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News - July 2000

"More people would learn from their mistakes if they weren't so busy denying that they made them." - Anonymous

Retirement Legislation Could Endanger Pension Plans
The Dallas Morning News - By Pamela Yip - July 31, 2000

Retirement legislation that's now making its way through Congress contains many features that will encourage American workers to save more for their golden years.

But critics of the Comprehensive Retirement Security and Pension Reform Act say the bill also has provisions that could actually hurt employees covered by traditional pension plans.

Opponents say parts of the legislation, which recently passed the House of Representatives, are vague and "would give the green light to companies to further erode the retirement security of American workers."

For example, employee groups said the bill could head off efforts to protect the pensions of older workers from the impact of controversial cash-balance pension plans and other hybrid plans, which many corporations have adopted and which tend to benefit younger workers.

Critics also said the bill would benefit only higher-paid employees, who can afford to save more for retirement.

But the key rallying point among opponents of the legislation centers on subsidized early-retirement benefits.

How would that happen? Critics point to a provision that would give the government the power to reduce or eliminate subsidized early-retirement benefits.

"It does away with the early-retirement provision, so that what you earned under your old retirement plan could be taken away from you," said Lynda French of Austin, a board member of the IBM Employees Benefits Action Coalition, formed last year to protest IBM's conversion to a cash-balance pension plan. "You've earned early-retirement benefits, and it's very wrong to take them away from any employee who has earned them."

"For 25 years, pension plan participants have been protected by an ERISA [the federal Employee Retirement Income Security Act] provision that basically states, 'Once a benefit is earned, that benefit cannot be reduced by an amendment to the plan,'" Ms. French said. "It appears to us that 25 years of ERISA protection may be eliminated. ..."

The bill could create a "big loophole if this proposed change will allow an employer to take away an employee's earned, accrued benefit and replace it with something else and claim that the change is not material," Ms. French said.

"It would be a license to steal, so long as you're only stealing from a few people on a large-employer context," said Norman Stein, a pension law expert at the University of Alabama School of Law in Tuscaloosa.

The Clinton administration also opposes the legislation.

"It contains provisions that may lead to reduced retirement security for rank-and-file workers," the Office of Management and Budget said in a statement. - Lynda French is the webmaster of this fine site.

Beware: The Rich Are Getting Richer
L. A. Times - By NORMAN STEIN - July 31, 2000

'Reforms' in the House bill won't much help rank-and-file workers save for retirement.

When the siren song of pension reform emanates from our nation's capital, beware: The rich are likely to get richer, and almost everyone else will get poorer.

As a nation, we have invested hundreds of billions of dollars--more than $80 billion last year alone--in tax subsidies aimed at encouraging employers to offer pension plans that would help their employees save for retirement.

Despite this massive national investment in retirement security, fewer than half of the employees in the private-sector work force participate in a pension plan--about the same percentage covered in 1974 when Congress overhauled the private pension system. Seventy million people--mostly low- and moderate-income employees--currently work for employers who don't have pension plans or who have pension plans that fail to cover them.

What's the answer? For House Ways and Means Committee Chairman Bill Archer (R-Texas) and the other committee members who sent pension "reform" measures to the House floor, where they passed overwhelmingly, it is more pension tax breaks for the affluent. The idea, according to the legislation's sponsors, is to dangle juicy tax-shelter carrots in front of business owners and managers who do not currently have retirement plans. When employers take the bait and adopt pension plans, all workers supposedly benefit because all, high and lowly, will be covered.

But look at the imbalance. One provision in the House bill would jack up limits on annual benefits from traditional pension plans, allowing the most affluent employees and entrepreneurs to look forward to more than $160,000 per year at retirement. Other provisions would increase the amount that some of these same people can salt away, tax-free, in profit-sharing or 401(k) plans to more than $45,000 each year--this includes employer contributions--and would create Roth 401(k)s in which a fortunate few could effectively shelter even more.

These provisions are aimed directly at the wealthiest Americans, the only ones who could possibly afford to use them. Little in the bill would directly do any more than existing law to help low- or moderate-income employees save for retirement.

In any case, this misguided trickle-down pension policy is unlikely to result in many new pension plans. According to a study by the Washington-based Employee Benefits Research Institute, the two leading reasons that businesses give for not sponsoring pension plans are not enough business profit and not enough employee interest. So raising the effective annual shelter limits as high as $45,000 and the maximum traditional pension benefits to $160,000 will do little more than lighten the tax burden for the wealthiest Americans, who already participate in pension plans and, in any event, don't need government paternalism to encourage them to save for retirement.

Even worse, some of the changes virtually invite businesses that already have pension plans to reduce benefits for both low- and middle-income employees.

For example, one obscure and seemingly innocuous measure would increase to $200,000 the maximum amount of salary (currently $170,000) that can be taken into account under a retirement benefit formula. Here is how it works. For a wealthy business owner (perhaps a doctor) to shelter income in a defined contribution plan, special "nondiscrimination" laws require her to contribute a proportionate part of her employees' income. If she wants to shelter the current maximum contribution of $30,000 for herself (17.65% of the current limit of $170,000), then she also may have to set aside 17.65% of the income of each of her employees. But if the salary limit is raised to $200,000, the percentage contribution required for her to shelter $30,000 drops to 15%. This means that if she is satisfied with her own $30,000 contribution, she can correspondingly reduce the percentage contribution for all of her other employees. An employee earning $50,000 a year could lose more than $1,000 in contributions the first year alone. Over the course of a 30-year career, assuming average investment performance, the employee could lose more than $100,000 in retirement savings.

Another provision in the legislative package would gut the "top-heavy rules," a special set of rules requiring certain plans to provide minimum benefits for rank-and-file employees. If enacted, some lower-income people who now get some benefits from their plan will receive smaller benefits or even none at all. Still another provision whittles away at the core of the nondiscrimination tax principle that bars employers from adopting plans that give a handful of wealthy employees enormous pension benefits while providing everyone else with trivial benefits.

What is needed are new ideas. The Clinton administration's plan last year for "USA accounts," in which the government would make direct and matching contributions for moderate- and lower-income workers, is one such idea. And what about conditioning new tax breaks on how well a pension plan actually treats moderate- and low-income workers? With some imagination, we can help all Americans in their quest for retirement security.

Norman Stein Is a Professor of Law at the University of Alabama.

Retirement rules may change, but who benefits?
Austin American Statesman - By Albert Crenshaw - July 30, 2000

As baby boomers begin to slide past the big 5-O and the reality of looming retirement begins to sink in, some of them are beginning to wonder whether they'll really have enough money when the time comes.

The House of Representatives has come rushing to what it insisted was the assistance of these near-retirees, approving a long list of changes in the nation's pension laws that backers said also would improve the lot of retirees in the more-distant future.

Some pension activists aren't so sure. There are many problems with the bill, they say, but two particularly stand out.

