Archive COPYRIGHT © The Star-Ledger NJ
Date: 1999/10/31 Sunday Page: 001 Section:
Older Workers Are Agitating as Companies
Move to Portable Pension Plans
By Sam Ali STAR-LEDGER STAFF
The time-honored pension. For many workers,
it's a sacred covenant between employee and
employer, one of the last remaining vestiges
of a kinder,more paternalistic era in corporate
Stick with a company for a long time, employers
promised, and you would retire not just with
a gold watch and a pat on the back, but a
big retirement nest egg. But now, a new kind
of pension plan is taking the business world
by storm, and it's blowing all the old pension
rules to bits.
It's known as a cash balance plan, and for
many mid-career workers, it can reduce long-promised
pension benefits by as much as one-third to
one-half and dash hopes of an early and comfortable
retirement.That's because the cash balance
plan is missing one key - and extremely popular
- ingredient: that high-octane boost in pension
benefits most employees bank on getting at
the end of their careers.
Little wonder then that older and mid-career
workers who have been playing by the old rules
for so long are decidedly miffed.
Indeed, the uproar from mid-career workers
has been near deafening as more corporations
sweep aside traditional pension plans and
embrace these newfangled ones. An estimated
20 percent of Fortune 500 companies, representing
more than 10 million workers nationwide, currently
offer these plans. The backlash is turning
the normally humdrum world of pensions into
a veritable war zone, pitting older workers
against younger ones, employees against their
bosses and now even Congress against Big Business.
"You put in a number of years with a
company, with a number of expectations, and
just when you're about to earn the most valuable
part of the plan, they tell you it's not there
anymore," said David Certner, senior
coordinator for economic issues at AARP.
Companies contend these new plans offer the
bulk of their workers a better and more flexible
retirement benefit. But, in dollars and cents,
the losses in expected - though not yet earned
- benefits can cut deep.
Consider this: Because traditional pension
plans calculate benefits based on years of
service and average pay in an employee's final
working years, as much as half the pension
is typically earned in the homestretch of
a career. Those are usually the years when
an individual's salary is at its highest.
Cash balance plans turn that mathematical
formula on its head. Under these plans, all
employees, regardless of age or tenure, accrue
pension money evenly over time based on a
percentage of their pay, typically 4 percent,
and a guaranteed fixed interest rate, typically
A cash balance pension also is portable,
a feature that appeals to today's young and
mobile work force, companies say. Whenever
and wherever you go, it goes with you. No
more late-career sweeteners that reward longevity
and encourage a here-for-life mentality.
So far, the loudest and most publicly acknowledged
outcry in this rancorous debate has come from
IBM employees - an outcry that has riveted
federal lawmakers and sparked a national debate
on the fairness of cash balance conversions.
But the employee backlash is spreading like
wildfire at other companies as more workers
whip out their pension calculators and do
their own math. At AT&T, Elaine McDermott,
59, is one employee who's feeling the sting.
McDermott, a resident of Portland, Ore.,
has spent 21 years at AT&T and was looking
forward to a monthly pension of $3,042 when
she retired in six years.
But in January 1998, the telecommunications
giant converted its $10.6 billion pension
plan for management to a cash balance plan
and McDermott saw a good chunk of her projected
future pension earnings vaporize over night.
Now her monthly benefit is frozen at $1,901.
And McDermott, a project manager in AT&T's
growth markets division, is outraged.
"I cannot project the lost balances
without wanting to scream," she said.
"We've been punished for being old. These
would have been the years that my pension
McDermott's frustration was echoed by several
AT&T managers from New Jersey, who did
not want to be identified.
Like many managers at AT&T, McDermott
feels like a victim of a double standard.
In 1998, AT&T union members voted to convert
their pension plan to a cash balance too -
with one striking difference.
Under the union plan, any employee with 15
or more years at the company gets to choose
if they want to switch to a cash balance plan
or stay in their old plan. And they don't
have to make that choice until they retire
- a choice non-union employees like McDermott
wish they had, too.
The pension conversion is at the heart of
a lawsuit brought by Phillip Engers, 52, and
other AT&T employees accusing the company
of age discrimination.
Engers, a data network consultant at AT&T
in Maryland, saw his future pension earnings
shrink by nearly 32 percent when the company
officially switched to a cash balance plan.
At the time of the switch, Engers was entitled
to a yearly pension of $40,294 - a figure
he was told would remain frozen until 2007
as a result of the conversion.
"The message to the older workers was,
you've basically gotten all the benefits you're
going to get for the next 10 years so why
don't you think about leaving?" said
Stephen R. Bruce, a Washington attorney representing
Engers did leave the company last year. The
suit is pending, and AT&T has so far filed
three motions to dismiss the charges.
"We believe the implementation of our
plan was done by the law and it was administered
squarely," said AT&T spokesman Burke
In fact, it may have been.
When employers switch to cash balance plans,
they must first establish an opening account
balance for every employee. To do that, employers
typically convert each employees' old pension
benefit to its current value. While many employees
assume their opening account balance is equal
to their old pension benefit, they're wrong.
In fact, it's often lower because the new
cash balance account is based on a worker's
career average pay - not the average of the
final years of a career.
In Engers' case, his opening cash balance
account came to $27,600 - far less than the
$40,294 he had already accrued under the old
pension plan. It's not that he lost the other
$13,000, but the math sure makes it look that
way at first.
While federal law prohibits companies from
cutting already earned pensions, companies
are free to alter their plans going into the
future anyway they see fit.
