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"We must become the change we want to see." - Mahatma Gandhi

Good News From Congressman Sanders

October 27, 2000

Rep. Sanders asked me to send all of you this e-mail to update you on pension reform legislation pending in the Congress.

As you know, last month, at the behest of major corporations, the Senate Finance Committee voted unanimously for a "pension reform" bill that would have allowed every single company in America to get away with age discrimination in cash balance plans. Rep. Sanders strongly opposed this bill. Fortunately, the pro-age discrimination sections of the Senate Finance Committee bill did not make it to the Senate floor and will not become law.

However, the House passed a broad tax bill yesterday by a vote of 237-174 that still includes pension reform provisions that would allow companies to slash the pensions of middle class and low-income workers. Rep. Sanders voted against this bill. The President has threatened to veto the bill if it is sent to him, and we are hopeful that he will do just that.

H.R. 2902, a bill Rep. Sanders introduced with Rep. Hinchey from New York to allow all workers a choice when companies convert to cash balance plans garnered 89 co-sponsors. Unfortunately, this bill will not become law this year.

If there is a lesson to be learned over the last couple of years, it's that when working people stand up and speak out on an issue, they can be effective - even in the face of opposition by corporate interests.

Once Congress adjourns, we are hopeful that the EEOC will take an aggressive stance opposing age discrimination in cash balance plans. To date, they have received over 800 complaints from employees at 34 different companies arguing that they had been discriminated against based on age by cash balance conversions. Rep. Sanders has met with the Chairwoman of the EEOC twice and EEOC Commissioner Miller once to urge the EEOC to aggressively pursue age discrimination in cash balance plans.

The EEOC has been waiting to make sure that the Senate Finance Committee pension reform bill legalizing age discrimination in cash balance plans would not become law this year before they took any action. Now that it is clear that this onerous bill will not become law, we are hopeful that the EEOC will take action soon.

Even though we have not gone anywhere close to where we would like to be during this Congressional session, we have had some significant success. We should continue to work together on pension issues next year, and Rep. Sanders and I look forward to working with you in the future.


Warren Gunnels

Ralph Nader to IBM Employees

Ralph Nader - 4/21/2000

I congratulate you IBMers. I congratulate all of you for banding together by the thousands, for creating a movement for changing by organizing effectively, employee by employee, to take on one of the most powerful corporations in the world. And today Lou Gerstner and the rest of America's CEOs are paying attention.

IBM has fallen prey to the same corporate greed and arrogance that has infected too many multinational corporations - assuming they are not accountable to anything but their profit objectives. But today, many of IBM's stockholders - Calpers and New York State Common, their advisors like Institutional Shareholder Services and hundreds of thousands of people who own pieces of the company - are voting their stock with their conscience to support the efforts of employees. These shareholders recognize that a company's worth is NOT based on how well it cuts the health benefits of workers, how it slashed pensions, how it lays off workers. A company's worth and ultimate value is based on how well it treats its workers so that they will continue to perform and build that corporation.

It is particularly reprehensible that IBM chose to cut employees pensions and retiree medical coverage at a time when the company is posting record profits, ringing up $87.5 billion in revenues with a record after-tax profit of $7 billion (this is, in part, created by figuring in the earnings on the pension surplus that belongs solely to you as employees and retirees). Lou Gerstner is getting $2 million in pay, stock valued at $42 million, incentive payout of $5.2 million and his own pension of $1.14 million a year starting at age 60 - and to think he's been at the company for less than 10 years and he's cutting pensions and health care for all of you who built the company over a longer time. This is shameful and reprehensible.

I am writing this statement before the vote is in. But regardless of the vote count, you should know that you have won a tremendous victory constrained by a rigged electoral system, just by getting this shareholder resolution on the ballot and making IBM and every other corporation sweat. The SEC ruling makes clear that IBM's pension cuts were much more than "ordinary business" and raise serious national policy issues. This ruling gives a green light to employees throughout America to offer their own shareholder resolutions in cash ba1ance conversions - and in any situation where corporate behavior raises significant social policy issues. I am persuaded that what you have accomplished today will ignite a new movement for corporate democracy, with similar shareholder resolutions showing up on corporate ballots throughout America.

I am proud of you and your efforts and I wish scheduling would have made it possible to be with you today, as you join in a united front to make your corporation, and all corporations accountable for their actions. But only corporations can be in many places at once.

Letter From Senator Jeffords


The US Senate today passed an amendment offered by Senators Harkin, Jeffords and Kennedy on cash balance pension plans. The amendment, added to the annual budget resolution, states that it is the sense of the Senate that Congress should act this year to address concerns about conversions to cash balance plans.

Letter From Congressman Sanders

Congressman Sanders - 4/6/2000


Along with Vermont's IBM employees, I played an active role in reversing a company decision that would have slashed promised pension benefits to 35,000 IBM workers throughout the country. I have also introduced the most comprehensive legislation in Congress, which now has 78 co-sponsors, to protect the pensions of American workers. At my request, the IRS and other government agencies are now studying whether companies who convert to cash balance pension plans, affecting millions of workers, are violating federal age discrimination law.

I will also attending the annual IBM stockholders meeting in Cleveland on April 25th. Vermont IBMer Jimmy Leas managed to get a very good resolution on the agenda that calls on the company to reverse its policy that made substantial reductions in retiree health care benefits and pensions. As a result of the very successful actions of Vermont IBMers, workers all over the country are raising the issue of the unfairness of cash balance payment plans.

