DukeEmployees.com - Duke Energy Employee Advocate
Hearings - Page One
beneficiaries have rights without remedies, which of course are no rights at all."- AARP
U.S. HOUSE OF REPRESENTATIVES - April 5, 2001
"Enhancing Retirement Security: H.R. 10,
H.R. 10ís MOST CONTROVERSIAL PROVISIONS
(1) Disclosure and study of cash balance and hybrid plan conversions
The provision of H.R. 10 that has caused the greatest outcry among employees is Section 504, the provision that acknowledges, but does not adequately address, the extremely unfair practice of reducing the expected pension benefits of older employees by converting their traditional defined benefit plans to "cash balance" or other hybrid plans.
For tens of thousands of employees in hundreds of pension plans, many of them the largest in the country, this change in the rules of the game has cost them more than half of the benefits they had counted on getting - in many cases, hundreds of thousands of dollars. What is particularly shocking about this practice is that these benefits were fully funded and the employers fully intended to pay them - until they were advised by consultants that they could take advantage of a technical maneuver that could save them millions of dollars in benefit payments, while also boosting their companies - bottom lines.
Recognizing that this practice of reaping a windfall at the expense of long-service loyal employees is fundamentally wrong (and likely also illegal), a number of large companies have given their employees the choice of staying under their old plans, and receiving the benefits they had expected. Kodak and Motorola were among the first companies to "do the right thing" in this regard, and last month, 3M followed suit. But most companies are taking the position that their obligation to shareholders is to maximize profits, and will continue the practice until it is stopped.
Rather than stopping the practice, Section 504 effectively gives it a green light. It calls for the Treasury Department to conduct a study of the impact of conversions on older employees, which would duplicate a recently completed GAO study, and to issue regulations that would require employers to give employees in companies with 100 or more employees "sufficient information to understand the effect of the plan amendment" within "a reasonable time before the effective date of the plan amendment."
These provisions are little more than a delaying tactic advocated by lobbyists for large companies hopeful that it will to defuse the outrage of the many employee groups throughout the country that are looking to their elected representatives to resolve this contentious issue for the future by fairly balancing their interests with those of their employers. These groups think that "wearaway" of pension benefits should be prohibited, and that all employees should be given the option of remaining under their old plans. They also want to make sure that no action taken by Congress to protect employees from being hurt by future "hybrid" conversions interferes with the lawsuits they have initiated, and the age discrimination complaints that they have filed.
At the Pension Rights Center we agree that nothing should be done to interfere with pending litigation or agency proceedings. We also think that there is a way that the reasonable benefit expectations of employees can be reconciled with employers - interests in having flexibility to make prospective changes in their plans. We are convinced that a legislative compromise can be quickly crafted that would give employees the full value of the share of benefits they have earned as of the date a plan is amended, to the extent there is funding to pay these benefits, plus full benefits under the new plan. Employers would also continue to be free to terminate their plans, or offer their employees the choice of staying under their old plans.
As for disclosure, notice of an imminent conversion would be of little value to most employees unless those who thought they might be adversely affected were also given the right to make written requests for individualized comparisons of their benefits under the old and new plans, and they received those comparisons before the effective date of the amendment. If a company for some reason did not have the in-house capacity to do the calculations, it could provide the employees with their work records and access to one or more actuaries retained by the employer to do these calculations at no cost to the employees. It is simply unrealistic (and unfair) to expect that employees will have the mathematical skills to calculate what are typically extremely complex formulas, some times involving benefits under a succession of plans.
(2) Elimination of protected benefits after mergers and acquisitions
Large corporations involved in mergers and acquisitions frequently complain that they should allowed to eliminate options from plans they acquire if they provide equivalent benefits under their own plans. This makes sense if the new plan provisions are in fact fully equivalent. However, Section 405 of the bill goes much further than this and could result in the loss of protected benefits.
Section 405(a) would allow plans to eliminate options, including important spousal protections, in defined contribution plans. According to this provision, if employers acquire money purchase pension plans, which are required to provide joint and survivor options, the employers would merely have to get the participants _ consent to have the benefit paid as a lump sum. There is no requirement in Section 405(a) that the spouse also give consent to giving up what could be a very substantial protection. This provision should be modified to include spousal consent.
