PROPOSED PENSION REGULATIONS WOULD INVALIDATE
THE MAJORITY OF FORTUNE 100 DEFINED BENEFIT PLANS
Quirks in Proposed Rules Would Trip Up Plans Never
Questioned Before:
Coalition Recommends Modifications
WASHINGTON, April 9, 2003 - Using a broad new interpretation of
age discrimination, proposed pension regulations would invalidate
more than two-thirds of surveyed Fortune 100 companies' defined
benefit plans, a representative of the Coalition to Preserve the
Defined Benefit System said today at a two-day public hearing conducted
by the Treasury Department and Internal Revenue Service.
"The flaws in the proposed regulations will trip up pension
plans that have never before been questioned and are clearly not
discriminatory," said Kathy Cissna, director of retirement
plans at R.J. Reynolds, who was speaking on behalf of the group
of 57 defined benefit plan sponsors ranging from small organizations
to some of the largest U.S. companies. "We're afraid that the
proposed regulations will force even more companies to abandon defined
benefit plans, which provide a critical source of retirement income
to millions of American workers."
Of the 72 surveyed Fortune 100 companies with defined benefit plans,
50 would fail the proposed regulations while 22 would pass, according
to the Coalition-sponsored analysis. Eighteen companies do not currently
have defined benefit plans, and 10 of the companies could not be
reached, due to time considerations. The analysis, conducted by
Watson Wyatt, mainly looked at the formulas of the primary defined
benefit plan(s) for salaried workers. It was not an exhaustive review
of plan amendments, grandfather provisions or secondary plans. Cissna
added that had a total review been possible, the failure rate would
likely be considerably higher.
"Despite the good intentions and dedication shown by the agencies
in developing the rules, we believe the regulations as proposed
would invalidate many long-standing structures and features of today's
pension plans," said Cissna. "The rules would also limit
flexibility and innovation in pension plan design and further complicate
plan administration."
One of the Coalition's major concerns with the proposed regulations
is the restrictive general rule that applies to defined benefit
plans, and the extremely divergent way in which the proposed rules
treat defined contribution and cash balance plans on one hand, and
all other defined benefit plans on the other hand, Cissna said.
About 80 percent of all retirement plans today are defined contribution
or cash balance plans.
"This general rule will often force employers with defined
benefit plans to spend ten times more on older employees than on
younger employees, despite the fact that equal contributions for
such employees are sufficient to satisfy age requirements for defined
contribution and cash balance plans," said Cissna. "Workforce
rules should not require economic biases in favor of older workers
any more than younger workers."
While commending federal regulators for their decision earlier
this week to withdraw the portion of the proposed regulations that
would have imposed new comparability nondiscrimination tests on
cash balance plans, Cissna also called on them to consider several
changes to the proposed regulations:
- Test age discrimination for all retirement plans on the same
basis. There should not be a different and more onerous age discrimination
rule that applies to only 20 percent of the employer-sponsored
plans in existence.
- Adopt an accrued-to-date test rather than an annual test for
determining accrual rates.
- Allow offset pension plan designs to test for discrimination
on the basis of the gross benefit, not the net benefit.
- Maintain the existing rules for benefit delivery to employees
who are older than the plan's normal retirement age, particularly
in situations where the plan does not suspend benefits or offset
for in-service distributions.
"With these suggested changes, the government can ensure that
workers are protected against age discrimination while at the same
time avoiding extreme disruption of the defined benefit system,"
said Cissna. "At this fragile moment for the defined benefit
system, we must ensure rational and consistent age discrimination
treatment for pension plan designs and amendments."
For more information about the Coalition to Preserve the Defined
Benefit System or to obtain a copy of the testimony, go to www.preservedb.com.
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Contact:
Katherine Shain
202.715.7856
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