First, the increases in the IRA, 401(k) and 403(b) limits are beneficial only to those taxpayers who can afford larger contributions. Proponents of the bill have data that show that 61 percent of IRA contributors are now at the $2,000 maximum and presumably could afford more. Opponents counter with numbers that show only 5 percent of 401(k) plan participants now contribute the maximum $10,500.

The typical full-time worker in the United States earns $30,000, according to the Pension Rights Center, an advocacy group in Washington, and cannot afford to contribute half a paycheck to a savings plan.

Second, the bill would repeal restrictions on ``top-heavy'' plans in which the bulk of the benefits flow to owners, executives and other highly paid workers.

Current law requires employers to make a contribution of 3 percent of pay to rank-and-file employees if at least 60 percent of the money in the company retirement plan is in the accounts of owners and officers. This rule would be eliminated for certain types of plans.

Backers of the bill say that these and other restrictions on retirement plans discourage employers from setting them up at all, and that easing some of the rules would increase the likelihood that companies, particularly small ones, will start offering them.

But, say critics such as Harvard law professor and former Treasury tax-policy official Daniel Halperin, "the problem is you would get more plans, but you are going to get more plans in which the higher-paid owner is getting most of the benefits."

Said Karen Ferguson of the Pension Rights Center: "The bottom line is (backers) truly are going in exactly the wrong direction, and they are ducking the really hard issue, which is how do we get a retirement system on top of Social Security that will assure that people who can't otherwise save adequately for retirement will get the income they need when they are too old to work.''

'Phased Retirement' Mainly a Boon for Employers
The Wall Street Journal - by Ellen Schultz - July 27, 2000

After years of reducing the ranks of their older workers through layoffs and early-retirement programs, some American companies now say they're keen on keeping their seniors.

Citing labor shortages, they are backing "phased retirement" pension legislation, to allow older workers to start collecting their pensions while still working. Companies say this would encourage older workers to stay on the job, because they could afford to cut back to part-time work if they were able to collect their pensions to supplement their income.

Phased retirement came out of nowhere this year. The Senate has held hearings on it, and legislators last week introduced the Phased Retirement Liberalization Act, to help employers set up such programs.

But like many of the retirement proposals in Washington that are portrayed as enhancing the retirement security of workers, phased retirement primarily helps companies save money. The legislative fast track it is on shows how quickly consulting firms and employer groups can move when they find a new cost-saving tool, and how easy it is to promote such a change as a boon to workers.

'Retention Program'

The potential savings for corporations are huge. In January, GTE Corp. began allowing older, long-service workers to take their accumulated pensions in a lump sum while still working. The company called this a "retention program" intended "to stem the brain drain" of older workers who were tempted to quit to get their hands on their pension money. After taking their lump sums, which they could roll into IRAs and invest, the workers continue to earn a benefit in the pension plan.

"The option seems too good to be true. Why wouldn't an employee take advantage of receiving their pension now?" asked a hypothetical employee in a brochure GTE gave eligible workers. "Frankly, we don't know," the brochure responded. "We think it is a great opportunity!"

Apparently, so did more than 90% of the 1,700 eligible employees. That many took the lump sum.

The brochure didn't mention what an opportunity the program provided GTE. In the first quarter, thanks to the program, GTE reported a pretax gain of $487 million -- 37.7% of its pretax income -- government filings show. A spokesman for GTE confirms that most of the savings trace to the lump-sum withdrawals by people still on the payroll.

The program saves money by reducing the pension liabilities of the oldest GTE employees. Once they receive their lump sum, the pension they earn between then and retirement is much smaller, because prior years of service are no longer counted. Consider a 55-year-old earning $50,000 with 30 years of service. He would have an annual pension of $36,286 when he retires at age 65. But if he now takes a lump sum, which the company says would be $263,250, the pension he earns in his last 10 years will be $9,071 annually starting at 65. Employees who take their lump sum and invest it, rather than spending it, will likely end up with more than they would have received from their pension.

In the case of GTE (which recently became a part of Verizon Communications) these employees will continue working full time. By contrast, other phased retirement programs assume the worker cuts back to part time. In such cases, the compensation the worker earns will be lower, possibly reducing the pension further, depending on how the plan is structured. The employer saves from the reduced pension and other benefits, and also can pay less in FICA tax and 401(k) contributions.

Regardless of whether the person who starts drawing a pension is working full time or part time, companies can save money by eliminating the value of early-retirement subsidies. These are pension enhancements many employers added a decade ago to encourage older workers to leave. The law says a company can't just take them away. But if a worker takes a pension in a lump sum, the value of the subsidy can be excluded from that sum.

The concept of phased retirement -- drawing a pension without completely leaving the payroll -- has been around for years in the public sector and at nonprofit institutions such as colleges. But it was new to the corporate world until the consulting firm Watson Wyatt Worldwide repacked the concept last year.

Until a couple of years ago, Watson Wyatt was helping companies identify how much older workers were costing so they could take steps to cut the expense, such as by reducing pensions. Last year, Watson Wyatt switched to predicting a shortage of older workers, but its recommendation was the same: Cut pensions. Now, the purpose was to encourage older workers to stay.

In particular, Watson Wyatt suggested that companies eliminate early-retirement subsidies. If you cut out "the substantial kick-up in wealth" these provide to workers, "they can't afford to retire," says Sylvester Schieber, a principal at the Bethesda, Md., firm.

Phased Retirement

Another solution for employers, Watson Wyatt said, in a survey it sent to lawmakers and the news media last fall, was to implement phased-retirement programs. The idea was that some older workers wanted to phase down to part-time work. They could afford to do so if they could collect their pensions right away.

The news media were fascinated with the idea that a tight labor market had created a demand for older workers, despite the paucity of studies showing this. Journalists cranked out a stream of positive articles on phased retirement, quoting Watson Wyatt.

The firm's consultants met with legislators, saying the law needed to be changed to make phased retirement possible. Pension law prohibits companies from distributing pensions to people still working for the company before the "normal retirement age" established by a pension plan. Watson Wyatt urged that the law be changed to allow distributions at younger ages for those still employed.

But a change in the law isn't needed for a company to put in a phased-retirement program. All it has to do is lower the normal retirement age. (GTE did this, to age 55.) The problem with that, from employers' point of view, is that it would mean workers would "vest" in their pension benefits sooner, and qualify for early-retirement subsidies sooner. This would raise pension costs.

James Delaplane of the Association of Private Pension and Welfare Plans, an employer group, and Watson Wyatt's Mr. Schieber met with aides to Iowa Republican Sen. Charles Grassley and North Dakota Democratic Rep. Earl Pomeroy. In March, when Sen. Grassley held hearings on phased retirement, testimony from APPWP said pension laws preventing distributions to employees who are still employed "often force employees to retire completely."