Section 405(b) would similarly authorize the elimination of protected benefits in defined benefit plans in merger and acquisition situations. It states that subsidized early retirement benefits, among others, can be eliminated or reduced if they "create significant burdens or complexities for the plan and plan participants" and eliminating these benefits "does not adversely affect the rights of any participant in more than a de minimis manner."
This language is more protective of employees than earlier versions of the bill, thanks to strong protests by employees and their representatives. However, additional protection is needed. We urge that consideration be given to adding a provision requiring that employees be notified of the proposed elimination of the benefit, along with a statement of nature of the "burdens and complexities" it creates, and its likely impact on their benefits. In addition, we believe that they should be given an opportunity to comment on whether, in their view, the impact of the provision is burdensome on the plan, and the impact of the change on them is, in fact de minimis. A procedure similar to that in Section 3001(b) of ERISA should be developed so that employees can comment directly to the Treasury, or if they so request, the Labor Department Pension and Welfare Benefits Administration _ s Office of Participant Assistance and Communications can assist them in effectively presenting their protests to the Treasury Department.
H.R. 10ís DISCLOSURE PROVISIONS
(1) Summary Annual Report dissemination
Section 612 of H.R. 10 would allow the electronic dissemination of the Summary Annual Report. We are concerned that without guidance from Congress, this proposal could defeat the purpose of the "SAR".
The SAR is the only document that participants in traditional pension and profit sharing plans receive that lets them know how well their retirement money is being invested. Typically, one page in length, it tells employees and retirees whether their plans have gained or lost money during a year, and how much they are paying in administrative expenses. It also can alert them to questionable financial arrangements with individuals closely connected to the plan, and let them know if any money loaned by their plan has not been paid back on time. It also tells them that they have the right to request the detailed financial reporting form that their plans file with the government and how to get it.
The Summary Annual Report is an easy-to-fill-in-the-blanks form that is typically distributed at worksites, included with paychecks, mailed, or published in union newsletters. Larger plans disseminate SARs once a year; small plans, every three years. Distribution of the SAR reminds workers that the money in the pension or profit sharing plan belongs to them, and that they have reason to be concerned about how well it is invested.
Although many participants do not read their SARs, some do with important consequences for themselves, and the Labor Departmentís enforcement efforts. For example, the New York Times reported on the discovery by two Oregon laborers that their pension and 401(k) plans had lost millions of dollars. They alerted the Labor Department which uncovered extensive mismanagement of their funds. These construction workers were alerted to the problems in their fund solely by reading the SAR.
Electronic dissemination of the SAR may be appropriate in some instances, if it is carefully targeted to assure that the information in the SAR will actually be brought to the attention of employees. Proposed regulations published by the Labor Department prescribing "safe harbor" methods for electronic dissemination of the SAR would fall far short of this standard. If electronic dissemination is to be permitted, it should only be after participants have given consent to a particular form of electronic transmission that is specifically calculated to reach them. Merely sending e-mails to employees telling them that they can use a company computer to access a web site to view (and then print out) the SAR is not, in our opinion, adequate dissemination.
(2) Elimination of certain benefit suspension notices
Section 707(a)(2) eliminates a notice that is particularly important to many workers in the construction trades unions, and other multiemployer plans. These workers are typically encouraged to take generous early retirement benefits, in their early 50's or before. Then, several years into retirement, a significant proportion find that they are unable to make ends meet on their fixed pension benefits, and return to work in union work covered by their pension plan, but for new employers. What many do not know is that consequences can be devastating. Their benefits can be suspended until they reach age 65.
A particularly egregious example of this involved a Minnesota construction worker, who retired to Florida, and then decided to return to work covered by his Minnesota plan, something he had specifically been told he would be able to do. After he returned to work, he learned that the plan had just adopted a new rule, suspending benefits of retirees who came back to work, including those, such as him, who had retired before the adoption of the rule. He learned of the suspension through the very kind of notice that Section 707(a)(2) would eliminate. The notice told him about the suspension, the reasons for the suspension, and the applicable provisions of the plan, and how he could seek review of the planís action. It made it possible for him to immediately take steps to challenge the suspension.
Without the notice, he might have learned only when he left work covered by the plan and asked for his pension to be started again, that he would receive no additional payments until he reached age 65.
Whatever burdens providing the notice may place on multiemployer plan administrators, they are far outweighed by the consequences to multiemployer plan participants if the notice is not given.
