem.
    Senator Mikulski [continuing]. That is exactly right.
    Mr. Noddle. Not what the numbers are.
    Senator Mikulski. Right.
    Mr. Ward? Is that, remember what I said, transparency, 
early warning system, the right to know information in a timely 
way, and precise, and then some type of rating system.
    Mr. Ward. Yes, I would agree completely with that. I would 
maybe add to that the deficiency, funding deficiency penalties 
and payments that kick in at----
    Senator Mikulski. That excise tax issue you raised?
    Mr. Ward [continuing]. Yes. I think we would all agree that 
we also have to deal with that. In fact, Congress did deal with 
that temporarily a couple of years ago, so that is one----
    Senator Mikulski. And that is one of the issues where you 
are doubly penalized, so therefore if you have already gone 
Yellow to Red or you are trying to get out of Red, if you 
trigger these taxes it keeps you further in the hole, am I 
correct?
    Mr. Ward [continuing]. In fact, they are so onerous that 
they would bankrupt our company in a short period of time, so 
yes.
    Senator Mikulski. My time is up, and the chairman of the 
full committee is here. In my second round I am going to ask 
how many Government agencies do you have to deal with in 
compliance, and does that make any sense, or is that another 
reform?
    Mr. Ward. Thank you.
    Senator DeWine. Chairman Enzi.
    The Chairman. Thank you, Mr. Chairman. I want to 
congratulate you and the ranking member on your dedication and 
diligence and understanding of this issue and the work that you 
are doing on it. Our charge was quite limited, but obviously 
needs to be expanded to take care of a number of the problems 
that we have in these areas, and congratulate you on the 
witnesses that we have today.
    [The prepared statement of Senator Enzi follows:]

                   Prepared Statement of Senator Enzi

    Today's hearing will focus on two key issues in the defined 
benefit world that are crying out for reform: hybrid single-
employer plans and multi-employer pension plans. I think it is 
safe to say that every member of this subcommittee, and every 
member of the full Health, Education, Labor, and Pensions 
Committee is committed to the stability and strength of the 
defined benefit system. Today we will look at ways to promote 
stability and strength for hybrid and multi-employer pension 
plans.
    In the view of many, hybrid pension plans, such as cash 
balance and pension-equity plans, are the last best hope for 
preserving the single-employer defined benefit system. Quite 
frankly, defined benefit plans are in competition with defined 
contribution plans. The lower costs, risks, and frustrations 
that are presented by 401(k) plans have contributed to the 
accelerating decline in the number of traditional pension 
plans. Hybrid plans were devised as an alternative to outright 
termination of a traditional pension plan followed by a switch 
to a defined contribution plan. Hybrid plans provide 
portability to workers who change jobs while retaining the risk 
of investment declines on the employer.
    The legal status of hybrid plans has been called into 
question in recent years. The principal criticism of hybrid 
plans is that they ``cut benefits'' of older workers. That 
allegation is incorrect. As we all know, a cut-back of vested 
benefits is specifically prohibited under section 411 (d)(6) of 
the Internal Revenue Code. The penalty for cutting back an 
accrued vested benefit is plan disqualification. At this 
hearing we will hear arguments from the AARP that these plans 
are age discriminatory, and we will hear from two other 
witnesses why they think they are not. The witnesses will tell 
us what reforms are advisable and necessary to clear up this 
issue.
    We will also hear of the financial crisis facing some of 
the multi-employer plans. Multi-employer pension plans provide 
essential retirement security to 9 million workers, yet there 
is much we do not know about these plans. Both labor and 
management are coming to Congress seeking reforms to the 
current system to empower them to get the financial affairs of 
their plans in order. Billions of dollars are at stake and the 
survival of hundreds of small and medium-sized companies may be 
in doubt, depending on the decisions Congress makes. It is 
essential that we understand the causes and scope of the 
problem and ensure that we have the information and 
transparency to prevent such crises from sneaking up on us in 
the future.
    I am pleased with the many bi-partisan discussions that 
Senators and their staffs have been having in the last 3 months 
over the details of comprehensive reform of the single-employer 
defined benefit system. I fully anticipate that the HELP 
Committee will be able to produce a bill this summer before the 
August recess. The issues raised today, assuming consensus can 
be reached, may also be included in the package of reforms that 
goes to the Senate floor.
    Senator Enzi. I will get into some fairly specific 
questions.
    Mr. Lynch, in testifying before a House subcommittee last 
year, you stated that serious consideration should be given to 
whether additional procedural or legal controls over the 
management of the plans could prevent serious funding issues. 
Something as simple as imposing funding policy guidelines that 
mandate clear targets for the plan's unfunded liability. Your 
suggestion of imposing funding policy guidelines caught my eye. 
I realize that your coalition has rejected the benchmarks for 
the Yellow Zone, but are those benchmarks not the equivalent of 
imposing funding policy guidelines that you advocated last 
year?
    Mr. Lynch. Yes.
    [Laughter.]
    Mr. Lynch. I guess the easiest way to explain this from our 
vantage point is there is clearly a need to have not just 
simply: we hope you are going to do a better job on the one 
hand. On the other hand we cannot have criteria that is so 
stringent that the plans and the trustees simply cannot meet 
them, or in order to meet them there would have to be such 
draconian increases in employer contributions, where you would 
get back to putting in jeopardy a lot of the smaller 
contributing employers.
    So we are walking a somewhat careful line here. I think it 
is hard to argue against, and I certainly testified in favor of 
just such a plan. But that plan cannot be so stringent as to 
strangle these plans before they have an opportunity to 
actually get back on sound financial footing.
    The Chairman. Thank you.
    Mr. DeFrehn, your Red Zone proposal mandates a minimum 
participation accrual rate of 1 percent. That puts a floor on 
how much the trustees can cut benefits even temporarily. I note 
that another witness is asking for a ceiling on contribution 
increases, at least for small businesses. How can the plans 
ever get out of financial trouble if Congress takes options off 
the table?
    Mr. DeFrehn. One of the concerns of the coalition and of 
the multi-employer community generally, is that by eliminating 
future accruals all together, the active employees who actually 
fund these plans from the deferral of their wages as a 
collective bargaining agreement is reached, there is a wage 
package that is settled upon. The parties then discuss how that 
wage package gets allocated. A portion of it may go to health 
benefits, a portion to pensions and some into the wages. If you 
get to the point where the future accrual for active employees 
is eliminated all together, you eliminate the incentive for 
them to want to have a portion of their wages go into a plan 
for which they get no future benefits. So we believe strongly 
that it is important to not take the entire benefit away and 
that there should be a floor on that.
    With respect to Mr. Ward's comments about the cap on 
withdrawal liability, that is an issue that affects plan--
participating employers who leave the plan at a time when there 
are unfunded liabilities. And unfortunately, withdrawal 
liability creates no winners. But someone has to pay for those 
benefits. It is either going to be the employer who made the 
promises in the first place in agreeing to participate in the 
plan, or it is going to be the participant through reduced 
benefits, or it is going to be the PBGC, and I believe at this 
point the PBGC is off the table, and the participants, while 
our proposal suggests that perhaps some ancillary benefits 
could be reduced when the plan is facing imminent danger, we do 
not believe that benefits should be invaded at a point where 
the plans are relatively healthy.
    The Chairman. Have you done any economic modeling on the 
FMI Yellow Zone proposal?
    Mr. DeFrehn. Yes, we have. Two plans, I can give you some 
examples. One----
    The Chairman. Would you mind sharing that with the 
committee?
    Mr. DeFrehn [continuing]. Sure.
    The Chairman. Because then we can get into more detail than 
we could through an answer here.
    Mr. DeFrehn. Certainly we can get you the details.
    The Chairman. Thank you.
    Mr. DeFrehn. Sure.
    The Chairman. Mr. Noddle, what is your concern if only the 
Red Zone provisions were to be enacted?
    Mr. Noddle. Well, Senator the way we look at it, the Red 
Zone is a crisis situation and it has to be managed as a 
crisis. The Yellow Zone is a pending, looming problem that if 
not addressed will become a Red Zone crisis. So simply I cannot 
think of any reason why we would not want to get more 
transparency, more early warning into these plans, have a look 
into these plans to see so that the trustees and the collective 
bargaining process can sit down, not debate over what the 
numbers might or might not be, and say, we have a long-term 
problem here. How do we protect the retirement benefits for the 
people that we have promised them to? So let us do this over a 
longer period of time.
    That to me is just prudent. We do that in every other part 
of our business every single day in trying to anticipate what 
the future is going to be, how do we fund it, how do we react 
to it? I do not know why this would be any different.
    The Chairman. Thank you. My time has expired.
    Senator DeWine. Senator Isakson?
    Senator Isakson. Let me take a pass for now.
    Senator DeWine. Sure, sure.
    Barbara?
    Senator Mikulski. I will pick up on that question I said I 
wanted to ask, and start with you, Mr. DeFrehn. When I asked 
for the consensus, I am sorry, I advertently overlooked getting 
your opinion, and share it. Here is my question, what are the 
agencies involved that you all face in compliance? Do you have 
essentially a one-stop shop? Are you dealing with a 
multiplicity of agencies? Which takes us to the compliance. 
Then what are the agencies, or are these agencies involved in 
helping with this so-called warning system and the enforcement 
of this? And what recommendations do you have and what 
generally has been the cost of your compliance? I mean those 
are fairly meaty, but it sounds like while you are trying to 
run a business, be a labor union and bargain in good faith for 
both your workers, but understanding you need a solvent company 
to be able to work for one, it just seems to be layers and 
layers of complexity, where you all cannot get what you need to 
do the job, and then I have a feeling you are dealing with 
about three different agencies within the Government.
    By the way, I want to thank you for two things. One, 
testifying today, but not dumping, not dumping the problem on 
us, telling us to come up with the solutions. Obviously, you 
have done a tremendous amount of work on coming up with 
viewpoints, even if they disagree, there is consensus, and also 
for not dumping the liability. So we appreciate this, and 
therefore I'm going to have this partnership.
    Mr. DeFrehn, could you help me with these issues related to 
Government and governance?
    Mr. DeFrehn. Sure. The three Government agencies that we 
work with most are the Department of Labor, the Internal 
Revenue Service and the Pension Benefit Guaranty Corporation.
    I think your assessment of how complex and multilayered the 
process is is accurate. Unfortunately, it is not terribly 
responsive to the kinds of problems that we address and I 
mentioned in my oral testimony about making sure that plans 
that are subject to circumstances beyond their control be able 
to take advantage of the relief mechanisms that the law 
provides. Certainly over the past several years, the Internal 
Revenue Service in particular has been deficient in terms of 
its ability to respond to requests from plans that are facing 
funding deficiencies through the existing remedies under 
Section 412(e) of the code. There are at the present time about 
30 applications, some of which have been sitting there for as 
long as 2 years.
    Senator Mikulski. Wow.
    Mr. DeFrehn. And the Agency has not taken action on those 
applications. So that the parties, the contributing parties 
have an idea as to whether they actually do have a funding 
deficiency or not. Those are applications that would permit the 
plans to have an extended amortization period for their 
liabilities.
    Senator Mikulski. Mr. Lynch? We could just go down.
    Mr. Lynch. There is not a lot to add except that when, as 
members of the committee know, when we were working on that 
short-term relief bill 2 years ago, a 1\1/2\ ago, there was a 
fairly strong focus on the single-employer problem and the 
interest rate issue. We were generally viewed as the skunk at 
the picnic I guess coming along.
    Part of the difficulty we have with some of these agencies 
is I think the plans have by and large worked very well, and so 
there has not been a lot of attention paid to them, and 
consequently, I think there was a certain reluctance on the 
part of some of these agencies to really step forward and say, 
this is what we think needs to be done to address the problems 
of multi-employer plans.
    So as a corporate representative, and I am generally loathe 
to be suggesting more Government involvement, but I do think it 
would be useful for agencies like the PBGC--and I know they 
have created a new department over there, a reorganization, and 
the new department to look at the multi-employer issues. But I 
think that is very important, that they get a better handle on 
what the issues are.
    Senator Mikulski. One of the things that I would hope, and 
then there would be a follow-up conversation after this hearing 
is, do we need one agency that is the primary one-stop shop? 
No. 2, is the pension guaranty really coming in when people 
have been not only in the Red Zone but it is when Red Zones are 
almost irredeemable and on the verge of us assuming liability? 
And then what is the role of Department of Labor in this? Mr. 
Noddle, do you have comments?
    Mr. Noddle. The only one, Senator, that I would add that 
has not been mentioned is that as a public company that we have 
to deal with is the whole area of finance, the GAAP accounting 
and FASB and that is a whole other arena which we have to 
assess our liabilities----
    Senator Mikulski. Senator Enzi's area as Mr. Accountant 
here.
    Mr. Noddle [continuing]. And they may not always be in sync 
also with the way certainly the plans or trustees look at 
things. So the only thing that has not been mentioned that I 
would add is that.
    Senator Mikulski. So we have at least some policy 
recommendations that are at least the beginning of a consensus. 
Then we get into both compliance and enforcement, in which they 
should be a tool to resolving the problem before there is 
bankruptcy and insolvency, or essentially the dumping of the 
liability onto the pension guaranty. You see what I am trying 
to get at? Good policies and then a way where good guys who 
want to participate, good-guy companies that feel the 
Government is on their side, not just triggering excise taxes 
and forcing small businesses like you, Mr. Ward, into 
bankruptcy.
    Do you have any thoughts on this? Because you are a family-
owned business, and very sympathetic to this.
    Mr. Ward. Thank you very much. I could not add much at all 
to how you have described the complexity in dealing with 
various Government agencies and I do like the idea of a single 
point of reference, so to speak, that we could go to in dealing 
with these kinds of issues, and particularly gain some help.
    But if I could give you some perspective as a small 
employer on this particular mess that we are in right now, and 
the thing that concerns me is I look--I probably do not look at 
it like they do, at the level of detail. I run a small 
business. I am trying to grow a small business. I am doing it 
with union employees. There is a lot of pride involved in that 
aspect of what we are doing. We are one of the last of the 
Mohicans really in terms of small union carriers that are 
growing. Mind you though, where is the incentive, when on paper 
our withdrawal liability exceeds the entire net worth of our 
company? From a business case standpoint, there is no business 
case. Without pride, this business should be shut down.
    If there is some opportunity though at some point to limit 
the amount of withdrawal that exists out there, I believe at 
least the current carriers that are there would find incentive 
to continue to operate and continue to push forward.
    Senator Mikulski. So that is the incentive thing to keep 
people engaged in this multi-employer.
    Mr. Ward. Without it, put yourself outside the fund as an 
employer that the union would maybe organize, and they would 
bring you to the table and ask you, ``Would you like to 
participate in this multi-employer fund?'' Never in a million 
years would you do it. You would take your nonunion company 
down through a strike if need be to avoid the withdrawal 
liability. There is absolutely no way any new employer is going 
to come into this fund because of that disincentive that exists 
out there. And it exists as a current employer, and I believe 
that is why you do not see more people like me growing union 
businesses.
    Senator Mikulski. Thank you. I appreciate that.
    Thank you.
    Senator DeWine. Senator Enzi?
    The Chairman. I would defer to Senator Isakson.
    Senator DeWine. Senator Isakson?
    Senator Isakson. I do have one question, and I apologize 
for being late, I have just come from an hour of the Finance 
Committee hearing on single-employer pension benefit programs.
    This is a very complex issue, but I would like to hear each 
one of you discuss one aspect. There are two schools of 
thought. One school of thought is to extend the amortization of 
liability to give companies in trouble a chance to have the 
best of both worlds, and that is not be forced into bankruptcy 
and still be able to meet their liability without the liability 
of the fund going into pension benefit guaranty.
    The other is the short window recovery, meaning if you have 
an unfunded liability of $9 million, it is 3 million over 3 
years to make it whole, whereas the more liberal approach might 
be to let you amortize that over a longer period of time. I 
think I heard Mr. Lynch say--and it may have been Mr. DeFrehn, 
I am not sure--about the threat if you had this short-term 
window, required cash contribution, of how many companies it 
would force into bankruptcy, that is similar to exactly what 
the aviation industry faces today on the single-employer plans.
    If you all could just help me for 1 minute, and you 
probably already addressed all of this, but just give me your 
response to that, what you think is preferential, I would like 
to hear it.
    Mr. DeFrehn. Amortization extensions can help, and actually 
we are a part of the proposal that was offered in the earlier 
versions of the Pension Funding Equity Act last year for plans.
    The key though is that the extension be tied to a 
reasonable interest rate, and that seems to be part of the 
problem that the IRS has with acting on the 412(e) 
applications. I guess that is my only comment on that.
    Mr. Lynch. I think the challenge there is that you want 
short-term remedies to address short-term unexpected problems, 
market downturns, unexpected downturns. What you do not want 
are remedies that mask what is a much deeper problem and I 
think that is what we all have to wrestle with.
    Central States, large pension fund, Central States cut 
their accrual rate from 2 percent down to 1 percent, but they 
amortized that change over 30 years. It is going to take them a 
long time to get the benefit in terms of all the actuarial 
calculations of that change, and we would like to see those 
things, not only the cuts, but also any improvements to be 
amortized over a shorter period of time, and we think that 
makes a lot of sense.
    Mr. Noddle. There is no simple solution, one single 
resolution that is going to solve this problem. These are long-
term plans with long-term funding, and in order to solve this 
problem we have to look at it over longer perspective, and not 
everybody is going to retire tomorrow anyway.
    You know, one thing that has not been mentioned that I am 
sure that you realize, that I did not realize, frankly, till I 
got deeper into this issue, in the year 1999 and 2000, for 
example, funds were required to increase their benefits because 
their investment returns were high enough that there was an 
overfunding status in these plans. The way the regulations are 
written, if you do not increase your benefits, you lose your 
tax deductibility for the money you put in because you are 
overfunded. Rather than putting that money away for a rainy 
day, the plans and the trustees were forced to increase 
benefits. These are the kinds of things I think that we have 
that we have to clean up in these plans. And it takes a long-
term view of the plans to resolve all those things.
    Thank you.
    Senator Isakson. Thank you.
    Mr. Ward. Senator, I do not think I could add much to that. 
I would just say that we focus mostly on the plan that Mr. 
Lynch represents, the proposals that he has made. With regard 
to those issues, I think we are very much in acceptance of 
those.
    Senator Isakson. Thank you.
    Thank you, Mr. Chairman.
    Senator DeWine. Senator Enzi?
    The Chairman. I have a couple more questions here to get an 
understanding. Mr. Noddle, when you go into collective 
bargaining on one of these plans, do you bargain for benefits 
or for contributions? How do you know if the benefit you agreed 
to will cover the benefits that the trustees have promised? Why 
are the contributing employers on the hook for promised 
benefits if they did not promise benefits?
    Mr. Noddle. We do not bargain for and negotiate for 
benefits. We negotiate for funding levels, and this is what 
comes into the transparency issue and the lack of timely 
information. If all the information was clearly available on a 
timely basis to all parties, then the collective bargaining 
process goes forward in a much more quality way in terms of 
dealing with this thing.
    We negotiate funding levels, and then the trustees make 
decisions on what kind of benefit levels there will be. That is 
why the transparency issue and the early warning are so 
critical to this, so that we can sit down at the table, 
intelligent on both sides of the table, no dispute over what 
the numbers say, and one expert says one thing and another 
expert says another thing. We should have a common information 
transparency, and we say: Here is our collective problem; how 
do we solve this? And we are going to get such higher quality 
resolutions to our agreements if we are able to do that.
    The Chairman. Thank you.
    Mr. Ward, along that same line of timely and accurate 
information, in your written statement you wrote: the financial 
condition of the Central States plan has been a guarded secret 
with only the union and four major transportation companies 
privy to the most up to date information.
    What information have you sought in the past that you did 
not get, or that you did not get in a timely fashion? What 
additional information do you need? Do you ask for information 
other than the estimated withdrawal liability?
    Mr. Ward. What we would like to receive would be more 
timely information with regard to the condition of the plan 
itself, and we do not get that information. Granted, we do not 
ask, but it has never been available to use. We see it really 
at the end of 9 months after the end of the particular period 
in a report through our request for withdrawal liability, just 
so that we know where that stands at that point.
    The Chairman. I understand that your withdrawal liability 
increased in recent years from 2-3/10 million to 20 million; is 
that due entirely to the increased employment of teamster 
members, or was it the decline of the financial condition of 
the plan or other withdrawals from the Central States plan?
    Mr. Ward. All of the above. We grew our employment from the 
low 200s number of Teamsters that we employed to 294. We are 
over 300 today. And calculating withdrawal, they take your 
contributions over the last 10 years, factor that into the 
unfunded vested benefit that exists out there, essentially what 
the liability is, and we have a pro rata share. And with all 
the carriers that have exited, all the companies that have 
exited the multi-employer plan, it has just compounded that 
problem significantly. Add to that, obviously, some of the 
market conditions prior, but we would suggest that we have been 
pointing to these issues as far back as MEPA has been in 
existence, back until 1980.
    As Mr. Noddle has suggested, we do not negotiate the 
benefits. It is very frustrating for us to see a withdrawal 
liability continue to exist and grow as we grow our business, 
yet have no say in the setting of those benefits, or for that 
matter, who sits on the trustee panel.
    The Chairman. Thank you very much. I know we have another 
panel that we have to get to.
    Senator DeWine. I want to thank all of you very much. We 
could go on. We appreciate it. It has been very, very helpful. 
We could go on for a couple hours, I think, but you have all 
been very helpful. I think it has been an excellent panel, so 
thank you very much.
    Senator Mikulski. Mr. Chairman, I concur, and I would 
welcome the ideas, first of all, additional policy issues 
raised by the chairman and Mr. Enzi, and I would also like 
thoughts on governance issues, and help getting some breathing 
room because the compliance costs must be significant and 
confusing. Thank you.
    Senator DeWine. We would ask the second panel to come up. 
They have already been introduced. At this point, I will turn 
the gavel over to the chairman of the full committee, Chairman 
Enzi.
    The Chairman. [Presiding] We will go ahead with the next 
panel then, and appreciate again the participation of everyone.
    Mr. Sweetnam?