In other words, if you've already earned
a $40,000 or $50,000 or even a $100,000 pension
under an old plan, no one can take that away
from you. And because employees are free to
choose the higher of the two plans when they
ultimately leave the company, no one is actually
losing any benefits they've already earned,
Older workers who decide to continue working
at the company, however, may never see another
dime in future pension earnings from their
That's because it will take many years of
pay credits and interest before a new cash
balance accounts - Engers' $27,600 - catches
up to the old pension benefit figure and eventually
surpasses it. This unpopular feature is sourly
referred to by employees as ""wear-away."
In its defense, AT&T says it enhanced
its employees' old pensions by 27 percent
on average before the conversion to help offset
any future losses, said Alan Sefcik, human
resource director at AT&T.
"That's essentially worth five additional
years of service," said Sefcik.
But for employees nearing retirement, like
Engers or McDermott, that's not nearly enough
to make up for the better pension they would
have received under the old plan. By the time
McDermott is 65, for example, she will still
be earning $1,100 less in pension benefits
than she would have if AT&T had never
converted to a cash balance plan.
Not every company follows AT&T's model,
of course. Each designs its own conversion
plan, experts say. At Boeing, for example,
all workers start with an opening cash balance
account of zero. Meanwhile, old pension benefits
continue to earn interest in a separate account.
The bottom line is this: Don't rely on future
pension earnings always increasing, said Lawrence
Sher of PwC Kwasha Lipton Group, an employee
benefits consulting firm based in Teaneck.
After all, once upon a time, companies promised
their workers job security and fully funded
health benefits - promises that also have
gone by the wayside over the years.
"It's presumptuous to look down the
road with a calculator and project your salary
and bonus and your pension," said AT&T
spokesman Stinson. "It would almost be
as presumptuous as saying this year my stock
investments increased 37 percent and project
that they will do the same over the next 10
years. It would be nice and very comfortable,
but this is not a slide rule life that we're
Still, to ease the transition, many companies
do sweeten the pot for their long-term workers
following a conversion.
For example, companies like Citigroup automatically
allow long-term employees to stay in the old
plan. Kodak allows all 35,000 of its covered
employees to choose between the two plans.
Still others make bigger contributions to
older workers' accounts to make up any difference.
Some beef up existing 401(k) plans or offer
their employees stock options.
While the controversy surrounding cash balance
plans is a fairly new phenomena, these plans
actually have been around for years.
The concept was pioneered nearly 14 years
ago by BankAmerica Corp. and was designed
by PwC Kwasha Lipton Group.
Today, AT&T is just one of several hundred
companies that have converted their traditional
pension plans to cash balance plans - their
popularity coinciding with the rising prevalence
of 401(k) plans, another portable, employee-steered
Among the converts last year alone: Kodak,
Motorola, Avon, CBS Corp., SmithKline Beecham
PLC, IBM, AT&T, Citigroup and Aetna.
For their part, employers cite convenience
and competition - not cost savings or a desire
to boot older workers out the door - as the
reasons for switching plans.
A study conducted by the American Society
of Actuaries this year found that two-thirds
of workers actually fare better under cash
balance plans - particularly women, who tend
to have shorter job tenures.
In today's competitive job market, companies
say these conversions are necessary to attract
and retain younger workers - people who prefer
cash balance plans because they are more apt
to change jobs, either voluntarily or involuntarily,
a number of times during the course of their
Consider this: Only 9.5 percent of people
in the work force have been with their current
employer 20 or more years, according to Jack
VanDerhei, a fellow at Washington-based Employee
Benefit Research Institute.
At AT&T, for example, only one in eight
employees historically works a full career
of 25 years or more, said Sefcik, AT&T's
human resource director.
The end result: Many people effectively forfeit
their right to earn a big retirement nest
egg under traditional pension plans.
However, under a hypothetical cash balance
plan, a 30-year-old worker who's making about
$30,000 a year would earn close to $5,443
in pension benefits after only five years
on the job, as opposed to a measly $1,785
in a traditional plan, according VanDerhei.
Assuming that same person stayed at the same
job for 10 years, he would accumulate $14,317
in a cash balance account vs. $5,808 in a
On the downside, a 50-year-old worker who
is suddenly switched mid-career to a cash
balance plan gets the worst of both plans.
They don't get to enjoy the yearly compounding
growth of a cash balance plan, plus they lose
the jet-propelled boost in their final earning
years promised under traditional plans.
Another reason employers cite for adopting
these plans, en masse: They are exceedingly
simple for employees to understand compared
to conventional pension plans.
"People like the simplicity of cash
balance plans, knowing what the value is at
any point in time," said Sefcik.
Suddenly, the pension is immediately gratifying
and relevant, not some vague, far-off promise.
Ironically, while protests from older workers
have caused quite a stir in corporate boardrooms
and in the halls of Congress, a survey released
Oct. 18 shows that the majority of workers
actually like cash balance plans by a margin
of 2 to 1.
The telephone poll, conducted by The Third
Millennium, a New York-based research organization
representing young Americans, surveyed 800
people age 21 and older.
Still, it's important for companies to be
honest and upfront with their employees when
they switch their plans, in case there is
a shortfall, according to Wayne Bogosian,
president of Personal Financial Education,
a Massachusetts company that businesses hire
to counsel workers on pension changes.
How else, he questions, can employees make
up the difference and secure their financial
"If, in fact, transition benefits are
not going to be enough, the employer is obligated
morally to tell their workers so they can
do something about it," he said. ""That's
called truth in advertising. It's the right
thing to do and the fair thing to do.
"And if they don't, Congress will make
sure they do."