(3) Simplified financial reporting for plans with 25 or fewer employees
Section 606(b) of the bill would allow plans with 25 or fewer participants to filed the same kind of simplified plan that is now filed by plans that only cover one person. Since some of the greatest abuses, both in financial management and plan design, occur in plans of these size, further streamlining the already minimal information they provide the government (and their participants), would effectively undercut enforcement efforts by both the Treasury and the Labor Department.
As noted above, these plans are no longer required to state that they are top-heavy, which means as a practical matter, it will be almost impossible for participants to know if they have been wrongly denied the protections of the top-heavy rules. Participants in these plans, unlike those in larger plans, are not able to find out where their money is invested.
Any employer that finds filing of the minimal amount of information now required of small plans to be too burdensome, is free to set up a SEP (a Simplified Employee Pension), which requires no reporting with the government, because the design is straightforward (and now skewed toward favored employees), and the investment of the money is beyond the control of the employer. We strongly urge the members of the Subcommittee to ask GAO to do a cost benefit study of the consequences of simplification before proceeding with this measure.
(4) Individual benefit statements
Finally, we are very pleased that Section 507 of the bill would assure that, 26 years after the enactment of ERISA, participants in multiemployer plans will finally have the right to request individualized statements telling them how much they have earned in pension benefits. However, Section 507 includes nothing beyond the requirements of current law requiring that the information in these statements, or those provided by other types of plans, be meaningful.
All too often individual benefit statements contain difficult-to-understand technical language, fail to alert employees to likely reductions in their benefits (for early retirement, survivors benefits and Social Security and workers compensation offsets) and contain misleading projections that unrealistically assume that workers will continue to work until retirement age. We suggest that consideration be given to modifying this provision to include language similar to that in Section 401(c) of Congressman Andrews-Retirement Enhancement Act of 2000, which authorizes the Secretary of Labor to prescribe model language for individual benefit statements.
Finally, we think that the provision in subsection (a)(C)(3) of Section 507 specifying that benefit statement information may be provided in telephonic form be deleted, and that the Secretary of Labor be directed to issue an Interpretive Bulletin clarifying the extent to which employees can reasonably rely on information in their individual benefit statements.
cashpensions.com - June 19, 2000
Read Janet Krueger's U. S. Special Committee On Aging testimony. Janet is not known for mincing words.
How to Promote Pensions Without Harming Participants
U. S. Special Committee On Aging - June 5, 2000
SENATOR CHUCK GRASSLEY, Chairman, Iowa
The Employee Retirement Income Security Act (ERISA) was enacted more than 25 years ago. At that time, retirement plan coverage was hovering around 50 percent. Since its enactment there has been no improvement in the formation of defined benefit pension plans. In fact, as we mentioned just a moment ago, the opposite is true. To me, that suggests that the Act is flawed.
Mr. James A. Bruggeman, Employee of Central and South West Corporation, Tulsa, Oklahoma
My company announced in August 1997 that it saved $20 million in 1997 due to the new plan. And the new pension plan was in effect only six months of 1997. The company also stated that it expected to realize significant ongoing reductions in operating and maintenance expense because of the change. In December 1996, CSW entered into "Change of Control Agreements" with 16 key executives. CSW later reported that these agreements require it to pay the 16 executives $69 million upon closing of a contemplated merger between CSW and American Electric Power Company. In addition, CSW executives have received healthy bonuses in every year since the new pension plan became effective.
Mr. Joseph Perkins, Immediate Past President, AARP, Washington, DC
The ADEA, and companion provisions in the Code and ERISA, prohibit the reduction in (or cessation of) benefit accruals based on age. The overall objectives of these provisions are two-fold: to assure that pension plans do not discriminate on the basis of age and to remove disincentives to older employees to remain in the workforce. In general, cash balance plans violate both the letter and spirit of these provisions. As a result, both the cash balance formula itself, as well as a conversion of a traditional plan to a cash balance plan, violate current law.