Letter to the IRS from Congress


Bernard Sanders, Member of Congress

Department of Treasury
Internal Revenue Service
Room 5226, PO Box 7604
Ben Franklin Station
Washington, DC 20044

Attn: CC:DOM:CORP:R (Cash Balance Plans and Conversions)

We, the undersigned Members of Congress, are pleased to respond to your request for comments on cash balance pension plans. (64 Fed. Reg. 56578.)


We commend the Internal Revenue Service and Department of Treasury for the decision to further evaluate your position on the conversion of traditional defined benefit pension plans to so-called "cash balance" pension plans, and for soliciting public comments on this matter. Although such conversions have been occurring for many years, increased understanding of these conversions has raised serious questions, particularly whether they violate federal anti-age discrimination statutes.

Prior to the recent, and growing, scrutiny of cash balance conversions by employees, Members of Congress, and some actuaries, the complexity of these plans have made it understandably difficult for the cognizant federal agencies to fairly evaluate the age discriminatory effect of these plans. In this instance, the problem has been exacerbated by what – in the most generous terms – can be described as an almost complete lack of candor on the part of many proponents of cash balance conversions in communications with their employees and the media.

Numerous respected national journals have played a critical role in bringing to light not only the age discriminatory impact of these conversions but also the clear age discriminatory intent of at least some cash balance backers. Given the large volume of new information and concern about cash balance plan conversions, we urge the Department of Treasury, IRS, and all other cognizant federal agencies to thoroughly reexamine the existing legal requirements for defined benefit pension plans and the extent to which cash balance conversions fail to comply therewith. Workers and members of Congress do not have access to the full documentation related to these conversions on an individualized basis, making it critical that the key government oversight agencies use their access to plan documents to fully examine and understand the nature and effect of these conversions. We urge all of the involved agencies to act quickly within their respective regulatory authority to remedy the significant legal irregularities that appear to permeate these conversions, and if it is concluded that the agencies do not have sufficient authority, to propose legislation to Congress to address any outstanding legal issues.

The comments that follow address the following topics:

1) Cash balance conversions are often intentional attempts to cut the pension benefits of older employees and increase the operating income of employers.

2) Cash balance plans are defined benefit plans, not defined contribution plans.

3) Cash balance plans fail to meet the requirements for defined benefit plans and violate federal anti-age discrimination statutes.

4) The "wear-away" feature of many cash balance conversions violate federal anti-age discrimination statutes.

5) Cash balance conversions should therefore be disqualified under existing law.

6) A safe harbor should be established allowing cash balance plans to meet existing legal requirements only if all employees are allowed to choose which pension plan works best for them with detailed disclosure.

Throughout your consideration of cash balance conversions, we ask the IRS and the Department of the Treasury to bear in mind, that while the United States has a "voluntary" pension system, that system is, and should be, subject to rigorous statutory and regulatory oversight. This voluntary pension system receives over $80 billion a year in federal government subsidies through, inter alia, the tax code. It will always be the case that corporations will favor public subsidies without any governmental oversight. However, the taxpayers have a right to expect that corporations who take advantage of this special tax treatment will adhere to requirements of the law, including federal age discrimination statutes. Given the substantial sums of money in corporate pension plans, experience has repeatedly shown that, without governmental vigilance, corporations will attempt to manipulate their pension plans at the expense of their employees. Cash balance conversions are just the latest vehicle to accomplish that goal. In this case, federal age discrimination statutes provide the IRS and other federal agencies with the means to stop these schemes, which are intentional efforts to wring savings from the pensions of older employers.

1) Cash balance conversions are often intentional attempts to cut the pension benefits of older employees and increase the operating income of employers.

Cash balance plans are a relatively recent innovation. The first cash balance plan was implemented in 1984, according to the consulting firm Watson Wyatt Worldwide. Almost universally, companies implementing a cash balance plan are converting from some other type of defined benefit plan. To date, 22% of the Fortune 100 companies have converted to some sort of hybrid pension plan, over 70% of which are cash balance plans. It is estimated that 20% of those in the Fortune 500 have converted to a cash balance plan.

Cash balance promoters explain the popularity of cash balance conversions by arguing that cash balance plans provide employers with a competitive advantage because these plans better suit the desires of an increasingly mobile workforce. Promoters have also stated that cash balance plans are easier for employees to understand because the benefit is expressed in terms of a lump sum dollar amount as opposed to a monthly benefit under a traditional defined benefit plan. These rationales for cash balance conversions are frequently pretextual.

In truth, a significant reason that corporations convert to a cash balance plan is to cut the pension benefits of older workers – workers who comprise a larger and larger percentage of the workforce. That cash balance plans reduce the accrual rate for older workers is not a well-kept secret. Kyle N. Brown, a retirement and pension lawyer with Watson Wyatt Worldwide said at a Society of Actuaries Conference in October of 1998:

The economic value that is accrued, is different in hybrid plans than it is for traditional plans. In essence, that is part of the reason why you want to put these plans in. You know you are trying to get a different pattern of accrual. Well, what that means is that for your older, longer service workers, that their rate of accrual is going to go down. There is going to be a reduction in their rate of accrual.

The reason why large corporations are targeting their older workers’ pensions is easy to understand. Millions and millions of Americans in the so-called "baby boomer" generation are rapidly approaching retirement age. In Watson Wyatt’s July 1998 edition of its Insider newsletter, the aging of the U.S. labor market is carefully detailed. As the newsletter demonstrates, the number of workers in the 55-64 age category is expected to grow by 54% in the decade from 1996 to 2006. Companies that target the pensions of older workers will thus realize tremendous cost savings when these people retire.