STATEMENTS OF WILLIAM F. SWEETNAM, JR., ATTORNEY, THE GROOM LAW 
GROUP, PRESENTING THE TESTIMONY OF JAMES M. DELAPLANE, JR., ON 
BEHALF OF THE AMERICAN BENEFITS COUNCIL, WASHINGTON, DC; ELLEN 
 COLLIER, DIRECTOR OF BENEFITS, EATON CORPORATION, CLEVELAND, 
OH, ON BEHALF OF THE COALITION TO PRESERVE THE DEFINED BENEFIT 
  SYSTEM; AND DAVID CERTNER, DIRECTOR, FEDERAL AFFAIRS, AARP, 
                        WASHINGTON, DC.

    Mr. Sweetnam. Mr. Chairman, Ranking Member Mikulski, I 
appreciate the opportunity to appear today, taking the place of 
James Delaplane.
    The Chairman. Could we ask that as you are leaving that you 
leave quietly?
    Sorry to interrupt.
    Mr. Sweetnam. That is quite all right. I am a partner at 
the Groom Law Group, and I am appearing here on behalf of the 
American Benefits Council. The 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.
    In our written statement we describe the current legal 
uncertainty regarding hybrid plans, and provide recommendations 
to resolve it. But rather than summarize my statement, let me 
outline a number of significant issues that are pressed upon a 
chief executive as a result of this legal uncertainty and the 
negative effects that could well flow from the lack of a clear 
set of rules.
    Under the current pension environment chief executives are 
finding it difficult to justify a defined benefit plan. These 
companies voluntarily sponsor a defined benefit plan even 
though many of their competitors do not. These plans provide 
valuable benefits to participants and their families and 
relieve pressure on Government programs. Companies fund their 
plans through employer contributions. They bear the investment 
risk and pay premiums to the PBGC to finance insurance 
guarantees. In fact, over 20 percent of the premiums come as a 
result of coverage under hybrid plans. Many American companies 
have restructured their businesses in order to stay competitive 
in the world marketplace.
    The workforce likewise has changed. There are fewer 
employees who spend their entire career with one employer, more 
mid-career hires, and there is fierce recruitment competition 
for talented individuals. In analyzing these developments, many 
companies have found that a traditional defined benefit plan 
does not deliver meaningful benefits to this new workforce. 
Many companies have also found that a majority of the total 
pension benefits were going to a small share of workers who 
stayed for a full career. In addition, many companies 
discovered that they were inappropriately encouraging their 
employees to retire early and go work for competitors. As part 
of this analysis, many companies have looked to cash balance 
and other hybrid plans to meet their needs and the needs of 
their new workforce. A hybrid plan will deliver benefits more 
equitably to workers of all tenures, and offer the portability 
and transparency that employees say that they want.
    It is worth noting that the vast majority of participants 
fare better under a hybrid plan then under a traditional 
defined benefit plan. In response to this analysis many 
companies have realized the benefits a hybrid plan can provide 
to both employees and to the employer's ability to compete, and 
as a result, a number of employers have converted their 
traditional defined benefit plan into a hybrid plan. Many such 
conversions grandfather a significant group of older workers in 
the prior plan. Many also make ongoing contributions to 
employees cash balance accounts that increase with age and 
service. Many conversions were well received by their 
employees, and new employees can now see the defined benefit 
plan as a plus, especially after they receive their annual 
pension statement.
    So is this a positive story about how our voluntary pension 
system evolves to meet changing employer and employee needs? 
One would think so, but unfortunately, the story does not end 
there. Despite significant legal authority to the contrary, a 
single Federal judge has ruled that the basic cash balance 
design violates the Pension Age Discrimination statute. 
Incredibly, he ruled that compound interest in a defined 
benefit plan is discriminatory. Under this theory each of the 
1,200 hybrid plans in this country is illegal. Under this 
decision a cash balance plan is illegal regardless of whether 
the cash balance plan is a new plan or whether there was 
significant grandfathering of old benefits.
    So what are the questions that many CEOs are facing in 
light of this decision? Well, the damages in these age 
discrimination lawsuits can be enormous, and several other 
companies already face copycat suits. The fact that a company 
grandfathered its older workers or increased cash balance 
contributions as workers age does not matter in these suits. 
Nor does it matter that employees are happy, since the basic 
design of the plan and not the conversion has been challenged. 
It only takes one employee to file suit. So companies that 
provide a pension benefit that is designed to provide benefits 
to a wide range of employees find themselves in legal limbo 
with potentially devastating legal liabilities.
    Another concern is on the impact on the company's balance 
sheet. Given the size of these damage awards, a company's 
auditors are concerned about this potential liability.
    Another factor that raises the concerns of many CEOs is 
that Congress has prevented the regulatory agencies from 
addressing the age discrimination issue and is now considering 
legislation that would, for the first time, grant employees a 
legal entitlement to future retirement benefits not yet earned.
    With these concerns, many CEOs are thinking, why not just 
have a 401(k) plan like many of my competitors? As an interim 
step, some companies have decided to freeze their cash balance 
plan or not let any new employees participate in the plan.
    Mr. Chairman and the members of this committee, as 
policymakers dedicated to the retirement security of American 
families, I cannot imagine this is the story you want 
unfolding. Yet this is reality. A recent survey indicates that 
41 percent of hybrid plan sponsors will freeze their benefits 
within a year absent legal certainty.
    So it is within your power to change this story. First make 
it clear that the basic hybrid plan designs do not violate age 
discrimination rules. Second, provide legal certainty for 
employers that have converted to hybrid plans in good faith. 
And third, reject mandates for future conversions that will 
discourage employers from making new benefit commitments.
    Thank you and I will be happy to answer questions.
    The Chairman. Thank you.
    [The prepared statement of Mr. Delaplane follows:]

             Prepared Statement of James M. Delaplane, Jr.