There was no discussion of the savings employers might get with these programs, the staffers say. And no one asked an important question: If people can't afford to retire, can they afford to cut back to part-time work and begin consuming their pensions at a younger age?

Messrs. Grassley and Pomeroy introduced a bill to allow pension distributions to the still-employed at ages below the pension plan's normal retirement age. The APPWP praised the bill but said it should provide even more flexibility for employers. The group recommended easing rules that bar employers from cutting pensions already earned, and easing rules intended to prevent discrimination in favor of higher-paid workers.

Host Of Subtle Ways to Pare Retirement Payouts
The Wall Street Journal - by Ellen Schultz - July 27, 2000

When International Business Machines Corp. announced the latest changes in its pension plan last year, David Finlay, a senior engineer in Colorado, went to his basement and hauled out boxes of benefits brochures collected since he joined IBM in 1972. It wasn't too hard for him to figure out that through the 1970s and 1980s, various changes had been for the good. It took a lot longer to figure out what happened in the 1990s.

When he was done, months later, what he discovered dismayed him. In the past decade, the company made change after change to its pension plan, reducing Mr. Finlay's future benefits each time, by his reckoning. According to the 55-year-old engineer's calculations, he will retire in 10 years with a $57,700 annual pension, compared with $71,200 it would have been without the revisions of the 1990s.

IBM, which declines to comment on Mr. Finlay's analysis, is a case study in the manifold, complex ways large companies have been whittling away pensions over the past decade, a pension-paring spree that hasn't ended yet. An examination of hundreds of federal filings reveals such cuts at a host of big companies, including Ameritech Corp., Duke Energy Corp., Dow Chemical Co., Kmart Corp., Lucent Technologies Inc. and Southern Co. The upshot of the pension changes, which are often poorly explained to employees, is that millions of people will retire with pensions that are sharply lower than they once would have been.

"If your pension has changed in the 1990s, it probably changed for the worse," says Norman Stein, a pension-law professor at the University of Alabama at Tuscaloosa.

Sometimes companies cut pensions when business is bad, but that isn't what's happening here. Employers are imposing the pension cuts at a time when profits are lush and when most pension funds are fully funded or overfunded, thanks to the long-running bull market. Paring future payouts, in such an environment, renders plans even more overfunded.

This isn't just a comforting feeling to companies. For some, it is also a new profit center. That's because accounting rules allow excess pension income to flow to the bottom line, where it can boost operating income and smooth earnings.

Some of the changes are so complicated that even government pension experts aren't sure how they work. Created by consulting firms and companies' finance departments, the maneuvers flourish with little oversight. They go well beyond the "cash balance" system that caused an outcry last year after The Wall Street Journal reported that the new-style plan could cut older workers' pensions as much as 50%.

Some companies make subtle changes to the benefit-calculation formulas of traditional pension plans. Others take advantage of pension-law loopholes to eliminate early-retirement subsidies, and still others adjust compensation formulas to lower the amounts that count toward a pension. Says Brooks Hamilton, a lawyer who runs a pension consulting firm in Dallas: "Never have so few plundered so much from so many."

Federal law bars employers from retroactively cutting benefits an employee has earned. But it is perfectly legal to cut the rate at which benefits are to be earned in the future, or to eliminate future benefits altogether.

A company that is reducing future pension accruals of its employees is supposed to make this clear to them. Few do. In regulatory filings, companies typically cite "changes" or "modifications," not "cuts" or "reductions," and the brochures given to employees are typically vague. In IBM's case, a brochure for some 1995 changes did contain a reference to "lower value" for certain workers. Still, in 1999, even while IBM employees were complaining bitterly to lawmakers about adoption of a cash-balance plan, almost none realized that the 1995 changes had already transformed their plan.

One of the most common ways companies cut pensions is by changing the formula they use to calculate monthly retirement checks. Under traditional plans, payments generally are based on three items: years of service, an average-salary figure and a multiplier, such as 1.5%. All three can be changed. Southern Co., for instance, reduced its multiplier to 1% from 1.7%. Benefits were reduced 25% to 33%, by a Southern official's calculation, although employees of the Atlanta utility age 35 or older could remain subject to the old formula.

It might seem the years-of-service and average-salary elements would be immutable, but in fact, companies can manipulate these elements, too. They can cap the years of service that count toward a pension. And on salaries, instead of taking the employee's highest three years of pay, they can take an average of 10 years or even an entire career.

Kmart and Manpower Inc. froze their pension plans, so that neither future salary increases nor added years of service could increase the benefit. When Kmart froze its pension plan in 1996, it quickly turned it from underfunded into overfunded -- and pumped $63 million of pension income into its bottom line for 1998. A spokeswoman for Kmart says employees have the opportunity to participate in 401(k) retirement plans that supplement the pension. Manpower, which froze its plan at the end of February 2000, has no comment.

When a company changes its pension formula, employees can face months or years before their expected future retirement benefit gets back up to where it was before the change. In the meantime, they are essentially earning no benefit. "Wearaway," pension designers call this phenomenon.

Duke Energy made a complex adjustment in the early 1990s to the way it incorporates Social Security into its pension formula, a move that halted the accruals for the oldest workers for months or even years, the company acknowledges. Duke later converted to a cash-balance plan, again reducing accruals for some, although this time the change didn't affect those closest to retirement. Wearaway doesn't violate the law against cutting already-earned pensions so long as the employer provides the original, larger benefit to anybody who departs before working his or her way through the wearaway period.

At IBM, pension cuts began in 1991 when the company lowered the multiplier in its traditional plan to 1.35% from 1.5%. Mr. Finlay calculates that this and other 1991 changes reduced the pension he would draw at 65 to about $69,500 a year from $71,200. IBM also capped the pension, meaning that years worked beyond 30 wouldn't increase it.

Asked about Mr. Finlay's conclusions, IBM said in a written statement: "We are not saying your information is correct. We are saying only that we have decided not to participate" in an article about the changes.

IBM's next significant move came in 1995. The company wanted to drop an early-retirement subsidy, which it had added to the plan in 1991 to encourage older workers to leave. The subsidy, which let 55-year-olds retire with nearly the pension they would have at 65, "encouraged departures," so it "served us well," Donald Sauvigne, then head of retirement benefits at IBM, told an actuaries' conference in Vancouver, British Columbia, in 1995, according to a transcript. But IBM found it also had the unwelcome effort of encouraging people to stick around until at least age 55. "So we had to design something different," Mr. Sauvigne said.

What they came up with was, indeed, very different: a pension-equity plan. This is a hybrid that consultants Wyatt Co. (now Watson Wyatt Worldwide of Bethesda, Md.) devised for RJR Nabisco Holdings Corp. in January 1993, when Louis V. Gerstner Jr. headed RJR. In April 1993, Mr. Gerstner arrived at IBM, and soon it, too, began planning a shift to the new structure, though it isn't clear what Mr. Gerstner's role was. Ameritech, Dow Chemical, Motorola Inc. and U S West Inc. (now part of Qwest Communications International Inc.) all have adopted similar plans since then.