Ms. Karen W. Ferguson, Director, The Pensions Rights Center, Washington, DC
To put today's hearing in perspective, I would like to start by noting that never in the 24-year history of the Pension Rights Center have we seen such an outpouring of employee anger, frustration and bewilderment as that occasioned by the conversion of traditional defined benefit plans to cash balance arrangements. Although the largest proportion of complaints have come from employees of Fortune 100 companies, such as IBM, Bell Atlantic, Citibank, SBC, and AT&T, we have also heard from employees in smaller organizations, including a symphony orchestra, a for-profit hospital, a nonprofit educational corporation, and a popular restaurant chain.
These employees are outraged because they thought they had a deal: If they did their part by working loyally for long years for their employer, they would get a good pension that, together with their Social Security and savings, would make it possible for them to maintain their standard of living in retirement. They were aware that their Pensions were not worth much in their early years of work, but had been assured that their plans would "pay off" as they neared retirement age. Typically, their plans had been designed so that 50 percent of their pension would be earned in their last 10 years of work. Many of these employees are highly skilled professionals who could easily have found other employment, but chose to stay because of the promised pensions.
Exemptions in the Modern Work Place"
Committee on Education and the Workforce Subcommittee on Workforce Protections
The Honorable Cass Ballenger, Chairman Subcommittee on Workforce Protections, Opening Statement:
The Subcommittee is meeting today to examine the criteria under the Fair Labor Standards Act that define those employees who are eligible for overtime pay and those who are not. We will review the findings of a recent General Accounting Office report on the so-called "white collar," or professional, administrative, and executive exemptions, and hear from the Department of Labor, which has the responsibility for revising and updating the white-collar regulations. In addition, we will hear testimony from employer and employee representatives, who are directly impacted by the Department's regulations. I would like to take a moment to welcome our witnesses. We appreciate them taking time out of their busy schedules to share their expertise on this issue with the Members of the Subcommittee.
Ms. Cynthia M. Fagnoni, Director, Education, Workforce, and Income Security Issues, U.S. General Accounting Office, Washington, D.C.:
For most American workers, the rules for determining whether they are exempt from the FLSA, and thus its requirements for overtime pay, have remained largely unaltered in the past 46 years.
Ms. Cynthia M. Fagnoni - Must have PDF software to view.
Mr. William J. Kilberg, Senior Partner, Gibson, Dunn & Crutcher, LLP, Washington, D.C.:
As workplace duties diversify and intermingle, employers, employees, and even the courts are having increasing difficulty understanding and applying FLSA duties tests designed for a simpler time. Courts have even resorted to the unusual device of accepting expert testimony on the law to untangle these issues. When a standard intended to be applied by everyday employers, including small businesspeople, begins to exceed the acumen of judges and to require the intervention of specialized experts, it is high time to reexamine that standard.
Mr. Nicholas Clark, Assistant General Counsel, United Food and Commercial Workers International Union, AFL-CIO, Washington, D.C.:
Not surprisingly, the GAO found that workers covered by the white-collar exemptions are far more likely to work overtime (more than 40 hours per week) than workers protected by FLSA's overtime provisions. According to the GAO, in 1998, nearly half of the 19 to 26 million workers covered by the exemptions said they worked overtime, an increase from the 35 percent of workers reporting overtime in 1983. GAO Report, at 12. Significantly, and tellingly, workers covered by the exemption were nearly twice as likely to work overtime as workers covered by FLSA's overtime protections. Id. And the amount of overtime worked by these workers is striking. In 1998, about 15 percent of workers covered by the white-collar exemptions worked more than 50 hours per week, and 3 percent worked more than 60 hours per week.
Mr. T. Michael Kerr, Administrator, Wage and Hour Division, U.S. Department of Labor, Washington, D.C.:
We have seen employers claim this exemption - and not pay overtime - to a wide variety of workers for whom the exemption was clearly not intended simply based on a job title without regard to whether the worker actually meets the 541 requirements. For example, in the recent past we have had misclassification cases involving:
Mr. Dennis Sutphen, President, H.R. Consulting, Parkersburg, W.V.:
The composition of the American workforce has dramatically changed since 1938. Females, once a minority, now make-up the majority of workers. From 1983 to 1998 women covered by exemptions increased from 33 percent to 42 percent, respectively. Management and employee relations is noticeably different, working conditions have dramatically improved and there are now numerous types and ways to compensate employees for their hard work, some of which include: overtime pay, health care benefits, pensions, 401 (k) plans, paid vacation, paid holiday leave, paid personal leave, paid sick leave, profit sharing, stock options, and bonuses. Unfortunately, these strides in the workforce over the last 62 years are not reflected in the FLSA.