    Chairman DeWine, Senator Mikulski, thank you very much for the 
opportunity to appear before you today. My name is James Delaplane, and 
I am a partner with the law firm 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 
one of the most significant and pressing retirement policy issues 
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--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 hybrid 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 largely guaranteed even if the 
plan or the employer's business experiences financial trouble.
    As of 1999 (the most recent year for which official Department of 
Labor statistics have been published), nearly 19 million retirees were 
receiving benefits from defined benefit plans, with over $119 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.
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    \1\ U.S. Census Bureau, Statistical Abstract of the United States: 
2004-2005, Chart No. 532 (Source: U.S. Department of Labor, Pension and 
Welfare Benefits Administration, Private Pension Plan Bulletin, winter 
2003, 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 2002 the average 401(k) account balance for workers age 
21 to 64 was only $33,647 and the median (mid-point) 401(k) account 
balance was a mere $14,000. EBRI Notes, Vol. 26 No. 1, (January 2005).
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    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, the prospect of new and more onerous pension funding 
and premium requirements, 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\
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    \4\ The total number of PBGC-insured defined benefit plans has 
decreased from a high of more than 114,000 in 1985 to 31,238 in 2004. 
PBGC Pension Insurance Data Book 2004, 56 & 87. 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 
8,000 (or 21 percent) in just the last 5 years. Id.
    \5\ The Council last year released a white paper discussing in 
detail the multiple 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/documents/definedbenefits	paper.pdf.
    \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).
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    Mr. Chairman, we know that in addition to addressing the hybrid 
pension issues that are the subject of today's hearing, this 
subcommittee and the Congress as a whole will be spending considerable 
time in the months ahead considering potential reforms to the funding 
rules for defined benefit plans. The Council recently published its 
recommendations for pension funding reform, \7\ and we would welcome 
the opportunity in a future setting to visit with you and other members 
of the subcommittee on these important defined benefit plan issues.
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    \7\ American Benefits Council, Funding Our Future: A Safe and Sound 
Approach to Defined Benefit Pension Plan Funding Reform (February 
2005), available at http://www.americanbenefitscouncil.org/documents/
fundingpaper021604.pdf.
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        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.\8\ 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).
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    \8\ 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 found that the dominant 
motives for employer conversions to hybrid plans were employee 
appreciation of the plan, facilitating communication with employees, 
and the ability to show the benefit amount in a lump sum format.\9\ 
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.\10\ 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.
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    \9\ 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 
percent of respondents indicated employees' appreciation of the plan 
was either very important or important in the decision to convert to a 
hybrid plan; 93 percent 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).
    \10\ Data released shows that retirement plan costs have increased 
an average of 2.2 percent following a conversion, and when companies 
that were in severe financial distress were excluded from the pool, 
this figure increased to 5.9 percent. Watson Wyatt Worldwide, Hybrid 
Pension Conversions Post-1999: Meeting the Needs of a Mobile Workforce 
3 (2004). Conversions are often accompanied by improvements to other 
benefit programs, such as 401(k) plans, bonuses, and other post-
retirement benefits. Another recent survey found that when these 
improvements are taken into account, 65 percent 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 percent of the 
cases. PricewaterhouseCoopers, Cash Balance Notes 4 (May 2000).
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    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.\11\ 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.\12\
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    \11\ Women rank promoting portable pensions as their top retirement 
policy priority. Center For Policy Alternatives And Lifetime 
Television, Survey: Women's Voices 2000.
    \12\ 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'').
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    The unique value of hybrid plans in meeting employee retirement 
plan preferences is demonstrated in a recent survey. The survey reveals 
that workers prefer two retirement plan attributes above all others--
the portability of benefits and benefit guarantees.\13\ 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 working from a clean slate to 
produce the ideal retirement plan today, they would likely develop a 
hybrid plan. Clearly, preserving hybrid plans as a viable pension 
design is critical if employers are to maintain retirement programs 
that meet employee needs and preferences.
---------------------------------------------------------------------------
    \13\ Watson Wyatt Worldwide 2004, supra note 10 at 6.
---------------------------------------------------------------------------
    Perhaps most important of all, studies show that nearly 80 percent 
of participants build higher retirement benefits under a hybrid plan 
than a traditional plan of equal cost.\14\ Why? Traditional defined 
benefit plans tend to award disproportionate benefits (often as much as 
75 percent of total benefits under the plan) to employees with 
extremely long service. Yet very few employees spend a career with a 
single-employer.\15\ 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 percent more in retirement benefits from participating in 
cash balance plans than if his or her employers had provided 
traditional plans instead.\16\
---------------------------------------------------------------------------
    \14\ Watson Wyatt Worldwide 2000, supra note 9 at 24-25.
    \15\ Watson Wyatt Worldwide 2004, supra note 10 at 6-7. In fact, 
only 9.5 percent of employees work in the same job for 20 years or 
more. Employee Benefit Research Institute.
    \16\ Watson Wyatt Worldwide 2004, supra note 10 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 12 at 3.
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    The advantages of the hybrid plan are not reserved for younger 
workers. Even longer-service workers often fare better under a hybrid 
plan.\17\ 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 percent of cash balance plan sponsors provide pay 
credits that increase with age or service,\18\ while 87 percent of 
pension equity plan sponsors do the same.\19\
---------------------------------------------------------------------------
    \17\ Watson Wyatt Worldwide 2000, supra note 9 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).
    \18\ Mellon Financial Corporation, supra note 10 at 12.
    \19\ Watson Wyatt Worldwide 2004, supra note 10 at 2.
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    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 
traditional 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 account balances. 
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.\20\ 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.
---------------------------------------------------------------------------
    \20\ Mellon Financial Corporation, supra note 10 at 11 (90 percent 
of conversions contain special transition benefits); Watson Wyatt 
Worldwide 2004, supra note 10 at 4 (89 percent 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.
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    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 15 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.\21\ 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.
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    \21\ ERISA section 204(h); Treas. Reg.  54.4980F-1 (Notice 
requirements for certain pension plan amendments significantly reducing 
the rate of future benefit accrual) (Note: paragraphs (c) and (d) of A-
8 of the regulations pertaining to application of the notice 
requirements to certain amendments reducing early retirement benefits 
or retirement-type subsidies are proposed and not yet final).
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    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.\22\
---------------------------------------------------------------------------
    \22\ 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.\23\ 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.
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    \23\ 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. See e.g., Treas. 
Reg.  1.401(a)17-1 (discussing wear-away of benefits in connection 
with applicable compensation limits), Treas. Reg.  1.401(a)(4)-13 
(regarding correct use of wear-aways in connection with non-
discrimination rules), Rev. Proc. 94-13, 1994-1 C.B. 566 (1994) 
(providing model language including references to wear-aways for use by 
plans in complying with I.R.C.  401(a)(17)). 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.\24\ 
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.\25\ 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.
---------------------------------------------------------------------------
    \24\ 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 legislation enacted in April 2004 replacing the 30-year rate for 
pension funding calculations.
    \25\ 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).\26\ 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.\27\ Thus, this use of higher interest rates has not been a 
frequent cause of benefit plateaus in recent years.
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    \26\ 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.
    \27\ 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 percent) set opening account balances 
using the Treasury rate or a rate more beneficial to employees. Watson 
Wyatt Worldwide 2000, supra note 9 at 40; Mellon Financial Corporation, 
supra note 10 at 6 (77 percent 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.\28\ 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).\29\ Presuming an employee 
leaves the company at a time when he or she is entitled to receive the 
early retirement subsidy, the prior plan benefit may be greater than 
the cash balance account. 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.
---------------------------------------------------------------------------
    \28\ 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.
    \29\ 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.
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    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 features in their plans 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 would be out 
of step with congressional actions regarding our Nation's public 
pension system, Social Security. Congress has raised the Social 
Security retirement age--and may once again consider doing so as part 
of the current effort to address the system's solvency--and repealed 
the Social Security earnings test, partly 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.\30\ According 
to the court's flawed logic, simple compound interest is illegal in the 
context of defined benefit pension plans.\31\ 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.\32\ It would hold all 1,200 plus hybrid pension plans, 
\33\ regardless of whether adopted as new plans or through conversion 
from traditional plans, to be in violation of the pension age 
discrimination laws.
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    \30\ 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 that the age 
discrimination laws require rejection of basic economic common sense.
    \31\ 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 multi-employer 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.
    \32\ If the Cooper court's reasoning were applied to the Social 
Security program, even it would be considered age discriminatory.
    \33\ The most recent Government data indicates that as of the year 
2000 there were 1,231 hybrid plans covering more than 7 million 
participants. PBGC, supra note 4 at 3-6.
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    The conclusion that all hybrid plan designs are inherently age 
discriminatory begs the question why the Internal Revenue Service 
issued favorable determination letters for 15 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.\34\ 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.\35\ 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.\36\ Lastly, prior to the Cooper 
decision, numerous other Federal district courts addressed and rejected 
charges that the basic hybrid plan designs were age discriminatory.\37\ 
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.\38\
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    \34\ 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., 222 F.R.D. 88, 92-94 (D. Md. 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).
    \35\ H.R. Conf. Rep. NO. 1012, 99th Cong., 2d Sess. at 381.
    \36\ 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.
    \37\ 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'').
    \38\ Tootle v. ARINC, Inc., 222 F.R.D. 88 (D. Md. 2004).
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    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.\39\ Congress at the same time directed the 
Treasury Department to make legislative recommendations regarding 
conversions from traditional to cash balance plans.\40\ 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.'' \41\
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    \39\ See Section 205 of the fiscal year 2004 Omnibus Appropriations 
Act (PL 108-199).
    \40\ These Treasury Department recommendations were included in the 
Bush Administration's fiscal year 2005 and fiscal year 2006 budget 
submissions to Congress.
    \41\ H.R. Conf. Rep. NO 401, 108th Cong., 1st Sess. at 1185 (2003).
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    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 other 
employers for the alleged discriminatory nature of their plan design. 
Applying the rationale in the Cooper rulings, ultimate damages against 
the defendant were projected 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. Indeed, should the 
defendant in the Cooper case lose its planned appeal on the cash 
balance plan and related design issues, it has agreed to settle these 
two particular claims for $1.4 billion. Employers are understandably 
extremely anxious about the crippling effect of such lawsuits and 
potential damage awards, and are concerned that they will be 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 months, if not years, 
away and many hybrid plan sponsors are likely to find the intervening 
risks to their businesses and shareholders to be 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 the Federal 
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. As we noted earlier, other 
pressures in the defined benefit system are already prompting employers 
to consider freezes or terminations of their plans. Indeed, a recent 
survey reported that 27 percent of defined benefit plan sponsors have 
already frozen at least some element of their defined benefit pension 
program.\42\ The hostile climate for hybrid plans and the litigation 
risks and extreme damage potential are unfortunately starting to make 
the decision to freeze an easier and easier one for corporate decision-
makers.\43\ 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?
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    \42\ Society of Actuaries' Survey on the Prevalence of Traditional 
and Hybrid Defined Benefit Plans, prepared by Matthew Greenwald and 
Associates, Inc. (March 2005).
    \43\ 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 percent of all plan participants 
protected by the PBGC insurance program. Hence employer insurance 
premiums on these participants comprise 21 percent of the revenue 
generated by the PBGC through its per-participant premium program.\44\ 
If hybrid plans were removed from the defined benefit system, future 
premiums to the PBGC would be reduced significantly.
---------------------------------------------------------------------------
    \44\ 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.
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    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 
defined benefit plans is measured by reference to the formula spelled 
out in the plan document. If, under the formula, benefits do not 
decline on account of age, then the plan meets the legal requirements. 
In hybrid plans, this approach would look to the pay credits 
contributed on workers' behalf under the plan formula. 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.\45\ 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.
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    \45\ The hybrid plan proposals made by the Treasury Department in 
the Bush Administration's fiscal year 2005 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.
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    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.\46\
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    \46\ 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 2005 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 $95,000 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 have proposed requiring employers to pay retiring 
employees the greater of the benefits under the prior traditional or 
new hybrid plan. Others have proposed requiring 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. Pursuant to a 
directive from Congress, the Treasury Department has also made 
legislative recommendations regarding requirements for hybrid plan 
conversions undertaken in the future. Despite earlier proposed 
regulations that would have clarified the legality of the hybrid plan 
designs and made clear that conversions could be undertaken without 
special benefit requirements, the Treasury's legislative proposal would 
require employers to pay benefits at least as high as were provided 
under the prior traditional plan for a period of 5 years following the 
conversion.
    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 in our voluntary benefits system. 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 Senator Mikulski, for the 
opportunity to appear today. I would be pleased to answer any questions 
you may have.

    The Chairman. Ms. Collier?
    Ms. Collier. Chairman Enzi, Senator Mikulski, thank you for 
the opportunity to appear 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, OH. We have over 56,000 employees worldwide, 
including 29,000 employees in more than 40 States. Our business 
has changed considerably over the past 10 years, a result of 
more than 100 acquisitions and 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. 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 act to 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 our employees and for 
our Nation's retirement system. Employees will lose 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 to continually attract and retain high-level talent 
and to reduce the confusion resulting from multiple pension 
structures. We began to examine different pension alternatives 
in the mid 1990s. 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 program 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 at integrating acquired companies into 
Eaton. Once we settled on an ongoing design we had to make sure 
we responded to the needs of employees who were already in 
other pension designs. All new hires would start in the cash 
balance program, 1/1/02, as would the Aeroquip Vickers 
employees. 15,000 nonrepresented employees would receive an 
informed choice, effective 1/1/03, between remaining in their 
traditional defined benefit plan and switching to the cash 
balance plan.
    Employee reaction to our cash balance design was 
overwhelmingly positive. It is important to note that choice 
may not make sense for all companies. Employers need to have 
flexibility to modify 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 new cash balance 
design has increased our costs.
    Although the choice process required a significant amount 
of time and resources and money, 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 plans at this time.
    The resulting damage to employee morale and trust would 
greatly disrupt Eaton's day to day manufacturing operations. 
Without legislative action, our efforts to align our benefit 
structure with our business needs will have been wasted.
    Mr. Chairman, legislation is the only effective way to 
address today's uncertainty 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 issue 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, retirement security of millions of American 
families will remain in limbo. To provide widespread 
abandonment of pension plans by employers, Congress must 
clarify the legality of hybrid plans.
    Thank you again for the opportunity to appear here. I would 
be pleased to answer any questions.
    The Chairman. Thank you very much.
    [The prepared statement of Ms. Collier follows:]

                  Prepared Statement of Ellen Collier

    Chairman DeWine, Senator Mikulski, 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 
56,000 employees worldwide, including over 29,000 employees in 100 
locations in the U.S. The States with our greatest concentration of 
employees are North Carolina, Michigan, Ohio, South Carolina, Iowa and 
Pennsylvania. 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 2004 sales were nearly $10 billion, and we sold products in 
more than 125 countries. The business mix of the company has evolved 
significantly in the past 10 years as a result of more than 100 
acquisitions and divestitures. About 65 percent of Eaton's revenues 
come from businesses that we acquired in the past 7 to 10 years.
    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 plans. The Coalition's more than 75 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 1.5 million participants.

                    THE NEED FOR LEGISLATIVE ACTION

    I want to thank you for calling this hearing to address what is one 
of the most pressing challenges 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. 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, \1\ abandonment of these programs would be 
a disastrous result for employees and for our Nation's retirement 
system. Moreover, with the long-term solvency challenges facing the 
Social Security program, it is more important than ever to encourage 
employers to offer robust workplace retirement programs--or certainly 
not discourage them from doing so. 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\ Nearly 80 percent of employees earn higher benefits under a 
hybrid plan than under a traditional defined benefit 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.
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    Congress has before it a number of pressing issues involving our 
Nation's defined benefit pension system, including the need to enact a 
permanent interest rate to govern the measurement of pension 
liabilities and required contributions. These are important issues to 
Eaton and Coalition members generally but we sincerely hope that 
congressional attention to pension reform funding issues will not 
distract from the critical task of acting this year to address the 
hybrid plan issues.
    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 six 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 multi-employer 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.\2\
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    \2\ This correlates with the general experience of other employers. 
Surveys show that the most important factors underlying employer 
conversions to hybrid plans are improving communication about and 
employee appreciation of the pension plan, as well as being able to 
show benefits in a lump sum format. Watson Wyatt Worldwide 2000, supra 
note 1 at 44.
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    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 because of general trends 
in the labor marketplace, but also because within Eaton we 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 
and our desire to offer them a defined benefit pension made the 
development of a new pension design even more urgent.\3\
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    \3\ Eaton's growth through acquisition is a trend that has 
continued. Just last year, we acquired Powerware, a company with over 
1,100 U.S. employees and a frozen pension plan. Because of this 
acquisition, all former Powerware employees regained pension coverage 
by participating in the Eaton Personal Pension Account.
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                           KEY CONSIDERATIONS

    We considered several options for a new pension design, including a 
final average pay plan, a cash balance plan, and a pension equity plan 
(the other primary variety of hybrid pension plan). We also 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 hybrid plan, Eaton engaged the full range of outside 
consultants and experts to do appropriate due diligence and assist us 
with the conversion 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 1 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. As these alternatives 
make clear, 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 new ongoing design, we then 
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 traditional 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\
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    \5\ Mellon Financial Corporation, 2004 Survey of Cash Balance Plans 
11 (90 percent of employers provide special transition benefits); 
Watson Wyatt Worldwide, Hybrid Pension Conversions Post-1999: Meeting 
the Needs of a Mobile Workforce 4 (2004) (89 percent of employers 
provide special transition benefits). Those employers that do not (and 
that simply 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 that employers are not 
getting the definitive guidance they rely upon to operate their plans 
in full compliance with the law.
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    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. In addition, 
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 percent of pay up to 8 percent, 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.'' 
Our design benefits employees of a company acquired by Eaton since it 
recognizes past service with that company when calculating the level of 
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.
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    \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, supra note 5 at 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 5 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 12/31/02.
---------------------------------------------------------------------------
    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).
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    \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.
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    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 employees 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 our 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 to 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 are fully 
diversifiable.