Like its better-known cash-balance cousin, a pension-equity plan wipes out any early-retirement subsidy and produces smaller retirement payments for many older workers. Both plans differ from traditional pensions, under which employees earn as much as half their ultimate benefits in their last five to 10 years on the job. In contrast, under these newer types of pensions, the value of a worker's benefit grows at a more level rate throughout his or her employment.

A cash-balance plan provides employees with hypothetical accounts that grow with an annual company contribution, usually based on salary plus interest on the hypothetical balance. In contrast, the "accounts" in a pension-equity plan grow each year when the company contributes an amount representing the multiplication of a person's average pay over the prior five years or so by a factor that increases with service. There's also usually interest credited to the account, but it is embedded in the calculation and isn't evident to employees. "The plan took me months to understand," IBM's Mr. Sauvigne told his actuarial colleagues at the conference -- and he was a 25-year benefits veteran.

It also challenged Mr. Finlay. When he started studying IBM's pension moves in 1999, the engineer would bicycle home from work to a subdivision on the outskirts of Boulder, Colo., and stare at his computer till nearly midnight. He spent weekends developing spreadsheets and reverse-engineering the algorithms with the information he hauled up from his basement. He even took his laptop computer to a genealogical conference his wife was attending in Colorado Springs so he could fiddle with the material. His wife, MaryAnn, didn't mind. "We want to know where we stand," she says.

One thing Mr. Finlay eventually says he figured out was that the embedded interest rate went down with age. It was 5% for employees under age 45, 4% for those 45 to 55, and 0.5% for years above age 55. Yet it was other aspects of the formula shift that were reducing his pension, not this. By his calculation, the 1995 changes reduced his prospective pension to about $57,700 annually from the previously estimated $69,500.

"I'm a Goldwater conservative, a Vietnam vet and a Republican, but I'd support a union coming in here if it would force the company to open up its books on what it's doing," he says. "If I were 10 years younger, I would have left. It tells you something about a company when it does something like this to people."

That most IBM employees didn't protest back in 1995 isn't surprising. Like most companies, IBM unveiled the pension-equity plan as a move that involved "changes" and "a new formula," according to its government filings. In its handouts to employees, IBM said the changes were "the result of a recent study which concluded that the plan should be modified to meet the evolving needs of IBM and its increasingly diverse work force, and align more with industry practices and trends."

Employees confer with Labor Department on pensions
GANNETT NEWS SERVICE - Congressman Sanders' Website - July 26, 2000

WASHINGTON -- The Labor Department's ongoing investigation into corporate pension conversions has found widespread confusion among affected employees but no illegal activity by employers in their disclosure statements.

Leslie Kramerich, acting head of the department's Pension and Welfare Benefits Administration, said Tuesday the lack of understanding regarding future pension benefits may be more common than the agency realized.

As a result, the agency will issue a public request in the next couple weeks seeking comments from workers, employers and experts on how to make pension benefits more understandable, particularly when workers have a choice of a lump sum cash payment or a monthly annuity payable until death.

The problem in conveying the information is that each pension plan has a unique benefits formula that prevents the government from providing general advice, said Kramerich. "I don't think there's going to be a cookie cutter ballpark estimate we can put out that's going to answer that question."

She spoke to reporters following a two-and-a-half hour meeting with employees from IBM, AT&T, Duke Energy, Bell Atlantic and SBC who have seen their traditional defined benefit plans switched to so-called cash balance plans.

The employees told of persistent problems in understanding their new benefits.

Jim Matthews, a nuclear plant instrument control specialist who has worked for Duke Energy for 29 years, said an actuary and an attorney who were sent a copy of his new pension plan "couldn't crack it" despite their professional expertise.

"I've never said a word publicly against the company, but they've crossed the line this time," said Matthews, 53. He said his expected retirement date "depends on if I can figure out the pension plan."

Janice Winston, a 26-year employee for Bell Atlantic in Philadelphia who works as a telecommunications engineer, said she's been frustrated just finding out who the pension plan sponsor is and who to write to with questions about her benefits.

Since January of this year, employees such as Winston, 47, have been told they will get the pension with the more generous benefits -- either the old traditional plan or the newer cash balance plan -- but she said there's no way to verify the accuracy of the company's determination.

Last week, the House approved an amendment to a spending bill that prohibits the Internal Revenue Service from granting tax-exempt status to pension plans that discriminate against some workers on the basis of age. The language, crafted by Rep. Bernie Sanders, a Vermont independent, is designed to address complaints by older workers that cash balance pensions reduce their benefits.

David Sirota, a spokesman for Sanders, said a similar amendment may be considered by the Senate as soon as this week.

Congressman Sanders' Web Page

Ex-IBMer Gets Labor's ear
Post-Bulletin News - July 26, 2000

WASHINGTON -- Rochester pension activist Janet Krueger and other employee representatives took their concerns about cash-balance pension plans Tuesday to top U.S. Labor and Treasury Department officials.

Although the administrators did not promise any specific action, Krueger, a former IBM employee, and her peers were pleased to further their cause of equalizing pension benefits.

"We're sharing ideas," said Krueger, who is the spokesperson for the IBM Employee Benefits Action Coalition. "We're seeking additional visibility."

Indeed, the visibility of a fledgling group of like-minded employees from other companies called the Cash Pension Coalition has increased its visibility exponentially since first calling attention to the issue last year.

The past week has been especially good for the cause.

Besides the Tuesday meeting, pension rights advocates are pleased about an amendment the U.S. House passed on Thursday that called into question the tax-exempt status that cash-pension plan providers receive. Rep. Gil Gutknecht, R-Minn., played a leading role in passing the measure.

Although meeting participants discussed the House action, the administration talks were scheduled weeks before the amendment was passed.

Krueger and employees of five other companies, including Bell Atlantic and Duke Energy, met with Leslie Kramerich, the Labor Department's acting assistant secretary of pension and welfare benefits administration, and with the Treasury Department's tax benefits counsel. Six other employees participated via teleconference.

They are looking for action from federal agencies, from Congress and from the companies that provide the pensions. IBM is one of the companies facing a lawsuit about its changes.

"We feel a lot of what's been done is not right and shouldn't be tolerated," Krueger said.

Kramerich stressed that the Labor Department is concerned that employees are buried in technical paperwork and are having trouble understanding changes their companies are making. She said Tuesday's meeting allowed the Labor Department to hear from employees in the trenches.

"I'm hoping that, based on today's meeting and meetings we've already had, we'll be able to work on how to get the word out," Kramerich said.

The Labor Department is looking at perceived illegal action by employers who have converted to cash-balance pension plans. Kramerich said Tuesday her department has not found any evidence of illegal actions regarding information disclosure requirements.