In addition, Watson Wyatt’s Insider dispels one of the other myths advanced by cash balance proponents, namely, that these plans are a response to an increasingly mobile American workforce:

Contrary to popular belief, Americans are not changing jobs faster than ever before. According to an in-depth study of employment records by Watson Wyatt, as baby boomers are driving up the average age of the workforce, job mobility is decreasing.

Cash balance plans are thus not a response to a more mobile work force. In fact, as Watson Wyatt admits, the percentage of workers staying at a single employer for 10 years has risen in the last ten years, as has the percentage staying with the same company for 20 years.

Worker mobility is not the rationale for converting to a cash balance plan, money is. As 11,000 people a day turn 50, which Watson Wyatt posits will turn us into a "Nation of Floridas," employers need to find ways to retain them. Instead of creating incentives to retain older workers, companies have turned to cash balance plans, which make it much more likely that older workers will have to delay retirement. Employers who convert to a cash balance plan thus see a two-fold benefit. Companies retain older workers who can no longer afford to retire and the benefits the employees do receive at retirement will be significantly lower.

Just as with the worker mobility argument, cash balance promoters are disingenuous when they argue that the "lump sum" feature of cash balance plans are easier for employees to understand. To the contrary, cash balance proponents have argued in favor of these plans because they make it more difficult for employees to understand that their benefits are being reduced.

Again, cash balance promoters have been very open amongst themselves about the ability of these plans to mask benefit cuts. In a July 27, 1989 letter from Kwasha Lipton to Onan Corporation, the consultant notes, "One feature which might come in handy is that it is difficult for employees to compare prior pension benefits formulas to the cash balance approach."

Similarly, Joseph Edmunds stated at a 1987 Conference of Consulting Actuaries, "[I]t is easy to install a cash balance plan in place of a traditional defined benefit plan and cover up cutbacks in future benefits."

Likewise, William Torrie of PriceWaterhouseCoopers at the October 18-23, 1998 Society of Actuaries meeting said, "[C]onverting to a cash balance plan does have an advantage of it masks a lot of the changes . . . ."

In addition, current accounting rules actually encourage the practice of reducing pension benefits. Due to Financial Accounting Standard (FAS) 87, companies are able to report pension assets as operating income. By listing pension assets as operating income, companies can increase their bottom line by cutting the pension benefits of their workforce, which is exactly what is happening today. This is wrong, and must be put to an end immediately.

We understand that the intended purpose of FAS 87 was to require the disclosure of pension liabilities. While transparency regarding an employer’s pension situation -- both as to liabilities and surpluses -- would appear to be proper, clearly pension assets are not operating income. And allowing them to be characterized as such creates two perverse incentives. First, it encourages employers to reduce pension benefits in order to create large pension surpluses. Second, it distorts the financial health of the company, making investors believe the company is more profitable than it actually is. Surplus pension assets should be used for cost of living increases for pensioned retirees, and other retirement benefits. Unfortunately, that is not happening today. We believe that FAS 87 should be changed to require employers to list net pension cost as investment income instead of operating income.

In summary, despite the protestations of cash balance promoters, these conversions are implemented to unlawfully cut the benefits of older employees and to disguise those cuts by implementing a plan that makes it virtually impossible for employees to make an "apples to apples" comparison of their benefits under the old and new plans. We ask that the Treasury Department, the IRS, and other federal agencies keep the admissions of cash balance promoters in mind when evaluating cash balance plans’ compliance with federal age discrimination statutes.

2) Cash balance plans are defined benefit plans, not defined contribution plans.

Although there seems to be little dispute that cash balance plans are defined benefit plans and not defined contribution plans, we address it briefly. ERISA and the Code recognize only two types of pension plans: defined benefit and defined contribution plans. In the most basic terms, the distinction between the two is who bears the risk of investment gains and losses. In defined benefit plans, the employer bears the risk and in defined contribution plans, it is the participant. ERISA defines a defined contribution or individual account plan as,

[A] pension plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains, and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.

A defined benefit plan is any other pension plan which is not a defined contribution plan.

Cash balance pension plans are not defined contribution plans because they are employer-funded and participants do not bear the risk (nor reap the benefits) of investment gains and losses. Nor, despite the fact that participants are presented with hypothetical "cash balances" do they have segregated accounts.

Employer cash balance contributions are typically comprised of two components: a pay credit and an interest credit. The pay credit is generally a fixed rate of an employee’s salary. The interest credit is designed to mimic defined contribution plans by providing a hypothetical investment return, usually calculated as a fixed interest rate or tied to an index such as the yield on 30-year U.S. Treasury Bonds. Because this interest credit is calculated based on the difference between an employee’s age and normal retirement age, the amount of this interest credit relative to the pay credit decreases as the employee ages.

3) Cash balance plans fail to meet the requirements for defined benefit plans and violate federal anti-age discrimination statutes.

Because cash balance plans are defined benefit plans, they must comply with the letter of the relevant provisions of ERISA, the Internal Revenue Code and the ADEA. All three legal regimes provide that that the rate of pension benefit accruals not be reduced based on the employee’s age. Cash balance pension conversions violate these provisions because the rate of benefit accrual is reduced and is reduced because of the employee’s age. This problem is exacerbated by plan provisions commonly referred to as "wear away," which prevents older workers from earning new benefits under the new plan until they exceed those that the employee accrued under the former plan.