                        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 onsite meetings, and created a Web site 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).
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    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 in employees' cash balance opening 
accounts, 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 traditional design--a 
pro-employee change that is not required by law--that caused an 
appearance of wear-away.\12\
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    \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 Treasury Department and Internal Revenue 
Service 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 Web site 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 percent elected to 
switch to the EPPA. Of the employees at retirement age or within 10 
years of retirement, over 80 percent 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 percent 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 programs 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 
pension 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 direct plan 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 percent following a 
conversion.\13\ This figure further increased to 5.9 percent when seven 
companies that were in severe financial distress were excluded from the 
pool.\14\
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    \13\ Watson Wyatt Worldwide 2004, supra note 5 at 3.
    \14\ 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 recent survey found 
that when these improvements are taken into account, 65 percent 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 5 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 percent of the 
cases. PricewaterhouseCoopers, Cash Balance Notes 4 (May 2000).
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         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 with hybrid and many other 
forms of defined benefit plans.\15\ This is no longer a mere 
theoretical threat as numerous employers with hybrid plans have now 
been sued in copy-cat class action suits alleging that the very design 
of their hybrid plans is age discriminatory. Asserted damage claims in 
these suits reach astronomical figures--into the hundreds of millions 
and 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 would 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 4 years!
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    \15\ 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 the Cooper 
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 that have handed decisions down subsequent to 
the Cooper case, have reached the opposite conclusion and indicated 
that the cash balance design is age appropriate. Tootle v. ARINC, Inc., 
222 F.R.D. 88 (D. Md. 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.
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    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 our 
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.\16\ 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.
---------------------------------------------------------------------------
    \16\ As noted above, 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.
---------------------------------------------------------------------------
    In today's economic climate, prudent business leaders seek to 
minimize corporate risks not associated with the company's core 
business. As you are aware, sponsorship of a defined benefit plan of 
any variety entails a number of costs and uncertainties for a company, 
and such costs and uncertainties are likely to increase in the coming 
months as a result of legislation to reform the pension funding rules 
and increase the premiums employers pay to the Pension Benefit Guaranty 
Corporation. The very real litigation risks hybrid plan sponsors face 
today are over and above these extremely significant costs and 
uncertainties accompanying defined benefit plan sponsorship generally. 
Absent congressional action to mitigate the specific risks associated 
with hybrid plan sponsorship, business 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. Indeed, in 
light of these litigation risks, a number of large U.S. employers have 
already frozen their hybrid pension plans in recent months, deciding to 
no longer offer any sort of defined benefit pension program to their 
new hires. It should be noted that the bulk of employers that have 
moved to hybrid plans 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. The recent freezes by large employers 
bear this out. The unfortunate freezes and terminations of recent 
months will only become more widespread should legislative resolution 
of the hybrid issues take longer.
    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 Federal 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.
    Resolving the hybrid pension issues appropriately is particularly 
urgent given the many challenges American families face in achieving 
retirement security. With Social Security facing solvency problems that 
could well result in benefit reductions, with personal savings rates at 
near-historic lows, with employees bearing significant market risk in 
401(k) and other defined contribution plans, with retiree medical costs 
continuing to soar and with life expectancy continuing to increase, now 
is precisely the wrong time to encourage employers to depart from the 
hybrid pension plans that provide guaranteed, employer-funded 
retirement benefits in a way that suits today's mobile workers. Yet 
this is precisely what will occur if Congress does not act.

                               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.

    The Chairman. Mr. Certner?
    Mr. Certner. Mr. Chairman, Senator Mikulski and members of 
the subcommittee, I am David Certner, the Director of Federal 
Affairs of AARP. Thank you for the opportunity to testify on 
the important legal and policy issues surrounding older workers 
and cash balance plans.
    While cash balance plans are often called hybrid plans, 
they are defined benefit plans under the law, and they must 
therefore follow all the rules for defined benefit plans. AARP 
has long questioned the legal basis for cash balance plans 
because these plans cannot fit within all the defined benefit 
plan rules. Also, there are significant age discrimination 
questions that arise when employers convert a defined benefit 
plan to a cash balance formula. Treasury and the IRS recognized 
these problems when they placed a moratorium on conversions in 
1999.
    We believe that regardless of what one thinks of the cash 
balance design, that a careful review of the legal distinction 
between defined benefit and defined contribution plans, makes 
clear that hybrid cash balance plans do not fit within the 
current legal framework. The recent court decision in Cooper v. 
IBM agreed that cash balance plans do not fit within current 
law.
    But we urge this committee to address the legal framework 
for cash balance plans, and at the same time provide strong and 
effective protections for older workers involved in cash 
balance plan conversions.
    Traditional defined benefit plans typically provide only 
small benefits early in a worker's career and larger benefits 
later in the career for those who devote much of their working 
lives to the company. It is therefore unfair for employers that 
have sponsored this type of plan to eliminate these promised, 
larger late career benefits, just when longer-serving workers 
are about to obtain them. But that is precisely the damage 
caused by conversions of traditional pensions to cash balance 
plans unless older workers are given appropriate transition 
relief to address this pension pay cut, in essence that is 
brought about by conversions.
    Planned conversions change the rules in the middle of the 
game, and older, longer service workers have the most to lose. 
They generally lose out on the larger late-career benefits. 
They have less time to accumulate benefits under the new cash 
balance formula, and they are less able to leave their current 
job if benefits are cut because they typically have fewer job 
prospects.
    Worker outrage, adverse publicity and legal concerns have 
increasingly caused plan sponsors converting to cash balance 
plans to recognize the harm to older workers and to put in 
place protective transition provisions, just as we have heard 
from my colleague here at the panel. We urge Congress to, in 
effect, codify the better practices that many employers have 
already adopted in order to protect older workers and cash 
balance conversions.
    AARP believes that cash balance plans can have a role to 
play in the private pension system if and only if they are 
designed and adopted in a manner that protects the millions of 
older workers who have given up their wages in exchange for the 
traditional defined benefit promise.
    Provided that these protections for older and longer-
service workers can be adopted, AARP would support the 
enactment of a reasonable legislative solution that would 
provide the legal certainty for cash balance plans. Right now 
it's not good for either employers or employees to be operating 
under an uncertain legal framework.
    However, Congress should not legitimize conversions that 
many employers themselves have found to be unfair and harmful 
to older employees. One such unfair--and again, we believe--
illegal practice because it is based on age, is the so-called 
``wear-away.'' Wear-away simply means the time it takes for the 
new plan formula in essence to catch up to the guaranteed 
benefits under the old plan formula. Wear-away is in effect a 
period of time when no new benefits can be earned and that can 
last for over 10 years of time. Employers have recognized this 
problem and many have taken steps to preclude wear-away. AARP 
commends the most recent Treasury Department proposal to ban 
any type of wear-away, and we urge Congress to do the same.
    Many employers have also sought to address the large future 
pension cut that is experienced by older workers by giving them 
choice or by grandfathering older workers in the traditional 
plan formula. These and other protections have now raised the 
bar with respect to cash balance conversions in the private 
sector. In any effort to clarify the law, Congress should not 
now lower the bar by enacting weakening legislation that 
invites the market to return to the lower standards of the 
1990s. Instead, Congress needs to hold all companies that 
voluntarily choose a cash balance plan to a standard that many 
companies have been willing and able to meet on their own.
    The cash balance format deserves protection from legal 
challenge only if it protects older workers from the harm 
caused by moving to that structure.
    We look forward to working to finally resolve this issue 
through legislation that will strengthen the defined benefit 
system and protect older workers and address the legal 
uncertainties surrounding cash balance plans.
    Thank you.
    [The prepared statement of Mr. Certner follows:]

                  Prepared Statement of David Certner

                                SUMMARY

    1. AARP believes cash balance plans have a role to play in the 
private pension system if--and only if--they are designed and adopted 
in a manner that protects the millions of older workers who have given 
up wages in exchange for traditional defined benefit pensions. Provided 
that protections for older and longer-service workers can be adopted, 
AARP could support the enactment of a reasonable legislative solution 
that would provide legal certainty for cash balance plans.
    2. Traditional defined benefit pension plan designs typically 
provide only small benefits early in a worker's career, and larger 
benefits later in the career for those who devote much or all of their 
working lives to the company. It is therefore unfair for employers that 
have sponsored this type of plan for years to pull the rug out from 
under older workers by eliminating these promised larger, late-career 
benefits just when long-serving workers are about to obtain them. Yet 
that is precisely the damage caused by conversions of traditional 
pensions to cash balance plans--unless older workers are given 
appropriate transition relief to address the impact of the ``pension 
pay cut'' brought about by conversions.
    3. When conversions change the rules in the middle of the game, 
older, longer-service workers are the most vulnerable. They generally 
have less time to accumulate benefits under a new cash balance formula, 
are less able to leave their current job if benefits are cut because 
they typically have fewer job prospects, and are less able to adjust to 
changes that may dramatically reduce their retirement security (for 
example, they have less time to adjust by increasing their saving for 
retirement).
    4. Worker outrage, adverse publicity and legal concerns have 
increasingly caused plan sponsors converting to cash balance plans to 
recognize the harm to older workers and to put in place more protective 
transition provisions. Congress should, in effect, codify the better 
practices many employers have already put in place in order to 
legitimize cash balance plans and protect older workers.
    5. However, Congress should not legitimize conversions of a type 
that many employers have themselves found to be unfair and harmful to 
older, longer-service employees. The steps many employers have taken in 
conversions to preclude wear-away of benefits and to give older workers 
``choice'' or ``grandfathering'' in the traditional plan formula and 
other protections have raised the bar with respect to cash balance 
conversions. Congress must not now lower the bar by enacting weakening 
legislation that invites the market to return to the lower standards of 
the 1990s. Instead, Congress needs to hold all companies that 
voluntarily choose to convert to a cash balance plan to a standard many 
companies have been willing and able to meet on their own.
    6. The cash balance format deserves protection from legal challenge 
only if it protects older workers from the harm caused by moving to 
that structure. We look forward to finally resolving this issue through 
legislation that will strengthen defined benefit pension plans, protect 
older workers, resume the IRS determination letter process, and address 
the legal uncertainty surrounding cash balance plans.
                                 ______
                                 
    Chairman Dewine, Ranking Member Mikulski, distinguished members of 
the subcommittee, I am David Certner, Director of Federal Affairs, of 
AARP. AARP is a nonprofit membership organization of over 35 million 
persons age 50 or older, about 45 percent of whom are still working. 
AARP fosters the economic security of individuals as they age by 
seeking to increase the availability, security, equity, and adequacy of 
pension benefits. AARP and its members have a substantial interest in 
ensuring that participants have access to pension plans that provide 
adequate retirement income and that the benefits accrued under a plan 
are not reduced because of age.

            I. WHAT ARE CASH BALANCE AND OTHER HYBRID PLANS?

    Congress provided a detailed structure in defining retirement plans 
under ERISA \1\ and the Internal Revenue Code (``IRC''). All retirement 
plans are either defined benefit plans or defined contribution plans, 
even if they have features of both. A defined contribution (or 
``individual account'') plan provides an individual account for each 
participant, with the benefits at retirement consisting of 
contributions the employer and employees have made, plus income and 
gains, and minus expenses, losses, and forfeitures. [ERISA section 
3(34)]. A defined benefit plan is defined as any retirement plan other 
than an individual account plan. [ERISA section 3(35)]. Traditionally, 
the benefit at retirement under a defined benefit plan is based on a 
benefit formula that takes into account years of service and, under 
many plans, final salary or wages.
---------------------------------------------------------------------------
    \1\ The employee Retirement Income Security Act of 1974, as 
amended.
---------------------------------------------------------------------------
    Recognizing that defined contribution plans and defined benefit 
plans--and their methods of accruing or accumulating benefits--are 
fundamentally different, Congress prescribed a different set of rules 
for each (including rules governing the timing of benefit accruals, 
valuation of benefits, certainty of benefit determinations, and 
expression of accrued benefits).\2\ A plan sponsor may not pick and 
choose which rules to follow, but must follow all the rules depending 
upon the plan design selected.
---------------------------------------------------------------------------
    \2\ Where the statute does permit a mix of defined benefit and 
defined contribution rules, it so specifies, as in the case of one type 
of pension--target benefit plans.
---------------------------------------------------------------------------
    Cash balance pension plans (and other plans, such as pension equity 
plans) are so-called ``hybrid'' plan designs.\3\ Cash balance plans are 
defined benefit plans that have been designed to resemble defined 
contribution plans. Instead of presenting the benefit in terms of an 
annuity payable at retirement, as traditional defined benefit plans do, 
cash balance plans portray a participant's benefit as a lump sum amount 
that increases over time, and, in practice, pay most benefits in the 
form of lump sums.
---------------------------------------------------------------------------
    \3\ In the interest of simplicity, this testimony limits the 
discussion to the most common type of hybrid defined benefit pension 
plan, the cash balance plan.
---------------------------------------------------------------------------
    In most cash balance plans, the benefit is defined by reference to 
a ``hypothetical account.'' The hypothetical account is credited with 
an annual pay credit (usually a percentage of pay, such as 5 percent of 
pay each year) plus a hypothetical rate of return (usually tied to an 
index, such as a Treasury bond rate) on the account balance (an 
``interest credit''). As in all defined benefit plans--and consistent 
with the hypothetical nature of these ``individual accounts''--the 
employer contributes assets to the plan, the assets are invested for 
the plan as a whole instead of earmarking particular assets or 
investments for the individual accounts of particular participants, the 
employer (including those to whom it delegates) manages the plan, and 
the employer is permitted flexible funding. This means that, at any 
given time, there may be more benefits promised in the hypothetical 
accounts than there are assets in the plan.
    The employer's contribution obligation depends upon its estimate of 
the present value of total future benefit obligations and its 
investment gains and losses, not on fixed or promised annual 
contributions to individual accounts. Employers generally benefit from 
the ``spread'' between what the employer promises in interest credits 
and what the plan actually earns (the interest arbitrage) while 
assuming the investment risk if asset returns are less than needed to 
pay promised benefits. Since defined benefit plan rules allow for 
flexible funding, any investment shortfall can be made up over several 
years.
    AARP also has long questioned the legal basis for the hybrid cash 
balance formula itself (in addition to the significant age 
discrimination issues that arise when employers convert defined benefit 
pension plans to a cash balance formula). We believe that a careful 
review of the legal distinction between defined benefit and defined 
contribution plans makes clear that the most common designs for hybrid 
cash balance plans do not fit within the current legal framework of the 
Internal Revenue Code (IRC), the Age Discrimination in Employment Act 
(ADEA) and ERISA (see Appendix A). In fact, the recent court decision 
in Cooper v. IBM agreed with this legal analysis. We urge the committee 
to address the legal framework for cash balance plans and provide 
strong and effective protections for older workers involved in cash 
balance pension plan conversions.