Krueger said she is looking beyond the agency to investigate whether some cash-balance pension conversions are legal.

"I think the real question of illegality will be settled in the courts," she said.

NYPA-Entergy Agreement Assures Worker Benefits
Dow Jones - July 26, 2000

NEW YORK--(BUSINESS WIRE)--July 26, 2000--New York Power Authority (NYPA) employees transferring to Entergy Corp. when NYPA's two nuclear power plants are sold to Entergy will be fully covered, under an agreement announced Wednesday, by New York State pension improvements that have been passed by the Legislature this year and are signed into law.

The agreement calls for the Power Authority and Entergy to share the costs of providing the enhanced benefits to the approximately 1,700 NYPA employees who will shift to Entergy when the pending sale of the Indian Point 3 and James A. FitzPatrick nuclear power plants is completed.

C.D. "Rapp" Rappleyea, the Power Authority's chairman and chief executive officer, said that NYPA was voluntarily assuming half the costs of the pension improvements to assure that benefits for employees moving to Entergy will be equivalent to those they would have received at the Authority.

"Entergy is obligated under the basic sale agreement for the plants to provide equivalent benefits," Rappleyea said. "But several of the pension enhancements could take effect after the sale is concluded. We wanted to make sure they'd be available to employees shifting to Entergy, and we've settled the issue by agreeing to split the costs. Regardless of when the sale closes, these benefits will be there."

Rappleyea noted that the benefits will be identical to those for employees remaining at NYPA. "Entergy is pleased to work with NYPA to assure that our new employees will benefit from the pension improvements in New York State," said Jerry Yelverton, president and chief executive officer of Entergy Nuclear, a unit of Entergy Corp. "We view these people as an extremely important asset and we want their transition to be as smooth and positive as possible."

The pension enhancements are among those included in a series of bills signed by Gov. George E. Pataki or awaiting his signature. They include:

  • Permanent cost-of-living adjustments for retirees.

  • An end to pension contributions (now 3 percent of salaries) by employees who joined the state retirement system in July 1976 or later and have at least 10 years of service. (Employees who were in the system before July 1976 do not contribute to their pensions.)

  • Additional service credits of up to two years for employees who have been in the system since before July 1976.

  • Reduced penalties for early retirement for workers in the post-July 1976 group, making the penalties comparable to those for more senior employees.

  • Opportunities for workers to purchase pension credits for military service and for previous government service in New York State.

The agreement covers employees at the Indian Point 3 and FitzPatrick plants, and on NYPA's nuclear headquarters staff in White Plains.

The Power Authority and Entergy on March 28 signed an agreement, now awaiting regulatory approval, for sale of the plants to Entergy for $967 million, a record for the U.S. nuclear industry. NYPA had made continued employment for its nuclear workers, at equivalent salaries and benefits, an essential part of the transaction.

The nuclear businesses of Entergy Corporation are headquartered in Jackson, MS. Entergy, a global energy company based in New Orleans, is the third largest power generator in the nation with more than 30,000 megawatts of generating capacity, about $11 billion in revenue and over 2.5 million customers. Entergy's nuclear businesses encompass five power reactors at four locations in AR, MS and LA under regulatory jurisdictions, and the Corporation is expanding into the competitive power market nationally by purchasing additional nuclear plants. Entergy purchased the Pilgrim Station, Plymouth, MA, in 1999, the first nuclear plant sale in a competitive bidding process, and has agreed to purchase the Indian Point 3, Westchester County, NY and FitzPatrick, Oswego County, NY, plants from the New York Power Authority in 2000. Entergy is also managing decommissioning activities at Maine Yankee, Wiscasset, ME, and Millstone Unit 1, Waterford, CT.

DOL To Seek Input On Pensions
Dow Jones - July 25, 2000

WASHINGTON -(Dow Jones)- The U.S. Department of Labor will shortly launch a broad initiative aimed at determining whether corporations are adequately disclosing to beneficiaries changes in pension and health care plans.

The agency is planning to issue within the next week or two a formal "Request for Information," Leslie Kramerich, acting assistant secretary for pension and welfare benefits said Tuesday.

She disclosed the plan after meeting with a group of current and former employees of a number of major companies that recently implemented controversial changes to their pension plans. The group, led by Janet Krueger, who left International Business Machines Corp. about a year ago after the company changed its traditional defined-benefit pension plan to a cash-balance arrangement, is pressing the government to more aggressively combat what it views as numerous pension abuses in the business community.

Last year, the Internal Revenue Service solicited public comment on cash balance plans and has so far received over 700 submissions, Kramerich said. In a like fashion, the Labor Department will seek input from employees, retirees, companies and other interested parties on a separate, but related range of issues, she explained.

The information request will list a number of specific issues upon which the agency would like guidance, but related topics can be addressed as well, the official said.

Kramerich and Krueger, appearing together at a press conference, said that they discussed a range of pension-plan disclosure issues at their meeting.

"Its a very confusing area for us," Krueger said, expressing concerns that companies are hiding information when carrying out plan changes and presenting incomplete options to beneficiaries, particularly when employees are leaving a company, apparently in the hope that workers will make choices economically advantageous to the plan sponsor rather than to themselves.

The group is also concerned about how beneficiaries are treated when companies acquire or lose employees as a result of acquisitions or divestitures, she said.

Among other things, Krueger's group was seeking guidance from Labor and Treasury officials as to just when such practices become illegal under laws governing pension plans.

Kramerich said that her agency has sifted through a large number of complaints about plan disclosures and so far hasn't found anything illegal. But in many cases, it appears that the disclosures companies make aren't getting translated into information that is useful to beneficiaries, she said.

While the Labor Department has recently taken a number of steps aimed at making pension and health care plan data more comprehensible, "what we're hearing today is that we haven't done enough," the official said.

Kramerich also said that the Clinton administration's interagency task force on cash-balance pension plan issues continues to meet frequently and is still working toward the goal of attempting to determine the legality of both cash balance plans themselves and conversions of traditional defined benefit plans to such arrangements.

In reply to questions, however, she suggested those efforts aren't likely to reach a definitive conclusion any time soon and perhaps not before the Clinton administration closes down early next year.

Among other things, the task force is looking at whether the so-called wear-away provisions of plan conversions violate U.S. age discrimination laws.

Although the views of the task force on that and various other issues aren't yet known, the Clinton administration recently advocated banning such arrangements.

"A prohibition on cash balance wear-aways -- both normal retirement benefits and early retirement benefits -- should be enacted, and should be part of any broad-based retirement savings legislation," the White House Office of Management and Budget said in an official statement of administration policy on a pension-reform bill that recently cleared the House of Representatives.

The bill, authored by Reps. Rob Portman, R-Ohio, and Ben Cardin, D-Md., doesn't currently address wear-aways, but it hasn't yet been considered by the Senate and could still be changed.