As the IRS is aware, the Code and ERISA contains a detailed set of standards with which defined benefit plans must comply. Those standards include rules for reporting and disclosure, participation and vesting, funding, fiduciary responsibility, and administration and enforcement. The benefit accrual requirements, which are contained in the participation and vesting requirements, are fundamental and critical protections to ensure that pension plan participants fairly accrue and receive benefits under their pension plans. The benefit accrual rules are an important assurance that participants are treated fairly and that the plan sponsor does not design the plan to benefit only certain types of workers.

Under section 204(b)(1)(G) of ERISA, defined benefit plans are not in compliance with the law "…if the participant’s accrued benefit is reduced on account of an increase in his age or service." Furthermore, under ERISA § 204(b)(1)(H)(i) and Code § 411(b)(1) (H)(i) and ADEA § 4(i)(1)(A), a defined benefit shall not be treated as in compliance "…if, under the plan, an employee’s benefit accrual is ceased, or the rate of an employee’s benefit accrual is reduced, because of the attainment of any age."

In addition, one of the key elements of a defined benefit plan is that it promises and provides benefits in the form of an annuity, a monthly or regular stream of payments at retirement. ERISA § 3(23) expressly requires that defined benefit plans determine an individual’s accrued benefit "…expressed in the form of an annual benefit commencing at normal retirement age." And, Code § 411(a)(7), for purposes of section 411 vesting and accrual rules, defines "accrued benefit" in the case of a defined benefit plan as "the employee's accrued benefit determined under the plan and, except as provided in subsection (c)(3), expressed in the form of an annual benefit commencing at normal retirement age." We firmly believe that the age-neutrality of benefit accruals must be assessed based upon a normal retirement age annuity and not on the basis of cash balance plan "hypothetical accounts" which have no legal status under current law.

Based upon these requirements, cash balance conversions are in violation of ERISA, the Internal Revenue Code and ADEA. By definition, older participants accrue benefits at a lesser rate because they have a shorter period of time to earn interest than younger workers do. Under a cash balance scheme, the interest credit is tied directly to the employee’s age.

As Lee Sheppard observed in her January 11, 1999 article in Tax Notes Today (emphasis added),

Whether a cash balance plan would satisfy the proposed [IRS] regulation depends on the definition of 'rate of accrual.' If rate of accrual is defined by projecting the participant's benefit to an annual benefit beginning at normal retirement age, then cash balance plans flunk, because the size of the participant's actuarially determined benefit is purely a function of his or her age. Indeed, it is impossible to estimate a cash balance plan participant's pension benefit without knowing his or her age.

Professor Edward Zelinsky of the Benjamin N. Cardozo School of Law came to the same conclusion in his October 1999 paper, entitled, "The Cash Balance Controversy" (emphasis added),

As a matter of law, the typical cash balance plan violates the statutory prohibition on age-based reductions in the rate at which participants accrue their benefits …. There is no dispute about the underlying arithmetic: as cash balance participants age, the contributions made for them decline in value in annuity terms. Moreover, cash balance arrangements are defined benefit plans and therefore measure accrued benefits in terms of annuity equivalents, not in terms of the contributions themselves.

Cash balance promoters attempt to counter conclusions such as Ms. Sheppard’s and Professor Zelinsky’s by arguing that the rate of benefit accrual under a cash balance plan should not be calculated by projecting the pension benefits into an annuity beginning at normal retirement age. They point out that neither the Code nor ERISA define "rate of benefit accrual." Instead, some suggest that the IRS should look at the absolute dollar amount "credited" to employees’ cash balance "accounts" annually or that the IRS should remove cash balance interest credits from its analysis.

This argument is generally founded on statutory construction that is nonsensical. The accepted canons of statutory construction dictate that words and phrases should not be interpreted in isolation, but rather in the context in which they are used. Section 411(a)(7) of the Code requires an employees "accrued benefit" to be expressed in terms of an annual benefit commencing at normal retirement age . . . ." The term "accrued benefit" is used throughout section 411(b)(1). Cash balance promoters opine that, because the term "rate of benefit accrual" is used instead of "accrued benefit" in section 411(b)(1)(H)(i), Congress did not intend that the IRS should evaluate compliance with § 411(b)(1)(H)(i) by projecting an employee’s annual benefit beginning at normal retirement age.

It is not surprising that the term accrued benefit is not used in § 411(b)(1)(H)(i). This subparagraph is concerned with the pace at which the accrued benefit grows. To insert the term "accrued benefit" in this section would make it nonsensical. However, by reference to the provisions in the same paragraph, it is obvious that the benefit that is accruing is the projected annual benefit at normal retirement age.

Any doubt about the meaning of the language of § 411(b)(1)(H)(i) is resolved by comparing it to the § 411(b)(2)(A), which states in relevant part,

A defined contribution plan satisfies the requirements of this paragraph if . . . the rate at which amounts are allocated to the employee’s account is not reduced, because of the attainment of any age.

In essence, cash balance promoters argue that the IRS should apply § 411(b)(2)(A) in determining whether cash balance conversions violate the age discrimination statute. But, cash balance plans are defined benefit plans, not defined contribution plans. As such, cash balance plans must comply with § 411(b)(1)(H)(i). A comparison of the language of these two sections evidences a different standard. The only interpretation that makes sense given the context of § 411(b)(1)(H)(i) and a comparison with the language of § 411(b)(2)(A) is that the rate of benefit accrual is evaluated in terms of the projected annual benefit at normal retirement age.