       II. CONVERSIONS OF TRADITIONAL PLANS TO CASH BALANCE PLANS

    The growth of cash balance plans has resulted mainly not from new 
plan formation but from conversions of existing traditional defined 
benefit plans. Employers have converted to cash balance and other 
hybrid plan designs for a number of reasons, including a desire to 
reduce plan costs and limit future pension obligations as the bulge of 
``baby boomers'' nears retirement and hence moves through the years of 
greatest pension cost to employers (and greatest pension value to 
employees); to increase employee appreciation (since many employers 
believe employees do not well understand or appreciate the traditional 
defined benefit plan); to eliminate costly early retirement subsidies 
and final average pay features; to increase pension surpluses that, in 
the 1990s, often contributed to reported corporate earnings; to 
redistribute benefits under the plan from older, longer-service 
employees to younger and newer workers; and to achieve these objectives 
without terminating the defined benefit plan and adopting a new defined 
contribution plan, which often would entail income and excise taxes and 
would terminate the interest arbitrage.
    In general, the direct and immediate result of a conversion of a 
traditional plan formula to a cash balance formula is a reduction in 
future benefits for older workers. A 1998 survey by the Society of 
Actuaries found that in cash balance conversions, the average benefit 
reduction for an older employee was 70 percent to 85 percent of 1 
year's wages, but younger workers saw a benefit increase of 10 percent 
to 40 percent of 1 year's wages.\4\ Moreover, the actuaries that design 
cash balance plans have been on record acknowledging that conversions 
to cash balance formulas ``help employers cut pension benefits and 
change retirement plans,'' especially for older workers. Ellen E. 
Schultz, Actuaries Become Red-Faced Over Recorded Pension Talk, Wall 
St. J., May 5, 1999, at C-1. Indeed, plan actuaries have at times 
bluntly acknowledged this reality.\5\
---------------------------------------------------------------------------
    \4\ Id. at 18.
    \5\ In an illuminating exchange, Amy Viener, an actuary at William 
M. Mercer, Inc., responded to an inquiry about whether cash balance 
plans reduce benefits: ``Converting to a cash-balance plan does have an 
advantage as it masks a lot of the changes. . . . You switch to a cash 
balance plan where the people are probably getting smaller benefits, at 
least the older-longer service people, but they are really happy, and 
they think you are great for doing it. . . .'' Id. at C-19. A co-
panelist of Ms. Viener's at another meeting stated, ``It is not until 
they are ready to retire that they understand how little they are 
actually getting.'' Ms. Viener responded, ``Right, but they're happy 
while they're employed.'' Id.
---------------------------------------------------------------------------
   III. HOW CONVERSIONS HARM OLDER WORKERS: THE PENSION PAY CUT THAT 
                       BREAKS THE PENSION PROMISE

    A. The General Adverse Impact on Older Workers from Conversion to a 
Cash Balance Pension Plan.
    For employees, the change in plan design from a traditional defined 
benefit pension plan to a cash balance plan can have significant 
impact. For older workers, absent transition relief, it is almost 
always highly detrimental, amounting to a significant ``pension pay 
cut.''
    By depriving older workers--especially long service older workers--
of the benefit of their increased years of service and their peak 
earning years (including any early retirement subsidies), employers who 
make this dramatic change break the implicit promises made to older 
workers in the traditional defined benefit pension plan. These 
employees have given up wages and may have made career and retirement 
decisions based upon the expectation of a certain pension benefit, only 
to see that expectation disappear--replaced by the new cash balance 
plan formula under which their age precludes them from earning 
comparable benefits.
    In addition, some older workers may suffer a wear-away period--a 
period of time when no new benefits are accrued under the new plan. 
Older workers thus experience a double whammy--loss of the more 
beneficial defined benefit formula, as well as the lack of time to 
benefit from the new plan formula (with the potential for no new 
benefits at all).
    B. The Specific Adverse Impacts on Older Workers from Conversion to 
a Cash Balance Pension Plan.
    The conversion to a cash balance plan adversely affects older, 
longer service workers in at least four ways:
    1. Conversion deprives older workers of the benefits derived from 
long service and a higher salary they would have received in the 
traditional defined benefit plan.
    A traditional defined benefit plan often has a benefit formula that 
is based on number of years worked and final average salary. In 
addition, the annuity value is determined by number of years from 
retirement age, with greater value for those closest to normal 
retirement age. This final average pay benefit formula design provides 
smaller value in the early years of employment, with the greatest value 
coming in the last years of employment.
    Because this plan is designed to benefit longer service workers, 
older workers generally can accrue larger benefits under this 
traditional type of formula, especially if they are long-service 
workers. Younger, more mobile workers receive less from this plan 
design. A younger worker covered by a traditional formula, in addition 
to being many years from retirement age, generally has a lower salary 
and a smaller number of years of service. The result is a small benefit 
after only a few years of work. As one begins to approach retirement 
age, and as one's salary and number of years in the plan increase, 
benefits begin to grow more dramatically. The bulk of benefits can be 
expected in the years just prior to retirement.
    2.Conversion deprives older workers of early retirement subsidies 
often provided in traditional plans.
    The effect of increasing age and higher salary can be magnified by 
eligibility for an early retirement subsidy. Many traditional defined 
benefit plans include such a subsidy, generally based on a combination 
of number of years of service and age. Older employees who become 
eligible for these subsidies can see an additional spike in the value 
of their pensions. Conversions commonly eliminate these subsidies.
    3. Depending upon the conversion formula, older workers may be 
subject to a significant wear-away, causing them to work for many years 
before earning any additional retirement benefits.
    Compounding the adverse impact of the change in benefit formula, 
the benefits under the new plan, in essence, may take many years to 
catch up to the benefits already earned under the old plan formula. 
During this catch-up period, the employee would accrue no new benefits. 
This freeze of pension accruals stands in sharp contrast to employees' 
expectation that their final years of service would result in the 
greatest increase in their retirement benefits.
    Such a wear-away can occur if the employer designs the conversion 
to give employees an ultimate pension benefit equal to the greater of 
(i) their old formula benefit (earned based on service before the 
conversion and fixed as of the conversion) and (ii) their cash balance 
earned under the new formula. Under this ``greater-of'' approach, as 
long as the frozen old formula benefit exceeds the new formula benefit, 
the participant is not actually earning any additional benefits under 
the plan. The participant's total benefit is effectively frozen after 
the conversion until the new formula benefit grows larger than (wears 
away) the old. This could take 10 years or more. In the meanwhile, 
older participants suffer an age-based cessation of accruals.
    A wear-away can affect participants who retire early as well as 
those who retire at the ``normal retirement age'' (typically 65). This 
is especially true if the old benefit formula provided a subsidized 
early retirement benefit before the conversion. In such a case, a 
participant who qualifies for the early retirement subsidy (before or 
after the conversion) might experience a period of years after 
conversion in which continued service for the plan sponsor generates no 
net increase in the early retirement benefit. This freeze of early 
retirement accruals would continue for as long as the new-formula (cash 
balance) benefit the participant would receive at early retirement age 
remains less than the old-formula benefit she would receive at that 
age.
    Older participants commonly will have more to lose from wear-away 
of subsidized early retirement benefits than from wear-away of the 
normal (typically age 65) retirement benefit. There may be more dollars 
at stake, and most employees retire before age 65.\6\
---------------------------------------------------------------------------
    \6\ For more information on preventing wear-away of early 
retirement benefits, see Appendix B.
---------------------------------------------------------------------------
    Wear-away is neither required nor necessary in a conversion. In any 
event, because wear-away is always based in part on age, it runs afoul 
of the prohibitions against age discrimination. A plan sponsor can, and 
often does, prevent wear-away by providing that the ultimate plan 
benefit is the sum of the participant's benefits accrued under the 
traditional plan (the old formula frozen benefit) and the cash balance 
formula. (This is often referred to as the ``sum-of'' or ``A+B'' 
approach.) \7\
---------------------------------------------------------------------------
    \7\ Because calculation of a wear-away following a conversion is 
based directly on age, it violates the pension accrual laws. ADEA 
section 4(i). While age is not the only element in determining wear-
away, it is an essential element in determining the actuarial 
equivalence of the earned benefit. See Appendix A.
---------------------------------------------------------------------------
    4.Older workers are disadvantaged because they have fewer years in 
which to accumulate significant pension amounts under the cash balance 
formula.
    A typical cash balance formula provides for a much larger accrual 
of benefits at an earlier age than a traditional defined benefit plan. 
Since a younger employee has a longer period of time before normal 
retirement age, the amount in the plan's hypothetical account will 
continue to earn interest credits for a much longer period of time, 
leading to greater benefits. Fewer years until normal retirement age 
means older workers have less compounding and thus smaller benefits.
    As a result, the conversion to a cash balance formula has the 
practical and substantive effect of often dramatically reducing or 
ceasing accruals to the pensions of older and/or long service workers. 
Older employees have reported reductions in their expected benefits in 
the tens and even hundreds of thousands of dollars. In contrast, 
younger mobile workers, who had accumulated little under the prior plan 
design, may see a higher accrual rate.
    In the early years of the traditional plan, an employee receives 
small benefits in return for the promise of greater benefits as the 
employee continues to work. The change in plan design to a cash balance 
plan undermines completely that benefit trade-off. Older workers find 
that having completed those years in the traditional plan when benefits 
were small--and having now reached the stage when benefits will begin 
to grow considerably--the conversion to the cash balance plan deprives 
them of those expected higher benefits. These conversions give new 
meaning to the term ``sandwich'' generation.
    The pension laws generally prohibit plans from reducing accrued 
benefits that an individual has previously earned. However, the law 
does not require an employer to continue any particular plan design, 
nor indeed even continue any plan, into the future. The conversion to a 
cash balance plan uses this permissive nature of our voluntary pension 
system in a way that undermines the expectations of employees. Despite 
having worked for years under a plan design that gave small benefits at 
the beginning but promised higher benefits at the end of one's career, 
the same employees are suddenly switched to a pension package that 
provides the very opposite. Unlike reductions in benefit formulas in 
which everyone may feel the pain equally, a conversion to a cash 
balance plan (absent special transition relief) produces clear winners 
and losers (the losers being the older, longer-serving employees). And, 
in some cases, this has been done in a manner that has masked the 
actual negative effects (as discussed earlier), at least for a time.

          IV. WEAR-AWAY IN A CONVERSION IS AGE DISCRIMINATORY

    The wear-away period often associated with cash balance 
conversions--the period of time after the conversion when no benefits 
are earned--is an unlawful and impermissible reduction or cessation in 
benefit accruals based on age. Because calculation of a wear-away 
following a conversion is based directly on age, it violates the 
pension accrual laws. While age is not the only factor in determining 
wear-away, it is always an essential element. See Appendix A.

                  V. BETTER PRACTICES BY PLAN SPONSORS

    The harm to older workers caused by cash balance conversions has 
given rise to outrage on the part of older and longer-service employees 
who have been affected and a higher level of awareness by other 
employees, including those potentially affected by future conversions. 
(In some cases, employee anger has been exacerbated by the fact that 
some conversions have imposed painful reductions in future benefits--
including wear-aways on older workers--even when the plan had 
substantial surplus assets, and the gains in pension surplus associated 
with this ``pension pay cut'' were used to improve reported corporate 
earnings and consequently increase performance-based executive pay). 
The damage caused by conversions that pulled the rug out from older and 
longer-serving employees has also generated considerable adverse 
publicity, public and employee relations problems for plan sponsors, 
and major court challenges to the legitimacy of cash balance plans and 
practices.
    As controversy erupted over cash balance conversions, the Internal 
Revenue Service in the fall of 1999 suspended its issuance of 
determination letters approving cash balance plan conversion 
amendments. Treasury and IRS announced that they were reviewing the age 
discrimination and associated legal issues raised by conversions, and 
received hundreds of public comments.
    This controversy and related developments convinced many plan 
sponsors to address the transition problems raised by conversions. 
While conversions in previous years were often unprotective, many 
employers have more recently addressed the transition issue by 
providing relief to their older, longer-service workers. More and more 
companies--fearful of negative media attention and the reaction of a 
more knowledgeable workforce, and concerned that their actions might be 
age discriminatory or otherwise unlawful--have designed more and better 
transition protection. This protection has come in a number of forms. 
Many companies have simply permitted their older employees the option 
of staying under the old formula, while others have automatically 
grandfathered older and/or longer-serving employees in the old formula. 
Some, like CSX, whose CEO at the time was Treasury Secretary John Snow, 
did not apply the conversion to any existing employees. Other companies 
have provided added benefit protections such as significantly higher 
pay credits or opening balances for older workers. In short, many in 
the private sector have responded to the problems with cash balance 
conversions by raising the bar for transition protection.

     VI. ACTIVITY IN THE EXECUTIVE BRANCH, CONGRESS, AND THE COURTS

    In December 2002, Treasury and IRS proposed regulations that would 
have given a green light to plan sponsors to again convert their 
traditional plans to cash balance plans without adequate protection for 
employees. (67 Fed. Reg. 76123). The proposed regulations would have 
protected the cash balance design under the age discrimination and 
other statutory provisions without adequately protecting participants. 
The regulations had they become final would, in effect, have blessed 
conversions that are not protective--thus plan sponsors would have been 
less likely to offer their employees choice, grandfather employees in 
the old plan formula, or use other protective practices that many 
companies had already adopted. Worse yet, the regulations would have 
permitted age-based wear-away periods, a practice clearly contrary to 
the letter as well as the spirit of the age law, and simply bad 
retirement policy.
    In 2003, many thousands of individual contacts regarding the 
proposed regulations were made to Treasury by workers concerned about 
the impact of conversions on their pension benefits. (Over 60,000 
contacts were made to Treasury and elected officials through the AARP 
Web site after the proposed regulations were issued). In July 2003, 
while Treasury was considering comments on its regulatory proposal, a 
Federal district court ruled that the basic common cash balance plan 
design impermissibly reduced the rate of benefit accrual on the basis 
of age and thus violated ERISA's age discrimination provisions (Cooper 
v. IBM Personal Pension Plan and IBM Corp., 274 F. Supp. 2d 1010 (S.D. 
Ill. 2003)).\8\ (See Appendix A). IBM appealed the decision to the 
Seventh Circuit Court of Appeals, where the appeal is still pending.
---------------------------------------------------------------------------
    \8\ Other Federal Courts have ruled differently, holding that the 
basic cash balance design is not age discriminatory. See Appendix A.
---------------------------------------------------------------------------
    Following the IBM decision, Congress responded to Treasury's 
proposed regulations by passing amendments to the Treasury 
appropriations legislation that, directed Treasury and IRS to stop work 
on the regulations and instead to put forward a legislative proposal 
providing transition relief for older and longer-service participants 
affected by cash balance conversions. In response, Treasury withdrew 
the proposed regulations \9\ and made a legislative proposal (included 
in the Administration's fiscal year 2005 and fiscal year 2006 budgets). 
We were pleased that Treasury's legislative proposal recognized the 
problem with wear-away and the unfair treatment of older workers and 
recommended a ban on any wear-away of benefits at any time after a cash 
balance conversion.\10\
---------------------------------------------------------------------------
    \9\ See IRS Announcement 2004-57, in response to Section 205 of the 
Consolidated Appropriations Act of 2004, Pub. L. 108-199, which 
prohibited the use of Federal funds to issue any rule or regulation to 
implement the proposed regulations.
    \10\ The Treasury proposal would provide that hybrid plans are not 
age discriminatory and would permit cash balance plans to distribute 
the participant's account balance as a lump sum provided that the plan 
does not credit interest in excess of a market rate of return. The 
proposal states that it is prospective only.
---------------------------------------------------------------------------
    In recognition of the transition problem faced by workers, the 
Treasury proposal also included a 5 year ``hold harmless'' period after 
each cash balance plan conversion. This would require that each 
participant's benefits under the cash balance plan for each of the 5 
years after the conversion be at least as valuable as the benefits the 
participant would have earned under the traditional plan had the 
conversion not occurred. While the proposal is a step in the right 
direction, it is not sufficiently protective of older, longer-service 
workers, and it fails to reflect ongoing trends in the marketplace. In 
addition, because the transition problem is largely one that impacts 
older and longer service workers, any proposal can be tailored more 
narrowly to protect this more vulnerable class of workers. More recent 
conversions have afforded more protection to older workers. These 
trends, not adequately reflected in Treasury's proposal, are further 
confirmation that employers can and should do the right thing for their 
employees. Instead of lowering the bar, Congress now needs to hold all 
companies that voluntarily choose to convert to a cash balance plan to 
a standard that many companies have been willing and able to meet on 
their own.
    One approach that AARP has supported was introduced by Senator 
Harkin in the 108th Congress. It would require employers that convert 
to cash balance plans to allow employees who are at least age 40 or 
have at least 10 years of service the choice to remain under their 
traditional pension formula until retirement instead of switching to 
cash balance. In addition, other approaches have been discussed, such 
as choice or grandfather treatment for employees whose combined age and 
service exceed a specified number of ``points'' (e.g., 55).