Read about the Committee on Education and the Workforce Subcommittee on Employer-Employee Relations Hearing.
"Last July, the Committee reported out H.R. 1102, the bipartisan Portman-Cardin 'Comprehensive Retirement Security and Pension Reform Act.' This bill, which included 24 amendments to ERISA, makes retirement security available to millions of workers by expanding small business retirement plans, allowing workers to save more, enhancing portability, making pensions more secure, and cutting red tape. We now look to the next step in pension reform."
Unfortunately, it looks as if the chairman has bought the H.R. 1102 line. H. R. 1102 is a bill craftily designed to look harmless and even helpful. But, detailed analysis by pension experts reveal that this bill is bad news for American workers.
"As a starting point we do well to remember that in general ERISA fiduciary law is a huge success story. In the 1950s and 1960s Congress discovered shocking abuses in the handling and investment of pension and other employee benefit funds, mostly in corrupt union-dominated multiemployer plans, especially those associated with the Teamsters. Congressional investigators found kickbacks, sweetheart deals, and outright looting."
It took a few years for devious actuaries to find ways to circumvent the ERISA laws but, circumvent them they did! What do we have now? Corrupt pension plans, sweetheart deals, and outright looting. We have gone full circle. It literally took an act of Congress to stop the pension looting the last time.
"These plans are given the subsidy in order to help millions of Americans live with dignity in retirement and obtain the medical services necessary to maintain good health and alleviate pain and suffering. The federal government has a clear regulatory interest in seeing to it that the subsidy is used fairly, competently and in a trustworthy fashion."
It is important to realize that private pension plans in America are highly subsidized by the federal government. Many companies, including Duke-Energy, have taken advantage of all the tax breaks possible and then devised schemes to take back the long promised retirement pension funds!
"These plans have given millions of Americans the capacity to live longer, healthier lives, and to retire at much more than subsistence levels. In the case of the pension plans, they are the biggest single source of investment capital in the world and one of the key factors responsible for the steady and stable economic growth underlying our Nation's prosperity."
But, getting employees back to subsistence levels allows for a windfall of cash for senior management and the board of directors.
"The third, and arguably most important, policy requirement inscribed in ERISA, is that every effort must be made to prevent the degeneration of the mission undertaken by the private benefit system. That mission is to provide retirement income and health protection to working people and their dependents when they are most vulnerable."
The Duke-Energy pension plan has certainly degenerated. After lying to the employees for decades, Duke took retirement income and health protection when the employees were the most vulnerable.
"If the reasonable expectations of a great many participants and beneficiaries are being systematically frustrated, and frustrated in such a way that it is evident that plan sponsors or other interested parties are deriving enormous economic advantage by their ability to successfully manipulate ERISA's legal requirements, then regardless of whether these actions are in technical compliance with existing law and regulations, Congress should take a closer look and decide whether new rules need to be made. After all, ERISA was enacted in the first place because the reasonable pension expectations of a vast cross-section of the pension participant universe were being legally thwarted."
The reasonable expectations of a great many Duke Energy employees have been systematically frustrated. The employees fully expected Duke to keep the terms of the pension agreement. Duke Energy did derive enormous economic advantage by manipulating laws and then lied about it.
"The bottom line is that regardless of its voluntary character and great economic importance, no one can assure the survivability of the private benefit system if it disappoints large numbers of workers and retirees. When this situation arises it is essential that Congress pitch in and restore faith where private plans have lost their way."
Duke-Energy has most certainly disappointed large numbers of its workers and retirees. Duke Energy's plan has lost its way. Duke Energy has lost its way. Duke Energy has lost more than money. They have lost the trust and respect of their employees. Duke apparently has yet to get a clue.
"Conversion of defined benefit plans to cash-balance plans remains an extraordinarily volatile issue. Because of the highly adverse reaction of participants to these conversions, there has been a plethora of legislative and executive branch activity devoted to addressing their complaints. Legislation has been proposed to require greater disclosure, to block so-called 'wear-away' benefit accrual procedures, to give certain workers greater choice as to participation in the old plan or new plan, and so forth. The IRS and the EEOC are examining age discrimination problems, the Labor Department is examining the question of actuarial trickery, lawsuits have been filed, and, in general, things have gotten downright nasty."