This interpretation is borne out in the comments of Paul Strella -- currently at the pension consultant firm of William M. Mercer and formerly a Tax Benefit Counsel at the Department of Treasury -- at a 1992 Enrolled Actuaries Meeting:

There is a rule in the Internal Revenue Code, along with ERISA, that says that the rate of accrual, the rate of benefit accrual in a pension plan can not decline merely on account of increasing age. Well, a cash balance plan does exactly that.

This view is also apparently shared by some within the IRS. For example, a September 3, 1998 memorandum from the District Director of the Ohio Key District in Cincinnati, Ohio to the Director of Employee Plans Division in Washington, DC states that at least one cash balance plan "does not satisfy the clear and straightforward requirement of § 411(b)(1)(H)(i) of the Code because the plan's benefit accrual rate decreases as a participant attains each additional year of age."

4) The "wear-away" feature of many cash balance conversions violate federal anti-age discrimination statutes.

In addition to violating Code § 411(b)(1)(H)(i), and related sections of ERISA and the ADEA, by reducing benefit accruals based on age, many cash balance plans violate federal age discrimination law, including § 411 (d)(6) of the Code, through their use of the wear-away mechanism. It was only during the past year that members of Congress became aware that in many cash balance conversions, older workers do not accrue new pension benefits until they have "worn away" their previously earned benefits. To permit pension plans to include "wear away" violates both the letter and spirit of two key ERISA [and ADEA] principles: 1) that accrued benefits cannot be reduced, and 2) that pension plans cannot discriminate on the basis of age. To deny participants additional accruals on the basis of years of service and benefits already accrued under the plan before the amendment is contrary to public policy. In this situation, benefits accrued based on years of service absolutely is a proxy for age. Plan wear-away provisions do not meet the ERISA/IRC exception for explicit uniform limitations on benefit accruals for all workers based upon a maximum number of years of service. Under wear-away clauses, the only workers who do not receive continued accruals are the oldest workers. To claim that they always remain entitled to their accrued benefit, even though every day it is being eroded and used against their ability to earn new benefits, makes a mockery of ERISA’s accrued benefit protections.

There is little doubt that the wear-away feature of cash balance plans is targeted at older workers. The wear-away takes place because the benefits the employee is entitled to under the traditional defined benefit plan are greater than those under the cash balance plan. By definition, the employees that fit this profile are older workers because benefits under a traditional defined benefit plan accrue more quickly for the older, more senior workers while the rate of accrual under a cash balance plan accrue more slowly for this group of employees. Given the age discriminatory intent of cash balance promoters, the IRS should cast a jaundiced eye at their claims that the disproportionate impact of wear-away on older workers is not by design.

In our mind, the practice of wear-away is contrary to the law and public policy and cannot be allowed to continue. The fact that the IRS has not objected to these provisions in the past, and may have given some plan sponsors prefatory language refuting any age discrimination questions, should not stand in the way of the IRS and other agencies fresh assessment of whether cash balance plans comply with the law. In light of the wealth of new information that has become public in the past year, it is critical that the IRS take all needed steps to ensure that all pension plans comply with the law.

5) Cash balance conversions should therefore be disqualified under existing law.

As we have discussed, cash balance pension conversions are illegal under § 411(b)(1)(H) of the Internal Revenue Code, § 204(b)(1)(H) of ERISA, and § 4(i)(1)(A) of ADEA in terms of accrual rates. We have also indicated that most cash balance conversions are in violation of § 411(d)(6) of the Internal Revenue Code dealing with wear away.

Since, cash balance conversions are in violation of these laws, we believe that the IRS should disqualify these conversions under current law. Cash balance promoters have appealed for regulatory relief on the grounds that they were lulled into a false sense of security about the legality of cash balance conversions. We have little sympathy for their arguments. Much of the difficulty in uncovering the age discriminatory nature of cash balance conversions lies with the promoters themselves and they are entitled to no benefit from the confusion of their own making.

Finally on this point, we note that most of the arguments made by cash balance promoters are policy arguments for why hybrid pension plans, including cash balance plans, are a positive development that deserve the support of the federal government. Even if those arguments had some merit, which in our strong view they do not, those arguments are inappropriate in this regulatory context. Cash balance conversions violate federal anti-age discrimination statutes.

6) A safe harbor should be established allowing cash balance plans to meet existing legal requirements only if all employees are allowed to choose which pension plan works best for them with detailed disclosure.

In consideration of the goals of the age discrimination regimes in the Code, ERISA, and the ADEA, and based on our considerable consultation with employees affected by cash balance conversions, we also believe that a safe harbor should be established that would protect the tax-exempt status of cash balance conversions if the employers offer all current employees the choice to remain in the traditional defined benefit plan. We believe that such a safe harbor would come the closest to proverbial "win-win" outcome for all stakeholders in the cash balance pension debate.

The safe harbor that we are recommending would necessarily require the employer to provide a detailed individualized statement allowing the employees to easily compare between the traditional defined benefit plan and the cash balance plan. If the company does not want to provide these individualized statements, the company may be exempted from this requirement only if they allow their employees to choose which pension plan works best for them on the date that they leave the company. On this date, the company must also allow the employees to compare exactly how much they would receive under the traditional defined benefit plan and the cash balance plan.

Due to the complexities involved, we believe that companies that have already converted to cash balance plans should be given at least 90 days to make the above changes in their pension plan. As we noted above, from a policy standpoint we believe this represents a middle ground that would most effectively address the concerns of all involved. For the employers, their pension plans would continue to enjoy tax-exempt status. And, for the employees, they would be able to continue to receive the pension benefits that were promised to them.