                    VII. WHAT CONGRESS SHOULD DO NOW

    AARP believes hybrid plans have a role to play in the private 
pension system if--and only if--they are designed and adopted in a 
manner that protects the millions of older workers who have given up 
wages in exchange for traditional defined benefit pensions. Provided 
that protections for older and longer-service workers can be adopted, 
AARP could support the enactment of a reasonable legislative solution 
that would provide legal certainty for cash balance plans. Legislative 
protections should codify the better practices that many employers have 
already chosen to follow when converting to cash balance, such as 
eliminating wear-away of early as well as normal retirement benefits 
and adequate grandfathering or hold-harmless protection for those 
workers who are vulnerable in conversions. Treasury's proposal is a 
step in the right direction. However, its 5 year hold harmless period 
falls short of what would be adequate and of the better practices many 
employers have followed. At the same time, the more adequate 
protections could be crafted to preserve flexible options for plan 
sponsors. Among other things, the protections could appropriately be 
limited to a narrower class of employees than the Treasury proposal 
would cover--to those employees whose age and years of service exceed a 
specified level. In addition, we are open to considering other 
alternatives that adequately protect older, longer-service employees.
    Of course, AARP would oppose legislation that would legitimize 
hybrid plans that are unfair and harmful to older, longer-service 
employees. The cash balance structure deserves protection from legal 
challenges only if it protects older workers from the harm caused by 
moving to that structure. Now that many employers have recognized the 
harm and have raised the bar by providing reasonable protections, 
Congress must not now lower the bar by enacting weakening legislation 
that invites the market to return to the lower standards of the 1990s. 
Instead, Congress now needs to hold all companies that voluntarily 
choose to convert to a cash balance or other hybrid plan to a standard 
that many companies have been willing and able to meet on their own.
    We look forward to working with Congress, the Administration, 
employees and retirees, plan sponsors, and other stakeholders to forge 
legislation that will strengthen defined benefit pension plans, protect 
older workers, resume the IRS determination letter process, and address 
the legal uncertainty surrounding cash balance pension plans.

                               APPENDIX A
CASH BALANCE PLANS VIOLATE THE AGE DISCRIMINATION LAWS BECAUSE THE RATE 
             OF BENEFIT ACCRUAL DECREASES ON ACCOUNT OF AGE

    Cash balance plans that incorporate a uniform allocation or 
interest credit rate formula--as they typically do--violate section 
411(b)(1)(H) of the Code and the counterpart provisions of the ADEA and 
ERISA (ADEA section 4(i) \11\ and ERISA section 204(b)(1)(H)) because 
benefits accrue at a lower rate for older employees than they do for 
younger employees. See Cooper v. IBM Personal Pension Plan and IBM 
Corp., 274 F. Supp. 2d 1010 (S.D. Ill. 2003).\12\
---------------------------------------------------------------------------
    \11\ ADEA  4(i)(A), 29 U.S.C.  623(i)(A), makes it unlawful for 
an employer: `` . . . to establish or maintain an employee pension 
benefit plan which requires or permits (A) in the case of a defined 
benefit plan, the cessation of an employee's benefit accrual, or the 
reduction of the rate of an employee's benefit accrual, because of age 
. . . ''
    \12\ Other district courts have analyzed the issue differently. The 
benefit accrued issue in the Cooper v. IBM district court decision has 
been appealed to the Seventh Circuit Court of Appeals.
---------------------------------------------------------------------------
    Cash balance plans reduce the rate of benefit accrual based on age 
in two ways. The first is the age-based reductions in benefit accrual 
rates inherent in the cash balance formula itself. This age-based 
decline in accrual rates affects all employees in a cash balance plan. 
The second is reductions in accrual rates suffered by older workers 
under the cash balance plan when compared to the old plan (due either 
to a wear-away or to the lower rate of accrual in the cash balance 
plan).
    Because calculation of a wear-away following a conversion is based 
directly on age, it violates the pension accrual laws. While age is not 
the only element in determining wear-away, it is an essential element 
in determining the actuarial equivalence of the earned benefit. 
Moreover, declining accrual rates in cash balance plans based on age 
are the diametric opposite of the often increasing accrual rates in 
traditional defined benefit pension plans. For this reason, conversions 
to cash balance pension plans can have a dramatic impact on the 
retirement security of older employees.

                               APPENDIX B
   LEGISLATION SHOULD PREVENT THE POST-CONVERSION WEAR-AWAY OF EARLY 
                          RETIREMENT BENEFITS

    1. Early Retirement Wear-away Should Be Prevented By Use Of The 
Sum-Of Approach For Subsidized Early Retirement Benefits.
    As noted, a wear-away period can occur if, as is often the case, 
the traditional defined benefit plan provided a subsidized early 
retirement benefit before the conversion. In such a case, a participant 
who qualifies for the early retirement subsidy (before or after the 
conversion) might experience a period of years after the conversion in 
which continued service for the plan sponsor generates no net increase 
in the early retirement benefit because the value of the new-formula 
benefit at early retirement age remains less than the value of the old-
formula benefit at that age.
    Any cash balance plan legislation should make clear that this type 
of wear-away period (an ``early retirement benefit wear-away'') as well 
as normal retirement benefit wear-away--is prohibited. Early retirement 
benefit wear-away can affect many participants in converted plans, 
including those who are subject to a wear-away of their normal 
retirement benefit. The harm to older workers and the age 
discrimination concerns raised by the normal retirement benefit wear-
away also apply to the early retirement benefit wear-away. Moreover, an 
early retirement benefit wear-away can continue long past the time when 
a normal retirement benefit wear-away has ended.
    The early retirement benefit wear-away can be prevented by 
grandfathering or by applying the ``sum of'' (or ``A + B'') approach 
described above to early retirement benefits. (This could be done in 
tandem with a similar approach to normal retirement benefits or an 
adequately protective ``greater of'' approach with an appropriate 
opening account balance for normal retirement benefits). As a result, a 
participant who retired while entitled to a subsidized early retirement 
benefit under the old formula would receive the sum of that subsidized 
early retirement benefit annuity and the excess of the cash balance 
account over its opening account balance (in other words, the 
subsidized early retirement annuity plus the increase in the cash 
balance account).
    Consistent with the nature of subsidized early retirement benefits, 
this approach would be contingent. It would not apply unless the 
participant was entitled to a subsidized early retirement benefit under 
the terms of the old plan formula at the time the participant took his 
or her benefit under the converted plan (whether the participant first 
qualified for the subsidized early retirement benefit before or after 
the conversion).
    The plan sponsor could offer the participant the choice of taking 
the increase in the account balance as a lump sum, as opposed to taking 
it in the form of an annuity that is added to the old-formula 
subsidized early retirement annuity.
    2. Incorporating The Early Retirement Subsidy In The Opening 
Account Balance Would Be Inappropriate.
    Incorporating the value of the early retirement subsidy in the 
opening account balance would violate the prohibition against age 
discrimination. If the opening account balance were allowed to 
incorporate the value of the early retirement subsidy from the old 
formula, older participants could be given smaller opening account 
balances--and also smaller lump sum distributions upon retirement--than 
otherwise identical younger participants who qualify for the early 
retirement subsidy. In addition, because the subsidized early 
retirement benefit is contingent, including the subsidy in the opening 
account balance of all participants could create substantial windfalls 
for those participants who ultimately do not qualify to receive the 
subsidy.