Wear-aways occur when a beneficiary's accrued benefits under an old defined benefit plan are higher than his or her starting position under a substitute cash-balance arrangement. In such cases, workers don't gain any new benefits, sometimes for several years, until accruals under the new plan rise to the level of the old arrangement.

-By Fowler W. Martin, Dow Jones Newswires; (202) 862-6616;

(This story was originally published by Dow Jones Newswires)

More Green for the Golden Years?
Washington Post - by Albert B. Crenshaw - July 23, 2000

As baby boomers begin to slide past the big five-O and the reality of looming retirement begins to sink in, some of them are beginning to wonder whether they'll really have enough money when the time comes.

The House of Representatives last week came rushing to what it insisted was the assistance of these near-retirees, approving a long list of changes in the nation's pension laws that backers said would also improve the lot of retirees in the more distant future.

The Clinton administration opposes the measure--it has instead proposed a system of government-subsidized retirement accounts for lower- and middle-income workers--though the size of its margin in the House suggests it might be veto-proof if it were to be passed by the Senate.

Employer groups, along with brokerages, mutual funds and other financial institutions that stand to benefit from increased contributions to savings plans, are delighted with the measure and the big vote.

Some pension activists aren't so sure. There are many problems with the bill, they say, but two particularly stand out.

First, the increases in the IRA, 401(k) and 403(b) limits are beneficial only to those taxpayers who can afford larger contributions. Proponents of the bill have data that show that 61 percent of IRA contributors are now at the $2,000 maximum and presumably could afford more. Opponents counter with numbers that show only 5 percent of 401(k) plan participants now contribute the maximum $10,500.

The typical full-time worker in the United States earns only $30,000, according to the Pension Rights Center, an advocacy group here, and cannot afford to contribute half a paycheck to a savings plan.

Second, the bill would repeal restrictions on "top-heavy" plans in which the bulk of the benefits flow to owners, executives and other highly paid workers.

Current law requires employers to make a contribution of 3 percent of pay to rank-and-file employees if at least 60 percent of the money in the company retirement plan is in the accounts of owners and officers. This rule would be eliminated for certain types of plans.

But, say critics such as Harvard law professor and former Treasury tax policy official Daniel Halperin, "the problem is you would get more plans but you are going to get more plans in which the higher-paid owner is getting most of" the benefits.

Said Karen Ferguson of the Pension Rights Center: "The bottom line is [backers] truly are going in exactly the wrong direction and they are ducking the really hard issue, which is how do we get a retirement system on top of Social Security that will assure that people who can't otherwise save adequately for retirement will get the income they need when they are too old to work."

Suit vs. IBM pension plan going public
Poughkeepsie Journal - by Craig Wolf - July 22, 2000

Meeting set Tuesday in Washington

A lawsuit coordinated by employees of IBM Corp. who allege pension plan changes shortchanged them is working its way through federal district court.

Until Friday, no one would talk about the lawsuit. But Janet Krueger, spokeswoman for the IBM Employees Action Benefit Coalition, said the group plans to talk about it more now.

Damages sought could range from $1 billion to $10 billion and potentially cover most American employees of IBM and many retirees.

"It charges IBM with a number of violations against the ERISA (pension law)," involving changes including cuts in benefits without proper notification, she said.

The lead-off plaintiff is Kathi Cooper, whose suit was filed in November 1999 in federal District Court in the Southern District of Illinois. Filed as a class action, it could, if certified as such by the judge, cover others who sign up.

IEBAC plans a news conference Tuesday outside the U.S. Department of Labor in Washington, D.C., Krueger said.

Other companies accused

"We're having a group of employees from a number of different companies meet with officials from the Labor and Treasury departments to talk about the scams that have been going on," Krueger said. IBM is not the only company facing such suits, she said.

Krueger argues that the Employee Retirement Income Security Act of 1974 - known as ERISA - needs to be enforced better as well as improved to provide more protection for employees.

She said the IEBAC group sees age discrimination in the structure of the IBM Personal Pension Plan over a period of years, not just during the 1999 conversion to a cash-balance plan.

"The IBM plan had late retirement penalties," she said, "If you worked more than 20 years, your pension was gradually reduced, based on your age."

"They were playing with the pension plan to motivate older employees to leave. They felt competitive people were the young ones coming out of school, and they didn't want the older employees."

Rep. Sanders Seeks To Block Cash-Balance Approvals
Dow Jones - July 20, 2000

WASHINGTON -- A bipartisan group of legislators, led by Rep. Bernard Sanders, a Vermont Independent, is seeking to block the Internal Revenue Service from approving conversions of defined-benefit pension plans to cash-balance arrangements.

The Service has suspended such approvals for the time being, pending an inter-agency review of the legality of both conversions and cash balance plans themselves, but the IRS could resume clearing such arrangements at any time.

Sanders and Reps. Gil Gutknecht, R-Minn, Maurice Hinchey, D-NY, John McHugh, R-NY, and Dennis Kucinich, D-Ohio, plan to offer an amendment late Thursday to a bill currently pending before the House of Representatives that, among other things, will fund the IRS for the fiscal year beginning Oct. 1, 2000. The initiative wouldn't allow the IRS to use any resources to approve plan conversions.

Sanders and various other legislators believe conversions, and possibly cash-balance plans themselves, illegally discriminate against older workers.

Earlier this week, the full House approved a pension reform bill that would require companies converting plans to make more information available to plan beneficiaries. More disclosure isn't enough to satisfy Sanders and various other critics of cash-balance arrangements, however. They believe that, at a minimum, companies that make conversions should be required to give all beneficiaries the choice of either staying with the old arrangement or moving to the new one.

-By Fowler W. Martin, Dow Jones Newswires; (202) 862-6616;

(This story was originally published by Dow Jones Newswires)

Workers can have witness at discipline meeting
Boston Globe - July 19, 2000

WASHINGTON - The National Labor Relations Board has given new workplace rights to nonunion workers with a ruling that lets workers facing discipline bring a witness to meetings with the boss.

Under long-established law, union workers can bring a union official to such meetings. In a 3 to 2 vote last week, the board extended the law to the 90 percent of the work force that is not unionized.

Workers' advocates said the change is overdue, because employers typically have the upper hand. Lewis Maltby, president of the National Workrights Institute in Princeton, N.J., said it gives workers "a fighting chance of fairness."

The NLRB's stance on the scope of the disciplinary buddy system has changed over the years, depending on the political appointees named to the board. Under predominantly Republican administrations, boards have viewed Section 7 of the 1935 National Labor Relations Act, which protects "concerted activities" by workers seeking to assert their rights, as applying only to union workers. When Democrats controlled the board, it ruled the clause covered nonunion workers, as well. That interpretation lasted from 1982 to 1985. When Republicans took control again, the board said Section 7 didn't include nonunion workers.