We do not, however, offer here an opinion about whether the IRS has the authority to implement such a safe harbor under current federal law. If the IRS determines that it does not have the authority to do so, we stand ready to support an IRS request to implement the necessary statutory changes.

Thank you for giving us this opportunity to express our views. We look forward to working with you to address the serious age discriminatory impact of cash balance conversions.


Bernard Sanders, William Clay, George Miller, Martin Frost, Barney Frank, John Conyers, Jr., Edward J. Markey, Jerrold Nadler, Patsy Mink, Martin Olav Sabo, Marcy Kaptur, Nancy Pelosi, Peter J. Visclosky, Luis V. Gutierrez, Rush D. Holt, John Elias Baldacci, Carolyn B. Maloney, Cynthia A. McKinney, Lynn C. Woolsey, Donald M. Payne, Sherrod Brown, Peter A. DeFazio, Tammy Baldwin, Robert A. Brady, Lane Evans, Corrine Brown, Frank Pallone, Jr., Michael P. Forbes, Sheila Jackson-Lee, Gary L. Ackerman, Tom Lantos, John Joseph Moakley, Steven R. Rothman, James P. McGovern, Dennis J. Kucinich, John F. Tierney, Janice D. Schakowsky, Neil Abercrombie, Eleanor Holmes Norton, Bob Filner, Michael F. Doyle, John W. Olver, Major R. Owens, Bennie G. Thompson, Michael E. Capuano, Sanford D. Bishop, Jr., Danny K. Davis, Ted Strickland, Alcee L. Hastings, Jesse L. Jackson, Jr., Carolyn McCarthy, Stephanie Tubbs Jones, Barbara Lee, Pat Danner, Ron Klink

Letter to Congress


Protect the Pensions of American Workers
Urge the IRS to Enforce the Pension Age Discrimination Laws

February 17, 2000

Dear Colleague:

Across America, millions of workers have seen their pension benefits cut back significantly by their employers. Millions more are wondering if the pensions they have will be there for them when they retire.

Please join me, therefore, in urging the Internal Revenue Service (IRS) to enforce the pension age discrimination laws that are already on the books. Recently, the IRS has asked for public comments on cash balance pension plans. Cash balance pension plans have slashed the pension benefits of millions of hard working and loyal employees by as much as 50 percent. Companies are converting to cash balance plans because by slashing the pensions of their long-term employees it boosts their profits. Companies should not be increasing their profits on the backs of their loyal and hard working employees. Not only is this immoral, but it is also illegal.

Large, multinational companies that have defined benefit pension plans receive over $70 billion a year in tax breaks from these pension plans alone. There should be no tax breaks for companies that willfully violate the pension age discrimination statutes. It is critical that the IRS hear from Members of Congress on this vital issue.

I hope that you will join me in signing onto these IRS comments on cash balance plans. Specifically, the comments make the following points:

  1. Cash Balance Conversions Are Often Intentional Attempts To Cut The Pension Benefits Of Older Employees.

  2. Cash balance plans fail to meet the requirements for defined benefit plans and violate federal anti-age discrimination statutes.

  3. The "wear-away" feature of many cash balance conversions violate federal anti-age discrimination statutes.

  4. A safe harbor should be established allowing cash balance plans to meet existing legal requirements only if all employees are allowed to choose which pension plan works best for them with detailed disclosure.

Cash balance pension promoters claim that cash balance plans are better for a younger, more-mobile workforce. They are wrong. A front-page story in the Wall Street Journal on December 16, 1999 disputes this myth: "Many younger workers are no more likely to collect a benefit from these new-fangled plans than they are from traditional pensions."

Finally, the fact that cash balance plan conversions violate current pension age discrimination laws is clear. According to Edward Zelinsky, a law professor at the Benjamin N. Cardozo School of Law, "As a matter of law, the typical cash balance plan violates the statutory prohibition on age-based reductions in the rate at which participants accrue their benefits .... There is no dispute about the underlying arithmetic: as cash balance participants age, the contributions made for them decline in value in annuity terms."

Pension security is vital to the working men and women of America, and we must do all we can to ensure that employees of the most profitable companies in America do not lose their retirement benefits. Please join me in signing the IRS comments on cash balance plans. If you would like to sign on or have any questions, please feel free to contact Warren Gunnels on my staff at 5-4115.


Bernard Sanders
Member of Congress

From Congressman Sanders - 1/6/00

Congressman Sanders to the SEC reads, in part: "...Further, the Stockholder Proposal should not be excluded because it relates to possible illegal conduct on the part of the company that may have serious financial repercussions. The Commission should take note that the legality of cash balance pension conversions such as those at issue in the Stockholder Proposal are currently under review by other arms of the federal government, including the Internal Revenue Service (IRS) and the Equal Employment Opportunity Commission (EEOC).

"First and foremost we believe that IBM's decision to convert its traditional defined benefits pension plan to a so-called "cash balance" plan on July 1, 1999 may violate the federal pension age discrimination laws. The Internal Revenue Code, the Employee Retirement Income Security Act (ERISA), and the Age Discrimination in Employment Act all clearly state that employers cannot reduce the rate of accrual in a defined benefit plan based on the attainment of any age. The pension conversion that IBM effected earlier this year does just that. That cash balance pension conversions - such as IBM's - may violate these provisions of federal law is well known within actuarial circles.