    The Chairman. I want to thank all of you for your testimony 
and for providing it briefly for us. Your full testimony will 
be a part of the record.
    I want to know some more about this wear-away. Mr. 
Sweetnam, could you explain the issue and how it is different 
in conversions to hybrid plans than changes made in traditional 
defined benefit plans?
    Mr. Sweetnam. What the wear-away is--and we call it a 
benefit plateau--is where you have a protected benefit. The law 
protects everything that you have accrued up until the time of 
a change. So where you have that protected benefit, you are 
always going to get that.
    What happens sometimes when you start a new cash balance 
plan, is that you will have a benefit under the new cash 
balance plan that may be lower than the protected benefit. Now, 
there are a couple reasons why that benefit may be lower. One 
may be because of changes in interest rates because sometimes 
what you do when you start off a new cash balance plan is that 
you take your old benefit and convert it into a lump sum 
distribution and make that your opening account balance. Well, 
if the interest rates changes on the protected benefit, that 
will mean that there is a wear-away. Some people call that 
inadvertent wear-away.
    Another thing that can happen is, is that if you have under 
your protected benefit, early retirement subsidies--and an 
early retirement subsidy is something where you are promising 
really an increase in benefits for those people that leave 
early. But that increase in benefit goes down over time as you 
get closer to normal retirement age. One of the things that can 
happen in wear-away is where you have set up your cash balance 
benefit without including early retirement subsidy, something 
that I would note that AARP thinks is age discriminatory if you 
put early retirement subsidies in that opening account balance.
    So here if you leave early, you may have a period of time 
where that early retirement subsidy, you take that under your 
old benefit formula, your old protected benefit formula, and 
that might be greater than the other benefit formula.
    There was a third type of wearaway which really is not used 
that much, and that was where people set up that opening 
account balance using a very different interest rate than the 
current interest rate used to pay out benefits. Since the 
current interest rate used to pay out benefits, which is based 
off of the 30-year Treasury rate, it is so slow many companies 
did not do that, and our testimony talks a little bit about 
that.
    The Chairman. Could you also cover the whipsaw theory of 
liability a little bit so that we know how it affects the 
employer's behavior and the employee's benefits?
    Mr. Sweetnam. Whipsaw is when you decide how much the 
benefit has to be paid out when you convert a benefit stream 
into a lump sum distribution. The way that you--the law says 
that you must calculate a lump sum distribution--is you take 
the future payment stream and you discount it using the 30-year 
Treasury rate. So if you were going to take an immediate 
distribution from your cash balance plan, what you do is you 
take the interest rate that you are guaranteeing under your 
cash balance plan, use that interest rate to determine what the 
benefit would be at age 65, discount that back to current using 
the 30-year Treasury rate.
    Well, if you use an interest rate that is different than 
the 30-year Treasury rate, what you are going to have is a 
benefit that is higher in doing this discounting than the 
benefit that you had actually promised people.
    Now, unfortunately what this does is either one of two 
things. It forces employers to use as a crediting rate the 30-
year Treasury rate, which makes employees a little bit mad 
because they know that the company is making more money in that 
pension plan than the 30-year Treasury rate. And then, No. 2, 
what it does is that if a company tries to do a good thing and 
do a better interest rate crediting, what happens is that they 
have to pay even more money than was actually promised. 
Unfortunately, there have been three circuit court cases that 
have confirmed this whipsaw theory, and I believe that it is 
something that the Congress really has to address.
    Mr. Certner. Mr. Chairman, I think this is a classic 
example of why the hybrid cash balance plan does not fit within 
the DB plan rules.
    The Chairman. I got that from your testimony.
    Mr. Certner. The whipsaw is exactly something----
    The Chairman. I really need to ask Ms. Collier a question 
here. I am sure you will get some other opportunities to speak 
on it.
    Ms. Collier, given what you know about the uncertainty of 
the law in the hybrid plans, what do you think Eaton would have 
done with its traditional plan, keep it or convert it to a 
401(k) plan? If the law is not clarified soon would you 
unconvert the hybrid plan and return to traditional design?
    Ms. Collier. I am dreading that possibility. I can honestly 
say that we would not entertain the notion of just completely 
reverting the employees who converted voluntarily via our 
choice program back to a traditional program. I have already 
seen from peer companies in my industry and elsewhere, with the 
uncertainty around cash balance plans, what employers by and 
large have already started to choose to do is to freeze the 
defined benefit plan and just put in 401(k) plans. I have 
served as a recommendation for different firms, and people come 
to me based on our experience, and they are not coming any more 
asking about switching to a cash balance plan. They are all 
abandoning the retirement program and just putting in the 
401(k) plan.
    The Chairman. Thank you. My time has expired.
    Senator Mikulski?
    Senator Mikulski. I want to thank all members of the panel 
for their testimony.
    Essentially my State represents kind of what is happening 
and why there would be a need for a hybrid plan. Most of the 
jobs in the Baltimore community, and even those who work for 
Government were defined benefit. We are transforming ourselves 
into an innovation economy. Research, technology, development, 
biotech, infotech, you name it, and younger workers are very 
different.
    This then takes me--I could ask questions to all of you, 
but, Ms. Collier, I would like to stick with you because you 
actually went through this. No. 1, what do you think helped 
with the whole issue of morale and also to protect you from 
lawsuits around the so-called age discrimination? It is not so 
much age discrimination, it is the length of time, the length 
of work time issue. You could go to work, for example, in a 
defined benefit plan, particularly in manufacturing, at age 20 
and 30 years later you are 50, so you would be eligible for 
that famous 30-years-and-out that so many workers did.
    Ms. Collier. Right.
    Senator Mikulski. Could you tell me, No. 1, you had good 
information. What all did you do that managed the morale issue 
and the information issue, and would that be lessons learned? 
And would you recommend that that type of information 
requirement be mandated?
    Ms. Collier. Well, actually we did follow, Senator 
Mikulski, some requirements that came out. When we were 
designing our program, wear-away was a big issue and disclosure 
was a big issue, and Congress passed a law in 2001 enhancing 
the disclosure requirements. And we feel like we equaled or 
exceeded those.
    We also learned from past practices of other employers and 
we built upon those, and I think that is a common thread 
throughout industry. We had a very, very detailed communication 
campaign. We had over 250 meetings at our 100 sites throughout 
the country, Web sites.
    Senator Mikulski. So you went over and beyond the Federal 
requirement which is why people----
    Ms. Collier. Yes, we did. We went over and beyond the 
Federal requirement, but I think a lot of employers do 
voluntarily. There is about 90 percent in a survey from Watson 
Wyatt last year that would indicate that about the high 80s or 
low 90s of employers do provide transition benefits.
    Senator Mikulski [continuing]. Did that manage the morale 
and deal with the fear issue?
    Ms. Collier. It did. We did not have one complaint on our 
cash balance conversion, and in fact, I think people were very 
grateful for the opportunity. We had a lot of confusion within 
Eaton. We used to be strictly in the automotive and truck 
industry and we are in five businesses.
    Senator Mikulski. I understand. Let us go to the so-called 
length of time possible discrimination issue, and then the 
concern over real lawsuits, the copycats, etc. That is why 
people are bailing out of hybrid and going to 401(k) because 
they do not have to deal with it. Is that right?
    Ms. Collier. Yes. And I think----
    Senator Mikulski. But here is my question, which is how did 
you deal with it? What did you do to be able to deal with these 
two different types of pensions now, and how did you deal with 
the older employees?
    Ms. Collier [continuing]. The older employees, we did not 
want to preclude them, because our transition methodology was 
choice. And I have been involved in others where it was 
transition credits or grandfathering or a variety of 
techniques. But because ours was choice we did not want to 
preclude the older employees from choosing into the cash 
balance plan.
    Senator Mikulski. Well, walk me through the case study. 
Could your workers actually--they could choose to stay with 
the----
    Ms. Collier. Stay in their plan, and we had 5 or 6 
different plans that they were already in, or they could choose 
into. It was a one-time option to choose into the cash balance.
    Senator Mikulski [continuing]. Let me ask it in my own way.
    Ms. Collier. OK.
    Senator Mikulski. For those who had been 20 years, they 
could choose to stay in the defined benefit or whatever was the 
version of those 5 plans, or they could transfer into the new 
plan.
    Ms. Collier. Yes.
    Senator Mikulski. And that was up to them. But once you 
made your choice, that was it. You could not say, whoops or----
    Ms. Collier. No. But in order to prevent the whoops we had 
individualized packages, we had Web sites that you could model 
your own interest rates. We fully disclose the wear-away and 
the impact of it in meetings and individually on people's 
statements and hypothetically.
    Senator Mikulski [continuing]. How did you deal with the 
issues on which lawsuits are usually done? Was it because you 
offered choice, or how did you deal with it economically?
    Ms. Collier. Well, the lawsuits at the time we were looking 
at the plan actually were coming down in favor of the plans not 
being age discriminatory, but obviously we looked at those, and 
we felt that choice and heavy disclosure would prevent us from 
being exposed to lawsuits.
    Senator Mikulski. And has your legal counsel advised you 
that then under current law that would be compliant, or are you 
scared that in the absence of better legal clarification and 
some of the recommendations that we would hope to build on a 
consensus.
    Ms. Collier. We are very concerned about absent legal 
requirements and legal clarification.
    Senator Mikulski. So in other words, we could end up 
penalizing the good guys.
    Ms. Collier. Absolutely.
    Senator Mikulski. Which is the 401(k). You are kind of on 
your own. In some companies it is almost Darwinian, but here 
you are trying to have the benefits of protecting one school of 
thought or approach to work, and then as well as the new 
workers who will be portable?
    Ms. Collier. Yes.
    Senator Mikulski. Yet you feel that because the hybrid 
plan, even though they say they might move in 4 or 5 years, 
there would be now a stake in them staying because you have a 
good pension.
    Ms. Collier. Right.
    Senator Mikulski. And it is clear and in some ways you have 
the information about what to expect.
    Ms. Collier. Yes.
    Senator Mikulski. What you are worried about, that for 
these efforts to accommodate the new economy, you could be 
penalized because we have an outdated framework.
    Ms. Collier. Absolutely, and we were making our decisions 
in good faith based on a lot of legislative guidance that was 
out there at the time, and we had actually received a 
termination letter on our plan. We received that prior to the 
choice process. So we had a lot of guidance that would indicate 
we were within legal boundaries.
    Senator Mikulski. Thank you.
    And I appreciate--for the men there, it was excellent, but 
I am kind of a case study person and this was very helpful to 
me. Thank you.
    The Chairman. Senator Isakson?
    Senator Isakson. If I can, I want to follow up with Ms. 
Collier for a second. Evidently Eaton had made a number of 
acquisitions, so how many different defined benefit plans did 
Eaton have?
    Ms. Collier. That were involved in the conversion, we had 
6, and then we have about 15 represented plans including two 
multi-employer plans.
    Senator Isakson. When you made this acquisition of the 
company that had 5,000 employees who had no plan, that was kind 
of the trigger to say, hey, we need to take a look at what we 
are going to do--we are a growing company--for the future. And 
that is when you created the choice and the cash balance 
option. So the other 5 plans, people had the choice, if they 
were vested in any of those 5 plans, to stay in that plan----
    Ms. Collier. Actually, even if they were not vested.
    Senator Isakson [continuing]. Even if they were not vested 
they had the choice of staying in that plan or opting out cash 
balance; is that correct?
    Ms. Collier. Correct.
    Senator Isakson. Mr. Certner, I want to ask you a question, 
and I want to try and frame this in the right way because I 
think it gets to the heart of this issue. Eaton was a growing 
concern from a relatively small business to what anybody would 
consider to be a significant national company, large number of 
employees, multiple State, etc, and in those acquisitions and 
in the different plans it finally found itself in a position 
where it wanted to centralize its benefit plan, create a 
mechanism where it was as fair and uniform as possible for both 
new acquirees as well as older people.
    In your statements about the issue on age discrimination 
and defined benefit plans you kept referring to expectations of 
employees. Now here is my question. It sounds to me like Mrs. 
Collier's company, Eaton, by offering choice, allowed anybody 
who had earned any level of defined benefit to have the choice 
to keep it or have the choice to go out, but did not allow 
anybody to be guaranteed expectations if they had done other 
things. I guess what I am saying is on this whole age 
discrimination issue and on the whole issue of benefits, it 
seems like we have to deal with what people should expect, 
reasonably expect, and what companies should be able to expect 
to be able to deal with changing times. I would like for you to 
address that for a second.
    Mr. Certner. If I understand what Eaton has done, which is 
basically to give all of the employees choice of which plan to 
go into, we have no problem as a matter of policy with that 
kind of decision. We think a cash balance plan is a legitimate 
plan design that a company may wish to choose as a matter of 
policy, and as long as the older workers are protected--I think 
they even went beyond that by providing it to all workers--then 
we do not have any problem with that as a matter of policy.
    Of course what I have said earlier, and I think what the 
courts have said, is that, regardless of what we may think is a 
good policy, that we are still dealing with the law today and 
we think the law basically is saying that these hybrid cash 
balance plans do not exist under the framework that we 
currently have today, but as a matter of policy we think it is 
appropriate to change that framework to make sure that we can 
do plans like cash balance plans in the future, so long as we 
are doing what we did in our company, which is to protect the 
old workers, to let them stay in the old plan if they wanted 
to. That way you can adapt your plans to changing times while 
still protecting the people who have already put a lot of years 
into a plan where really in the traditional plan context, you 
do not earn a whole lot in those early years in the plan, and 
so if they are protecting them by keeping them in the plan, we 
have no problem with the policy that has been accomplished by 
her company.
    Senator Isakson. It seems to me, continuing on that theme 
for a second, it seems to me that we are at a point of where we 
are going to go one direction or another. We do not have the 
luxury of much time. We have to deal with the Cooper v. IBM 
case. We have to deal with that one way or another. Second, we 
have to deal with the reality of what is happening in the 
workplace, and I am dealing with it in terms of aviation 
pensions right now.
    It seems like to me that if we can provide companies with 
the ability to preserve benefits to the maximum extent possible 
and make conversions for the future so there is an option for 
defined benefits, we are far better off than if we take a 
position that because current law says X based on 
interpretation, we are going to force all plans to go into just 
401(k) type plans. If we take your testimony out to the Nth 
degree in terms of what we did here in Congress, would we not 
more or less, based on what Mr. Sweetnam and Ms. Collier said, 
be in a position where everything is going to be just defined 
contribution plan and there will be no defined benefit plans?
    Mr. Certner. Yes, and we do not think that would be a good 
approach, and so the cash balance concept is not a bad idea as 
a matter of policy. It does have a number of benefits we think 
for employers. As long as we deal with the transition issue for 
employees who are currently under the traditional plan we think 
we can make this work, and we think we can create a good 
statutory framework and amend the law to make sure that cash 
balance plans are legal, are not subject to challenge at the 
same time that we protect the older workers' benefits.
    Senator Isakson. I see my time is up. I will yield back.
    The Chairman. Senator Kennedy?
    Senator Kennedy. Thank you, Mr. Chairman. I want to thank 
our Senators Mikulski and DeWine for helping so much in 
chairing this hearing this morning, and I thank you as well for 
the focus and attention you have given this issue previously. 
Our general roundtable was enormously helpful and valuable, and 
your working with the Finance Committee, all of us hope that we 
can work together. We do have some shared responsibility, and I 
thank all of those who have worked to bring us to this point. 
We have some important meetings that are coming down the road 
next week, next Thursday I believe.
    I think all of us were struck this morning when we saw in 
the Post and the major report in the New York Times as well 
about the pension plans falling further behind this whole 
reporting process. I was here at the time when we passed that 
ERISA in 1974 I believe. I think we are going to get a lot of 
questions about that reporting. We are not getting into that, 
as I understand, today, but this is just one additional feature 
of a very complex but enormously important kind of issue in 
terms of retirement security that I think is increasingly of 
concern to workers as they have listened to the debate and 
discussion on Social Security, as they see a lot of their 
savings gradually disappear, the costs going up in so many 
different areas, and these pensions so at risk.
    I think what we have seen is what has happened with the 
single pension program, and I think we heard earlier--I will 
look forward to read through the testimony--about the 
importance of taking action now with the multi-employer. We 
have an opportunity to take action now, and with the combined 
sort of recommendation of business and labor to make some very 
important progress. I think the points that are being made here 
again this morning by our panel are excellent and very, very 
important to us.
    But generally, when people start talking about pensions 
their eyes glaze over when the words just come out of your 
mouth, but I think what we are finding out in real terms, this 
is at the heart and the soul about security for millions of 
Americans, and we have to address it.
    I welcome Senator Isakson mentioning about the airlines, 
because we are not going to look at dealing with these kinds of 
issues. We are just going to be so far behind the ball. And I 
am troubled that we have not gotten some recommendations from 
the administration to deal with this issue here.
    I do not know, just in the time I have left, Mr. Certner, 
whether you have reacted or responded to the administration's 
general proposal. Have you commented on that earlier? I 
apologize if you have. I do not want you--I will take the 
opportunity to read on through it, but if you might want to 
just use the few minutes I have left to just sort of elaborate 
on it.
    Mr. Certner. I think you are referring to the funding 
proposal from the administration. I think we are facing a very 
difficult time in the pension funding world because we are 
coming out of a time period where we have had some downturn in 
the market, we have lower interest rates which means 
liabilities are going to be projected to be larger, and we have 
had a little bit of a slower time in the economy, and so many 
companies right now are finding it very difficult to make up 
some of the funding shortfall that they have seen. I think some 
of the numbers you probably see in that report is suggesting 
that funding shortfall has really grown pretty substantially 
because we have had this kind of perfect storm of events I 
think that are affecting companies dramatically.
    But in part, the PBGC is really designed to fill in the 
gaps when these kinds of times occur. If companies did not go 
under and lose some of the benefits for individuals, we would 
not need a PBGC in the first place. So the fact that the PBGC 
would have to step in now and then I think is anticipated. The 
fact that we are going to have some bad times when there is 
going to be more stress on the PBGC I think is going to be 
anticipated, and I think as we move forward and try to correct 
some of the funding inadequacies, we really do have to make 
sure we meet that proper balance of ensuring that plans are 
properly funded to pay their future benefits, but not overly 
burdened so that they will want to get out of the system. I 
think that is the kind of balance that we are all struggling 
with right now.
    Senator Kennedy. Do you favor a moratorium now, ending 
pensions over a period of time till we have an opportunity to 
address these issues in the Congress? Should we give some 
thought to that as well?
    Mr. Certner. Well, I do not know that we need to act 
precipitously about matters for the PBGC. It is not an 
immediate cash flow crisis. They can certainly continue to pay 
benefits for years and years.
    Senator Kennedy. What, have they gone from, what 23 billion 
surplus to what is it now? What are the figures now?
    Mr. Certner. They are in the red now. I am not sure what 
the latest numbers in this report are. I mean I think that is 
what you saw happen when the stock market burst, when interest 
rates went down with the slower economy, you suddenly saw a 
dramatic turnaround. A dramatic turnaround in the whole economy 
affects the PBGC just as much as it affects the rest of the 
economy, and PBGC is really seeing and experiencing the 
negative effects of that economy now.
    Senator Kennedy. As I understand, it is 23 billion in 
deficit now at the present time. Have this panel or earlier 
panels commented upon these retirement programs, the fairness 
issues that have been raised? Have you talked about that at all 
today? I do not know whether any of you have. I can see the 
blinking red light here. Any of you have any particular, 
comments about this previously, written about it, thought about 
it, or have some recommendations on some of those issues which 
are the basic equity issues where the workers got short shrift 
and there is substantial benefit that goes to the CEOs?
    Do not all jump in on that at one time.
    [Laughter.]
    Mr. Certner. Senator, one of the problems that employees 
certainly are facing is that they obviously are not the ones 
that caused the pension underfunding problem. They are now 
perhaps close to retirement. They are looking and depending on 
these pension plans. Many of them may be seeing dramatic 
reductions in their expected pensions. There are some proposals 
out there to further reduce, for example, the amounts that 
individuals can take out of the plans, and I think we have to 
be very cautious about what we are doing particularly to 
individuals who are at or near retirement and changing their 
benefit expectations, when they in essence had no control, no 
responsibility over the funding of these plans.
    Senator Kennedy. Thank you, Mr. Chairman. Thank you very 
much.
    The Chairman. Thank you.
    Senator Harkin?
    Senator Harkin. Thank you very much, Mr. Chairman, and 
thank you for holding this hearing, Mr. Chairman. The issue of 
cash balance pensions, especially conversions, is one I have 
been involved in for a long, long time, and last year I called 
together a number of people in this room to start meeting on 
this and to try to work out a broad consensus to get over this 
hump on this thing. I know my staff has had many more meetings 
with some of the people here today.
    I think both employee and employer groups seem to be asking 
for some kind of retroactive guidance. We need a clearer 
picture of rights and responsibilities, and we need to find 
some common ground on which to proceed.
    I have never been one opposed to cash balance plans. I want 
to make that clear. Under the new kinds of work that people are 
doing, and people do not sometimes stay with a company for 40 
years like they used to. I mean people shift jobs a lot in our 
society today, and cash balance plans answer that kind of a 
need.
    The real rub comes though is when you convert, and the 
terrible thing that has happened to so many people by companies 
converting from a defined benefit plan to a cash balance plan. 
I happen to agree with whoever said that they are not--these 
really are not defined benefit plans, by the way, and what 
happens with wear-away.
    Again, I remind people here that I had an amendment, a 
sense of the Senate resolution I offered in the Senate in 2000. 
It was approved overwhelmingly by the Senate, that wear-away 
should not be permitted, should not be permitted. That was in 
2000. So we have got to find a way that we can, if the 
companies want to make the conversions, it is done fairly, but 
that protects the accrued benefits of the older workers.
    I think the Treasury Department, I think, is a pretty good 
starting point. I want to particularly thank Secretary Snow--I 
will say that publicly--for the approach set forth in their 
proposal. It is a vast improvement over the proposed regulation 
of December 2002. Senator Durbin and I met with Secretary Snow 
in January of 2003 just prior to his confirmation vote, and he 
said he had worked for fair transition rules. We talked about 
the rules that they had had at the CSX Railroad from which he 
had come. So I believe that Treasury's legislative proposal is 
a good starting point. So again, the issue here of trying to 
protect older workers.
    Now, Mr. Certner, before I left to take a phone call you 
were about to respond to an issue of wear-away that Mr. 
Sweetnam was talking about, and I wanted to ask you to finish 
your thought on that because I want to say something about it 
too, but I wanted you to finish your comment on the wear-away 
situation.
    Mr. Certner. Thank you, Senator. I do want to thank you for 
your leadership on this issue because I think some of the 
actions you have taken earlier on has enabled Treasury to put 
out a better more constructive proposal that we can work from.
    Wear-away is based on many factors, how many years you have 
worked, what the plan design is, but always age is a factor in 
determining the length of the wear-away. And the law is very 
clear that you cannot stop or reduce pension accruals based on 
someone's age, and in a wear-away situation, clearly the older 
you are, the longer your wear-away period. We have seen wear-
away periods, and these are periods in essence where you are 
running in place, you are not earning any additional pension in 
the plan because your benefit in the new plan still has not 
caught up to what you would have gotten in the old plan. We 
have seen wear-away periods that can be 15 years. These are 
clearly violative of the letter and spirit of the law, and we 
believe that they are illegal currently today. We are glad that 
treasury has formally said we should ban all forms of wear-
away. We are glad that most companies now have moved away from 
having a wear-away situation. You do not need a wear-away when 
you do a conversion to a cash balance plan. But we think they 
are illegal today and we would welcome the law clarifying that.
    Senator Harkin. How do you feel--I will ask all three of 
you, starting with Mr. Sweetnam--how do you feel about the 
opportunity for older, longer-serving workers to choose between 
an old and a new plan, and what would you think about what 
would the period of grandfathering be that you might come up 
with, Mr. Sweetnam?
    Mr. Sweetnam. Well, the American Benefits Council is very 
concerned about having that sort of a grandfathering provision. 
Plans are voluntary, and we do not want to have a one-size-
fits-all solution. By having some sort of a mandatory 
grandfather, what that is saying is that you cannot change your 
plan, you as an employer cannot change your plan with regard to 
those employees. Now, that is very different than being able to 
change your plans in order to react to changes in the workplace 
and to moving into this.
    Now, we think that currently the marketplace has been 
working in a way that people are reflecting, companies are 
reflecting those sorts of concerns, but let the marketplace 
work and let it be not one-size-fits-all, but let everybody do 
what best suits their particular market.
    Senator Harkin. Are you opposed to letting a person, let us 
say an older worker who is aged 45 or 50, who has participated 
in a plan for 20 years, and the company wants to put in a cash 
balance plan. Are you opposed to having that person choose 
between keeping the defined benefit plan or having to go on the 
cash balance plan?
    Mr. Sweetnam. I am not opposed--the Council is not opposed 
to allowing that to happen. We are opposed to mandating that 
happening. For example, what if you were in a situation where--
--
    Senator Harkin. So then you are saying that a company can 
come in, go to cash balance and force a wear-away, you are all 
for that?
    Mr. Sweetnam [continuing]. Senator, wear-away is actually a 
concept that has been used in various other situations with 
regard to changes in law that have come out of congressional 
mandates. For example, caps on the amount of compensation that 
you can have. When that cap was put in, Congress allowed and 
the IRS mandated that one way that you could reflect this was 
to do wear-away, wear-away those higher benefits. And so wear-
away is a concept that is littered throughout employee 
benefits.
    Senator Harkin. And congress has said, we do not want that 
to happen in cash balance conversions because it is unfair.
    Mr. Certner. The Treasury has proposed doing away with 
wear-away.
    Senator Harkin. I know that. In fact the regulation you 
worked on when you were at IRS, Mr. Sweetnam, has been done 
away with, and treasury has done away with that. Mr. Certner is 
absolutely right on that. Treasury has moved beyond that, and 
that is why I thanked Treasury because I think now we are 
getting to better ground rules here, where older workers can 
have some choice. I am not fixed on any period of years. 
Treasury says 5. I think that may be a little bit longer. I do 
not know what the proper thing is there. But we have 
legislation some of us introduced that said anyone over 40 with 
10 years or more of service ought to get to choose. Let them 
choose which one they want.
    Ms. Collier. Senator, my concern would be the law of 
unintended consequences with that, because even the threat of 
mandates I believe is already starting to drive employers from 
the defined benefits system, and right now I have peer 
companies in my competitor group that have completely stopped 
their defined benefit system and gone to straight 401(k) 
without any such transition requirements.
    Senator Harkin. The only mandate that we are giving is the 
mandate that they be allowed to choose. We are not saying which 
one they have to choose, but they should be allowed to choose.
    Mr. Sweetnam. But, Senator, what that does is it says that 
really what you are saying is that you should either do this 
one-size-fits-all or terminate your plan----
    Senator Harkin. No.
    Mr. Sweetnam [continuing]. --because you are not giving----
    Senator Harkin. What I am saying is that if you want to go 
to a cash balance plan, that is fine, but that the older 
workers who have been in a defined benefit plan for a long 
time, ought to be able to choose, should I stick with the plan 
that I have had or go with the other one. Now, I would remind 
you that Secretary Snow and the CSX Railroad, that is what they 
did, and it worked out just fine, and other companies are doing 
that.
    Mr. Sweetnam [continuing]. What the American Benefits 
Council says is that we want people to have the opportunity to 
design their plans and their conversions whichever way they 
want. If what you are saying is that the employer does not have 
the ability to change its plan unless they do a grandfather, so 
the choices to the employer are one of three under that. One, 
maintain the plan which does not meet the current needs; two, 
maintain the plan for a period of years, which is whatever 
under your legislation is 10 years; or 3, terminate the plan 
and go to a 401(k). We do not think that those should be the 
options. We think that we should have much more flexibility and 
that the employer community has been able to deal with this in 
the marketplace to reflect their own needs, and we think that 
is the way that it should be.
    Senator Harkin. Maybe we are just talking past each other, 
but your second point that you pointed out there, I would 
define it differently than that. I would say that the employer 
could switch a plan, go to a cash balance plan. But for those 
older workers who could choose if they had over 10 years of 
service and they were over 40 years of age, then the employer 
would have two plans. They would have a plan that would be 
phased out over time that would be for the older workers that 
wanted to stay in defined benefit. Then they could have the 
cash balance plans for the younger workers.
    Mr. Sweetnam. But what that is doing is it is not giving 
the employer the ability to make the change. It is putting that 
decision someplace else. And what we say is having that sort of 
a requirement will result in more companies deciding to get out 
of the defined benefit system, because then they can make that 
change. Because you are not saying that--in this legislation 
you are not saying that I cannot terminate the plan. You are 
just saying that if you want to move to one particular type of 
plan, that you have to give choice there. But if you wanted to 
terminate the plan, you have no choice, employee, you have no 
choice.
    Senator Harkin. Under the law right now you can terminate a 
plan.
    Mr. Sweetnam. That is true.
    Senator Harkin. Anybody can terminate a plan. Why do they 
not? Because workers will leave and go to another place to 
work.
    Mr. Sweetnam. Senator, I think there is a reason why it 
makes sense in a conversion from a traditional plan to a cash 
balance plan to give that choice that you do not do in other 
circumstances, and that is because under traditional defined 
benefit plans the way it works is when you are younger you have 
a small accrual and when you are older you have a larger 
accrual.
    Senator Harkin. That is right.
    Mr. Sweetnam. But in a cash balance plan it is exactly the 
reverse. When you are younger you basically accrue much larger 
benefits over time. When you are older you do not accrue as 
much. So when you convert from one to the other, you flip the 
plan design around completely, and that is why when you do that 
kind of a change it is completely appropriate to have some kind 
of grandfathering or choice as they realize they need to do in 
Eaton to be fair, and it is not the same as in other 
circumstances where you may want to make a design change in the 
plan or reduce the formula.
    Here you are completely flipping the formula on its head, 
and it is so appropriate in that circumstance to have an 
appropriate transition for the older worker. Otherwise they 
lose. They get the worse parts of both plans and they can never 
catch up. They will be way behind. And we have heard this from 
thousands of our members. This is a very complicated issue, but 
this is not an issue that we brought out to our members.
    This is an issue that we heard about from all the 
individuals and all the companies that were affected by this, 
and you do not normally get this kind of self-created outrage 
in pension plans unless people really feel wronged here, and it 
is not as if these companies in many cases were on hard times 
and going out of business, did not have the money. These were 
companies that had very often surpluses in their plans that 
were readjusting their benefits but they were creating winners 
and losers in their plan and the losers were always the longer 
service older workers, and that is why providing some kind of a 
grandfathering choice or other kind of transition protection 
makes sense in the cash balance context.
    You are not mandating that the employer do anything. You 
are just saying that if you choose to go this route--and you 
have many routes you can go--but if you choose to go the route 
of changing to a cash balance plan, here is a set of rules that 
you need to follow.
    The Chairman. I want to thank everybody for participating 
in this. We have a vote that is already at the halfway point. 
The time has been greatly extended already, and you may submit 
any questions you want to either panel, and I would hope that 
you would all respond timely and with the same enthusiasm and 
ability that you have already demonstrated. I have a whole 
bunch of questions that I would also like to ask of each of 
you.
    And one of the things that kind of ties both the panels 
together I think is that I think the hybrid plans are actually 
asking for less than the multi-employer plans, but both need 
solutions and we need to work on both of them.
    so with that, I will adjourn this hearing and leave the 
record open so that we can submit additional questions.
    Thank you all.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