Management attorneys said word of the ruling is spreading quickly. "This is coming as a rude awakening to most nonunion employers," said one, Paul Salvatore. "It gives employees a new remedy in our already very litigious American workplace."

Workers' advocates, on the other hand, see the ruling as an important step toward leveling the playing field. "Up until this point, the worker going into a meeting with his boss has about as much chance as Christians going up against the lions in the Coliseum," Maltby said.

Boeing bosses agree attrition is a problem
SCJonline - July 18, 2000

Since 19,000 members of Boeing's technical community ended a 40-day strike March 20, their union, the Society of Professional Engineering Employees in Aerospace, has been sounding warning klaxons about low morale and attrition in engineering ranks.

Now managers may be recognizing that there's a problem, said an Boeing engineer who sent an internal memo.

The memo lists 16 causes for the low morale and voluntary exodus, including "talk of team vs. family and perform or be replaced does not help to build morale."

"There is a general perception that upper management is too focused on short-term bottom-line thinking," the memo reads, and "Upper management has lost a lot (most) of its credibility."

Second GE Union Accepts Contract
InfoBeat - July 14, 2000

EVENDALE, Ohio (AP) - A second major union of employees at General Electric Co.'s main jet engine plant has voted to accept a new three-year contract with the company. United Auto Workers Local 647 represents 1,200 hourly employees at the GE Aircraft Engines plant in this Cincinnati suburb and about 40 at a GE parts warehouse in Erlanger, Ky. The vote Thursday had 79 percent accepting the deal. The contract is retroactive to June 26. It follows the form of a national agreement between GE and a coalition of 14 unions. It includes a 4 percent wage increase this year, 3 percent next year and 2.5 percent in 2002, plus cost-of-living increases. The GE plant's second-largest union, the International Association of Machinists and Aerospace Workers, voted last weekend in favor of a new three-year contract. That union represents 640 maintenance workers.

SEC Employees Overwhelmingly Approve Unionization
Dow Jones - July 13, 2000

WASHINGTON -- Securities and Exchange Commission Employees voted Thursday to unionize.

In a 968-373 vote, employees at the SEC voted to affiliate with the National Treasury Employees Union, the largest federal employees' union.

Turnout for the election, was high with more than 1,400 of the 1,902 eligible voters participating in the election.

Professional employees, chiefly SEC accountants and lawyers, agreed to form a single bargaining unit with non-professional staff.

Ethics often missing on the job
The Star-Ledger - July 10, 2000

Employees have high expectations when it comes to ethics.

Most -- 90 percent -- expect their organizations to do what is right, not just what is profitable.

"From senior and middle managers to line employees and administrative personnel, this finding cuts across all organizational levels," says Michael Daigneault, president of the Ethics Resource Center in Washington, D.C.

Expectations are one thing. Reality is often another.

The Ethics Resource Center survey that found American employees want to work for a company that values honesty, respect and trust, but one in three said they witnessed ethics violations on the job in the last year. The five most common transgressions: lying, withholding needed information, abusive or intimidating behavior toward employees, misreporting hours worked and discrimination.

Another look at ethics in the workplace makes this news look good.

In a national survey by KPMG, a professional services firm, 75 percent of 3,075 employees said they observed violations of the law or company standards in the last six months. Nearly half said their employer "would significantly lose public trust" if what they witnessed made it into the news.

"There is a fairly significant level of misconduct, and we are seeing it cut across all industries," says Win Swenson, national managing director of KPMG's Integrity Management Services. Workers report everything from falsification of financial data and environmental abuses to sexual harassment. Among employees in sales, for example, 56 percent said they observed deceptive sales practices.

If short-term business goals are met, maybe even via ethical shortcuts, the long-term risks of misconduct may seem only theoretical. But they are real, bubbling beneath the surface, slowly eroding the potential of a company's greatest asset: its people.

When there is the fear that you can't bring bad news to managers, that to report wrongdoing will only label you a troublemaker, communication begins to break down and companies operate on less than full knowledge, says Ken Johnson, a senior consultant with the Ethics Resource Center. "There is a waste of human potential that will show up in measurable things -- employee satisfaction, customer satisfaction, the bottom line."

The Washington ethics group strikes a hopeful note with this finding: More than 80 percent of the 1,500 employees interviewed said their companies had an ethics program in place -- written standards, training or a means to get ethics advice. And 55 percent of employers provided workers with clear-cut ethics training, up from 33 percent in a similar survey in 1994.

Still, one in eight employees say they feel pressure to compromise their organization's ethical standards.

Turning a blind eye to violations is bad business for a lot of reasons. Here's one:

"We live in an age when an ethics breach is known instantly and is communicated around the world," KPMG's Swenson says. "Years of communicating goodwill and brand can be hurt badly in a fraction of a moment."

Here's another: Should a company be brought to court over legal violations, judgments can be less severe if they prove a good-faith ethics effort and follow the 1987 Federal Sentencing Guidelines -- criteria including employee legal training and an auditing system. Lack of compliance can mean quadrupled penalties.

As companies fall over each other to offer fancy perks to attract and keep employees in the talent wars, they also may want to remember this: Employees who observed violations that were not addressed were less likely to recommend their company as a good place to work, according to the KPMG study. Meanwhile, more than 75 percent of employees in the Ethics Resource Center survey said their organization's concern for ethics and doing the right thing is a key reason they are still with their companies.

Electrolux Won't Pursue Appeals
Dow Jones - July 6, 2000

NEW YORK -- Electrolux AB (ELUX) and its U.S. unit, White Consolidated Industries Inc., entered a memorandum of understanding with the Pension Benefit Guaranty Corp. to settle a legal dispute that dates back to 1985.

In a press release Thursday, Electrolux said that under the terms of the memorandum, White Consolidated won't pursue further legal actions regarding its appeal of the U.S. District Court's decision against it regarding pension obligations.

Pension Benefit Guaranty, a U.S. government corporation which insures retirement benefits under private pension plans, will not pursue the remedies it is entitled to as a result of the District Court's decision.

Pension Benefit Guaranty and pension plan participants will be compensated for the pension benefits that were the subject of the litigation, and the method of satisfying the pension obligations will be resolved after discussions with regulatory agencies.

After receiving regulatory approvals, White Consolidated will sponsor the pension plans in question.

However, if the resumption of the pension plans doesn't proceed for any reason, White Consolidated will pay $180 million plus interest to Pension Benefit and the plan participants.

The company expects that the ultimate cost relating to the agreement will be within the $225 million reserve recorded in the third quarter of 1999.

The case originated in 1985, one year before Electrolux acquired White Consolidated Industries, when White sold five steel-related companies. As part of the purchase agreement, the unspecified buyer assumed responsibility for pension liabilites,(sic) but defaulted in the early 1990s, and the plans were terminated.