"The age discriminatory impact of cash balance pension conversions - such as IBM's - has also received 'significant coverage in the national media. With some variation, over 300 U.S. corporations have converted to a cash balance pension system. News stories highlighting cash balance age discrimination have appeared in the Wall Street Journal, the New York Times, the Los Angeles Times and on CBS national news. There can be little doubt that the relationship between age discrimination and cash balance pension plans raises serious public policy concerns. Given that the management of IBM has chosen to respond to this public policy concern in a manner which is half-hearted at best, the stockholders should not be excluded from deciding whether IBM should continue to pursue a pension program that is infected with age discrimination.

"The seriousness of the IRS and EEOC investigation is demonstrated by the fact that the IRS has placed a de facto moratorium on approving the tax-exempt status of cash balance pension conversions until this issue is fully considered by the IRS, EEOC and Department of Labor. Currently, IBM has not received a favorable tax determination letter approving the tax-exempt status of its cash balance conversion. EEOC Chairwoman Castro has stated that investigating whether cash balance pension conversions constitute age discrimination is a 'top priority' for her agency.

"...That financial harm includes the loss of the tax-exempt status of IBM's pension plan, and fines and civil money penalties resulting from age discrimination charges brought by the EEOC and/or individuals. A finding that IBM's pension conversion is age discriminatory may also put into question the allowability of IBM's pension costs for the purpose of government contracting. If such costs are found to be unallowable and have been billed to the government either indirectly or as part of indirect rates, IBM could also face treble damages and penalties under the False Claims Act given its knowledge of the age discriminatory nature of its cash balance pension conversion." If you read about the IBM cash balance plan, you would think that you were reading about Duke Energy's cash balance plan. Duke blows plenty of smoke and tries to muddy the water, but the plans are very similar.

AARP's Amicus Brief


"In Congressional testimony and in a letter to Administration officials in September, AARP called for a full investigation to determine whether cash balance plans violate age discrimination laws. In the letter, AARP Executive Director Horace B. Deets raised questions about whether the plans conflict with the Employee Retirement Employment Act (ERISA), the Internal Revenue Code and the Age Discrimination in Employment Act(ADEA). 'We have heard numerous complaints from AARP members and other older workers regarding the lower benefits they will receive as a result of these conversions,' Deets said in the letter. in the AT&T case, the AARP brief states that the company distributed a brochure in November, 1997 telling management employees that it was converting to the cash balance formula. The brief says that the initial cash balance accounts established for participants were significantly less than the value of the accumulated annuities they had already earned under the old formula. The brief also notes that the employee plaintiffs alleged the company knew that employees within seven years of retirement eligibility would not earn any additional benefits from the new plan because of the transition features being implemented.' This is an important point that also applies to Duke Energy. If you were with seven years of early retirement on 1/1/97, and retire at age 55, you will NEVER earn any new retirement accruals! The retirement plan ended for you on 1/1/97, only no one told you! The 7% added to your cash balance hypothetical account means NOTHING. You will never see a dime of the "hypothetical" money.


(Posted with permisson from Ms. Krueger)

Janet Krueger is an American heroine in the pension reform effort. She immediately quit IBM in protest when they introduced their cash balance plan. Though she no longer works for IBM, she has taken over as founder of the Yahoo IBM Pension message site, founded the IBM Pension web site, testified before the senate pension hearing, and has worked tirelessly for pension reform. Below is a message she received from a congressional staffer:

"I won't comment on your political strategy, but I hope you won't despair over this one vote. You guys are WINNING. It just takes a while for the game to be played out. Just think what you've accomplished in less than a year:

  • 8 bills introduced in Congress on your behalf

  • Two Senate votes w/ 48 votes in your favor each time

  • Two Senate hearings

  • A House letter to the IRS w/ 13 signatories

  • Senate letters to the IRS from Moynihan and Harkin

  • A House letter to the IRS, DOL and EEOC with 40 signatories

  • A Senate letter to EEOC from Grassley

  • A House letter to DOL re actuaries w/ 20 signatories

  • A favorable response from IRS -- "Determination letters put on hold"

  • A favorable response from DOL Secretary -- "Will investigate actuaries"

  • A favorable response from EEOC -- "Considering age discrim"

  • About a zillion newspaper articles and several TV reports

There is no lobbyist in this city who has accomplished that much on a single issue in one year. NOBODY. And it's all because you guys are organized and determined.

Get your spirits up. You're going to win."


As I promised, I want to keep you informed of the most recent developments that are taking place regarding the issue of cash balance pension plans…

In what I think is a very positive development, the Internal Revenue Service (IRS) and the Treasury Department have recently announced that they are seeking public comments from employees who have been impacted by cash balance pension plans. This is a formal process by which the government gains information from people throughout the country as part of developing public policy. In this case, these comments will be used by IRS officials in their analysis of the legality of cash balance conversions.

It is very important, therefore, that the IRS hear from employees in Vermont and throughout the country about the negative impacts cash-balance plans have had on their retirement security. I can assure you that corporate America and powerful lobbyists will be sending in their comments. Given the reality that millions of American workers have been negatively affected by these conversions, it is imperative that large numbers of employees take advantage of this opportunity by voicing their concerns.

You may send your comments to the IRS by writing to them at the following address:

Internal Revenue Service Attn: CC:DOM:CORP:R (Cash Balance Plans and Conversions) Room 5226, PO Box 7604, Ben Franklin Station Washington, DC 20044

My office has also developed a convenient website link to enable you to e-mail your comments directly to the IRS. You can access my website at:

The IRS is accepting public comments until January 18, 2000. Make sure that you contact them by that time.