Prepared Statement of the American Society of Pension Professionals and 
                               Actuaries

    The American Society of Pension Professionals & Actuaries (ASPPA) 
appreciates the opportunity to submit our comments to the Senate 
Health, Education, Labor and Pensions (HELP) Committee on reforming 
cash balance or similar hybrid defined benefit pension plans.
    ASPPA is a national organization of approximately 5,500 retirement 
plan professionals who provide consulting and administrative services 
for qualified retirement plans covering millions of American workers. 
ASPPA members are retirement professionals of all disciplines, 
including consultants, administrators, actuaries, accountants, and 
attorneys. Our large and broad-based membership gives it unusual 
insight into current practical problems with ERISA and qualified 
retirement plans, with a particular focus on the issues faced by small 
to medium-sized employers. ASPPA's membership is diverse, but united by 
a common dedication to the private retirement plan system.
    ASPPA commends the Senate HELP Committee for examining the issue of 
hybrid plans. These plans constitute vital and powerful tools for 
building a stronger and more effective national retirement system.

            THE IMPORTANCE OF A DEFINED BENEFIT PLAN SYSTEM

    The importance of promoting defined benefit plan coverage for our 
Nation's workers cannot be overstated. There are approximately 80 
million working Americans who are not covered by a defined benefit 
plan. This represents 75 percent of our private workforce not covered 
by a plan that provides guaranteed benefits. The lack of defined 
benefit plan coverage is even more acute among small business workers. 
Less than 2 percent of the 40 million workers who are employed at firms 
with less than 100 employees are covered by a defined benefit plan.
    The Americans not covered by a defined benefit plan will not have 
their benefits affected by a cash balance ``conversion'' since they are 
not currently covered in a defined benefit plan to begin with. They 
work at companies that you have never heard of, companies that do not 
have commercials on TV, but companies that will lead our economic 
recovery. Don't these workers at these companies deserve a chance at a 
more secure retirement?
    Some of these workers, if they are fortunate enough, at least have 
been covered by a defined contribution plan, such as a 401(k) plan. 
However, 401(k) plan benefits, unlike defined benefit plans, are 
completely dependent on the amount contributed and are affected by 
investment income and expenses.
    Due to recent declines in the stock market, millions of American 
workers relying solely on 401(k) plans have been forced to delay 
retirement or seriously reevaluate their retirement standard-of-living 
expectations. The effect is more than just not being able to buy that 
dream retirement home. It can be the difference between being able to 
afford adequate long-term care or needed, but expensive, prescription 
drugs. These unfortunate consequences would have been greatly 
diminished if these Americans had been covered by a defined benefit 
plan providing guaranteed retirement benefits not subject to the whims 
of investment markets.
    Defined benefit pension plans provide a guaranteed monthly 
retirement benefit for employees. This annuity benefit continues for 
the life of the worker and cannot be exhausted. 401(k) plan benefits, 
on the other hand, are not guaranteed. Ultimately, the level of 
benefits from a 401(k) plan and the length of time they continue to be 
paid are unknown to the retiree. Without increased defined benefit plan 
coverage, as Americans live longer than ever before, there is a greater 
risk that many Americans will outlive their retirement savings.
    Faced with defined contribution plan account losses, a cash balance 
plan funded with employer contributions and with a guaranteed rate of 
return is an attractive option in today's market. Any worker covered 
only by a defined contribution plan would welcome the prospect of 
coverage under an employer-funded cash balance plan that provides more 
certainty.

                      CASH BALANCE GUIDANCE NEEDED

    For better or worse, the last and best hope for promoting new 
defined benefit plan coverage is cash balance or similar hybrid plans. 
The good news is that there are thousands of businesses throughout the 
country who, in light of current developments in the stock market, 
might be interested in adopting a defined benefit plan such as a cash 
balance plan for their workers. Such plans could potentially cover 
millions of American workers. However, there are a number of 
significant legal uncertainties associated with cash balance plans 
because of the way benefits are accrued and distributed when compared 
to traditional defined benefit pension plans. Employers face 
uncertainty over how age discrimination rules apply to cash balance 
plans. Although these issues are technical in nature, they are critical 
to the legal operation of the plan.
    Unlike their larger counterparts, small and mid-sized businesses 
cannot afford high-priced lawyers to provide legal opinions to help 
sort through the various unanswered questions. Until all of the 
important legal uncertainties surrounding cash balance plans are 
resolved in a clear and unambiguous way, small and mid-sized companies 
will refrain from offering these valuable defined benefits to 
employees.
    Ironically, according to a survey published in PLANSPONSOR 
magazine, interest in defined benefit plan coverage among employees has 
increased by 20 percent as employees find it difficult to manage their 
401(k) plan accounts. However, small and mid-sized businesses are no 
longer interested in traditional defined benefit plans because of their 
inherent funding uncertainties and because employees simply do not 
understand them. Cash balance plans can provide employers with more 
predictable funding requirements and, because of their ``account-
based'' nature, they are often more appreciated by employees.
    ASPPA is focused on employees currently without a defined benefit 
plan. Faced with consistent 401(k) plan account losses, a cash balance 
plan funded with employer contributions and with a guaranteed rate of 
return looks pretty good right now. Any worker covered only by a 401(k) 
plan would welcome the prospect of coverage under a cash balance plan 
funded by the employer and certainty respecting investments. In fact, 
putting aside the issue of ``conversions,'' no rational or cogent 
policy argument can be made that workers without any preexisting 
defined benefit plan are also better off without a cash balance plan.
    ASPPA understands, nevertheless, that there are important issues 
applicable to conversions that must be resolved. However, we believe 
that because of the important role cash balance or other hybrid plans 
will play in the creation of new defined benefit plans, Congress should 
separately address issues surrounding conversions from defined benefit 
to cash balance plans. The goal should be to provide the 80 million 
working Americans with no defined benefit plan the opportunity for a 
more secure retirement.
    Given all of the competing interests striking the appropriate 
balance is not an easy task. We commend you for your efforts and urge 
you to stay the course.

                                SUMMARY

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

                       Prepared Statement of UPS

    UPS is pleased to submit this statement in support of the Multi-
Employer Pension Plan Coalition's proposal. This legislation draws from 
the work product of a large coalition of employers, organized labor, 
pension plan trustees, actuaries and trade associations that have 
worked for months to develop proposed legislation that protects the 
long term benefits of workers participating in Multi-Employer Pension 
Plans (MEPP's).
    UPS believes that this legislation is a balanced solution that 
meets the key criteria for addressing outdated pension rules: it 
effectively corrects the funding problems of MEPP's, it ensures that 
employers properly fund their pension promises on behalf of workers, 
and it protects taxpayers by setting up early warnings and safeguards.
    As part of that broad-based Coalition, and on behalf of over 
127,000 active UPS employees participating in these plans to help 
secure the legislation's enactment, UPS wants to be on record in 
support of the Proposal.
    The key elements in the Multi-Employer Pension Plan title of the 
Proposal provide the following:
     Stricter Funding Requirements for Benefit Increases: Plans 
will be subject to stricter funding levels that limit the trustee's 
ability to increase benefits if the plan is not properly funded.
     Transparency and Employer Contributions: Trustees must 
notify all participants if their plan is significantly under funded and 
employers must increase their contributions to help improve the funding 
levels.
     Strong Reliance on Collective Bargaining: The 
contributions to the plan, and benefits received from the plan, will 
remain part of the collective bargaining process.
     New Powers for Managing the Plans: The plan's trustees 
will be granted the tools to balance plan assets and promised future 
benefit payouts. It is important to note that vested benefits are not 
required to be cut. However, a limited power to make necessary 
adjustments to those benefits will now rest with the union and employer 
designated trustees of a plan. That authority is but one of several 
tools which would be provided to trustees to avert greater risks to 
workers' pensions.
    In many ways, the trustees of MEPP's are called upon to provide the 
same type of protections that are assigned to the Pension Benefit 
Guarantee Corporation (PBGC) for single-employer pension plans. This 
legislation now gives MEPP trustees the needed authority to address 
problems early-on. Such early responses will help avoid the need for 
later PBGC intervention and taxpayer-provided relief.
    UPS commends its partners in the Coalition for their spirit of 
cooperation and compromise. The product of those efforts is a balanced 
and reasonable solution for a serious problem. UPS will continue to 
work with the Coalition to ensure enactment of the Proposal this year.
    For further information regarding UPS's position on this 
legislation, please contact Marcel Dubois at 202-675-3345.

    [Whereupon, at 12:09 p.m., the subcommittee was adjourned.]

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