The Pension Benefit Guaranty then took over the pension plans.

-Dorothea Degen; Dow Jones Newswires; 201-938-5400

(This story was originally published by Dow Jones Newswires)

Firms Find More Profit From Retirement Funds
The The Wall Street Journal - by Ellen Schultz - July 5, 2000

Having already seen earnings boosted by stock-market-fueled pension-plan surpluses, some financial-service firms are finding more ways to use employees' retirement funds to add to their bottom line.

Beginning July 1, 46,104 participants in Bank of America Corp.'s $4.7 billion 401(k) retirement-savings program will have a one-time option to roll their accounts into the company's roughly $8-billion-in-assets pension plan, joining thousands already holding this option. While there are some advantages for employees in making the switch, one clear benefit belongs to the company: The new assets likely will generate far more in investment returns than the company ultimately will be obligated to pay out to the employees. This will help to generate pension "income," which, through an accounting wrinkle, could help boost the Charlotte, N.C., bank's earnings this year and in years to come.

Other companies are watching to see what happens under the new arrangement. If no regulatory impediment arises, it could trigger a wave of asset transfers from 401(k) programs into pension plans, pumping billions more into already-overfunded pension plans, pension experts say.

Bottom Line Boost

Just prior to the merger with Bank of America, 74% of the participants in NationsBank's 401(k) transferred $1.4 billion of their money into the pension plan. Via pension income, the infusion increased Bank of America's operating income by $13 million in 1998, when the bank posted pretax profit of $8 billion, and $25 million in 1999, when pretax profit was $12.2 billion, according to the company. Total pension income was $28 million in 1998 and $149 million in 1999. A company spokeswoman said that the pension income was "an insignificant percentage of the bank's pretax income" in both years.

In a 1998 internal memo dealing generally with the subject of 401(k)s rolled into pension plans, consultants at benefits-consulting firm Towers Perrin noted, "From an employer's perspective, the motive for this arrangement is financial. ... From an employee's perspective, the motives for electing a transfer aren't so clear."

While companies usually don't draw attention to it, many bottom lines have benefited during the past several years from pension income. Thanks to the bull market, the expected returns on pension assets have exceeded many plans' annual costs, and, under accounting rules, this leads to income-statement relief. Benefit cuts also have played a strong role in reducing pension expense during the past several years.

'Virtual' Mutual Funds

Bank of America employees who move their 401(k) money into the pension plan will be able to allocate it among "virtual" mutual funds, which are hypothetical portfolios tracking the return on the bank's in-house mutual funds currently offered in the 401(k) plan.

The "virtual fund" concept is raising eyebrows at the Securities and Exchange Commission. "It's highly controversial. At the very least, there are disclosure and registration requirements" that could be triggered, one regulator said. "We're looking to see if it involves securities laws issues." The Bank of America spokeswoman said the company received all the necessary regulatory approvals for its new plan.

The arrangement raises a novel potential conflict of interest: Bank of America stands to earn a bigger investment spread if employees who transfer their 401(k) money choose the most conservative options, which often isn't in the best interests of employees saving for the long term. The ideal situation for the bank would be for all the employees to invest in low-risk funds, said Norman Stein, a law professor at the University of Alabama at Tuscaloosa, Ala. "They'd be nuts to encourage employees to invest in stocks," he said.

Real life suit is fodder for fiction
The Dallas Morning News - by Scott Burns - July 4, 2000

It sends chills up your spine. There, in less than 100 pages, is a tale of alleged corporate self-dealing and executive intrigue involving millions of dollars and thousands of people.

On Page 6, it tells of a plot to create a profitable business using hundreds of millions of dollars in employee pension fund money. On Page 10, it tells how executives got special cash bonuses from the profitability of the business that used this money. On Page 14, it starts to tell the story of the protagonist's promising career and how it was derailed after he learned of the internal scheme to use pension and 401(k) money.

There's more. On Page 39, it tells how "tens of millions" in pension fund assets were pumped into an international equity fund to keep it from collapsing as outside investors redeemed shares in the 1997-98 Asian financial crisis. On Page 64, the protagonist meets his boss in a hotel conference room where he is summarily fired and asked for the keys to his office, on grounds of "insubordination" six days after receiving a raise, bonus and positive review from the president and CEO of the company.

A novel by John Grisham or Paul Erdman?

Not at all.

This is real life. It's the pleading in a recently filed lawsuit, available as a PDF file at First filed in October as a wrongful termination suit on behalf of James A. Mehling, a former vice president of New York Life, it was amended and refiled two weeks ago as a class-action lawsuit subject to treble damages under the Racketeering Influenced and Corrupt Organizations Act (RICO).

Filed by a consortium of three law firms (Sprenger & Lang in Washington, D.C., and Minneapolis; Stief, Waite, Gross, Sagoskin & Gilman in Bucks County, Pa.; and Sandals, Langer & Taylor in Philadelphia), the suit is one of a collage filed since last fall that allege misuse of money in employee pension, 401(k) and profit-sharing plans.

One is against First Union and Signet Bank for expensive investment changes in employee 401(k) plans. Another is against SBC Communications for changes in profit-sharing plan holdings that cost participants more than $1 billion in lost capital gains.

The basic charge in the Mehling suit is that New York Life, wanting to get into the mutual fund business, got into it by using assets from its own employees' pension plans.

The suit alleges that the insurance company took millions of dollars out of the pension plans and invested the money in newly created mutual funds that the company planned to sell to the public.

A few years later, the suit alleges, New York Life did the same thing with its 401(k) plan, taking money from low-cost funds and transferring to its proprietary MainStay mutual funds.

In both instances, the suit alleges, the cost of managing the money increased, reducing the investment returns earned by New York Life's employees. Without the employee money, the suit alleges, New York Life would have lost millions operating its mutual fund business, and executives associated with the fund business would have lost their bonuses.

For New York Life, the consequences of the suit, if lost, go far beyond the cost of any settlement. One possibility is that the company could be barred, under ERISA (the Employee Retirement Income Security Act) from acting as a fiduciary, essentially blackballing it from the money management business.

How will it end?

The only thing certain is that it won't be over any time soon. Regardless of outcome, however, the growing number of lawsuits around 401(k) and 403(b) plans means that all plan sponsors had better pay attention to the fees that come with the investment products in their plans.

The litigation light is on.

Code recommended for Duke Australia pipeline
Yahoo Finance - July 3, 2000

MELBOURNE, July 3 (Reuters) - Duke Energy International said on Monday it was disappointed by a National Competition Council recommendation for its eastern gas pipeline to be regulated by a national pipeline code. The National Third Party Access Code is designed to give fair access to monopoly infrastructure assets, but Duke spokeswoman Michelle Barry said it was overly prescriptive, inflexible and unnecessary in the case of the eastern gas pipeline.

News - June 2000