The EEOC will be glad to investigate your situation, if you file an age discrimination charge. That gives them the authority to investigate. Things are likely to get even nastier. But, this is what Duke asked for. They asked for it when the cash balance conversion was made.
"How, or rather why, did this happen? All the companies that converted to cash-balance plans had enormously overfunded defined benefit pension plans and had taken funding holidays for very long periods of time. They could have continued their defined benefit plans indefinitely. In fact, they could have improved their benefit formulas under these plans, given cost-of-living adjustments to their retirees, and dramatically improved their 401(k) plans for their younger employees, all without even breaking a sweat."
This is a very important point. The plan was self supporting. Duke was getting a free ride as it was. But, the love of money overpowered any vestige of self respect that senior management had left.
"Under present rules, an employer that terminates a defined benefit plan and recovers excess assets is liable for a 20% excise tax on the amount of the reversion if it establishes a qualified replacement plan or amends the terminating plan to provide for pro rata benefit increases. If the employer does neither of these things, it is subject to a 50% excise tax on the reversion.
"No excise tax applies if the reversion is transferred to an appropriate retiree health account or if the benefit formula of the plan is amended but the plan is not terminated. Switching a defined benefit plan's formula from the traditional accrual type to a cash balance type does not constitute a plan termination. The employer making the cash balance conversion does not take a reversion and does not pay an excise tax.
"However, the employer making the cash balance conversion is able to substantially reduce the pension liabilities associated with older employees and show that on its balance sheet, and is also able to show a substantially increased pension surplus which could be obtained on a possible future termination notwithstanding any reversion tax. The result is to inflate the company's bottom line and increase the value of its shares.
"Increasing the value of its shares makes the stock options given to the company's top executives much more valuable. If the company changing to a cash balance plan also reduced its retiree health benefits or eliminated the retiree health plan altogether, the stock options become even more valuable. The net result is a significant increase in the concentration of wealth in this country at the expense of older workers and retirees.
"It is generally agreed that no significant cash balance conversions would have occurred if the companies involved had not been sitting on huge defined benefit plan surpluses. It is the existence of these surpluses, and the rules permitting the tax-free build-up of these surpluses, which provides the impetus for this dramatic shift in employer pension priorities.
"When Congress passed the excise tax reversion provisions it was to discourage employers from tearing down long-established defined benefit plans just to get at surpluses. Until recently, this excise tax approach has succeeded. But the cash-balance loophole demonstrates that the success has been short-lived and it is really doubtful that any approach, other than one providing for the equitable allocation of surpluses between the plan, the participants, and the employer, will have any lasting effect."
Mr. Gordon has really covered this scam in detail. Duke did not terminate the plan because it would have cost them tax dollars. Now they can bleed us slowly for years with great tax advantages. The "found" pension money inflates the bottom line and stock prices. Follow the money. When Rick Priory and his cronies cash in their stock options, the con game is complete.
"Nor should we overlook the loss or reduction of coverage after a participant has clearly earned the right to have such coverage continue. The most blatant example of this is the reduction or cancellation of retiree health benefit coverage after employees retire and after they have made all their financial decisions for retirement based on their employer's promise of post-retirement health coverage.
"This situation is now approaching national scandal proportions. It is estimated that over the last decade somewhere between 5 and 10 million retirees and their dependents have been adversely affected by employers reneging on their retiree health benefit promises. The health of many retirees has suffered greatly as the result of the abrupt withdrawal or reduction of their medical coverage.
"In most instances, courts have held that ERISA provides little or no protection to retirees in these circumstances. They treat the employer's health benefit promise as in the nature of a gratuity, the same as they tended to treat pensions before the enactment of ERISA. Employer complaints about soaring retiree health costs are exaggerated since there were, and are, proven ways to limit their liabilities, and they know it. The situation cries out for legislative correction."
As if robbing our pension fund was not enough, Duke also robbed us of retirement health coverage. Their greed is endless. Duke thinks that we have no recourse to the loss of health benefits. But, as Mr. Gordon has pointed out, an act of Congress can change that overnight!
United States Committee on Health, Education, Labor and Pensions
September 21, 1999
Read Janet Kruegr's testimony by clicking the link below. No one has done more for pension justice than this lady.