The decision by the IRS to seek public comments is an extremely important development. Not only will working people, for the first time, be able to voice their opinions about cash balance payment conversions, but this action on the part of the IRS signals that they will not be issuing any new tax determination approvals for cash balance plans in the foreseeable future. This is a major step forward for those of us who believe that cash balance payment plans are illegal because they violate federal age discrimination laws.

As you know, IBM does not yet have IRS approval for their cash balance plan. This action by the IRS may, therefore, offer a window of opportunity for the company to do what they should have done from the start: offer all of their vested employees the right to remain in their old pension plan.

Meanwhile, I am continuing to seek a legislative solution to this very serious national problem. The Pension Benefits Protection and Preservation Act of 1999 which I introduced with Rep. Maurice Hinchey from New York on September 21, 1999 already has 52 sponsors in the House. Senator Wellstone has introduced identical legislation in the Senate. This bill is the strongest pension protection legislation being offered in Congress and has won the support of the IBM Employees Benefits Action Coalition. This comprehensive legislation would, in addition to requiring companies to provide strong disclosure, guarantee all employees a choice when companies convert to cash balance plans.

As you know, retirement security is one of the most important issues facing the working people of Vermont and this country - and I will continue to remain focused on it. For more information on this issue, please feel free to log on to my website, or contact my office.


Bernie Sanders (I-VT)
Member of Congress
Email Address:
For more information, please visit:



Knowing of your interest in the recent conversions from defined benefit pension plans to "cash-balance" plans, I wanted to update you on information that I have received from the Department of Labor on this. As you know, I have been seeking both administrative and legislative solutions to this problem, including contacts with the Equal Employment Opportunity Commission regarding age discrimination involved in such conversions, as well as the Internal Revenue Service (IRS), Treasury, and the Department of Labor. Yesterday, I received a response from Labor Secretary Alexis Herman to a letter sent by several Members of Congress, and I want to share this latest information with you.

Secretary Herman, at our urging, has directed the Assistant Secretary for Pension and Welfare Benefits to meet with the Actuarial Board for Counseling and Discipline and the Joint Board for the Enrollment of Actuaries to determine whether any investigation, including disciplinary action, is appropriate against individual actuaries who may have been devising schemes to mislead workers about the adverse consequences of conversion.

Further, Secretary Herman assured us that she will be pursuing any available remedy under existing federal law to ensure that workers have not been mislead and will receive straightforward information about their pension benefits.

In the meantime, I will continue my work to find solutions to this important issue. I welcome your continued advice and stand ready to assist with matters of a federal nature.

Lloyd Doggett
328 Cannon House Office Building
Washington, D.C. 20515
(202) 225-4865, (512) 916-5921

Letter from Congressman Bernie Sanders


"In my view it is an outrage that hundreds of companies, including IBM, have broken faith with their employees and reneged on the pension benefits they promised. The very good news is that the IRS has, essentially, placed a moratorium on the conversion of pension plans. Also, they are requesting comments from the public regarding the cash balance payment plan."

Letter from Senator John Edwards

Employee Advocate - - October 21, 1999

The letter excerpt below, is from Senator John Edwards. It gives his views on "big money" trying to buy Washington and how helpless that working Americans often feel. Could any of this possibly apply to our situation?

Mr. EDWARDS addressed the Chair.

The PRESIDING OFFICER. The Senator from North Carolina.

Mr. EDWARDS. Mr. President, our political process is diseased. The virus causing that disease is money. The worst virus of all is what is known as soft money. The people of America, including folks I grew up with in a small town in North Carolina, no longer believe their vote matters. As a result, they do not go to the polls; they do not participate. They have completely disengaged with their Government and the political process.

The reality is, people have disengaged for a two major reasons. One is the influx of big money. I don't think it is an accident that during the widening of the soft money loophole and the boom of big soft money contributions over the last several years that allows people to write checks for one-hundred thousand dollars, completely unregulated, unmonitored--that during this same period of time voter turnout has steadily declined.

It used to be that public service was a very noble calling, before this extraordinary influx of big money and these spiteful advertisements we have seen over the last few years. We have to do everything in our power to return power in this Government where it started and where it belongs, which is with average Americans going to the polls.

The single biggest loophole that we have today is soft money. I strongly support comprehensive, across-the-board campaign finance reform, to return power to regular people. But the reality is that what we have a chance of passing in this Congress is a ban on soft money. That doesn't solve the problem, there is no question about that; we will continue to have other problems in other areas. But if we keep putting this off, not addressing the issue and voting it down on a procedural basis, even though a majority of the Senators voted in favor of campaign finance reform, we have not sent the right signal to the American people. We have a responsibility--I believe I have a personal responsibility to the people that I represent all over North Carolina--to say that we are going to do what we can do. We are going to send you a powerful signal that we are starting the process of solving this huge problem.

The simplest way to send that signal is to ban soft money--to ban it tomorrow. Let's put a stop to this unregulated flow of huge sums of money that are coming into our political system. This ban alone won't solve the problems facing our political system. Nobody believes it will. But it will send a powerful message across this country that we care, that the people in this Senate care about how average Americans feel about the process. Because if we don't ban soft money, we send the signal that we don't care, that all we care about is ourselves, our own elections, and we don't care about the people out there across this country who are no longer going to the polls. We have to do something about that. They need to hear a loud and powerful message from us.

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