Pension Challenges for Expatriates

This is a great article from the Wall Street Journal describing all of the retirement planning difficulties and challenges expatriates face: “Retirement Traps Expats Can Avoid As They Make Moves: A Checklist of Issues to Consider, From Gauging Pension Options To Collecting Your Benefits Later.” The article advises employees who are planning to work abroad for less than five years to keep paying into social security and private retirement programs in their home country since most countries allow expatriates a five-year exemption from local social-security taxes.

Quote of Note: “The real headache for expatriates are employer-sponsored pensions. For now, there are no international, or pan-European, pensions. When an employee works in three countries, he will have three retirement plans that are next to impossible to consolidate due to discord in international tax laws. In addition, short periods spent in various countries can mean a loss of long-term benefits.”

Trend in Pension Freezing

Aon Consulting reviewed more than 1000 private sector defined benefit plans and found that more than 20% of those surveyed have already frozen plan benefits or are actively considering such action. You can access some information about the study in a Press Release. Breaking that 20% down, the press release indicates:

  • 13 percent have frozen benefits since January 1, 2001
  • An additional 2 percent are planning freezes before year-end
  • An additional 6 percent of pension plans are actively considering a plan freeze

The Fires in California: From Corp Law Blog's Viewpoint

Be sure not to miss Mike O’Sullivan‘s unique perspective of the fires in California at this post at Corp Law Blog.

HELP Committee Passes Gregg Pension Funding Bill

The Senate Committee on Health, Education, Labor and Pensions unanimously passed Chairman Judd Gregg’s (R-NH) bipartisan pension proposal. Main components of the bill which is called the “Pension Stability Act” are as follows:

  • Three-Year Fix: replaces the 30-year Treasury bond rate for a period of three years with a corporate bond rate based on “conservative indexes.”
  • Bi-Partisan Blue Ribbon Commission Appointed: Creates a commission to review all outstanding issues with a report to Congress in 2005.

You can read Senator Gregg’s press release here.

The Wall Street Journal reports: “Senate Panel Approves Bill: To Reform Pension Funding.” (Subscription required.)

Also, Reuters reports: “Senate Panel Backs Stopgap Pension Fix.” The article notes that the Senate Finance Committee measure sponsored by Senator Charles Grassley was approved earlier this year and would provide a transition to a permanent pension funding formula known as a yield curve. According to the article, “Senator Grassley will continue to work with Senator Gregg on a pension fix, but Senator Grassley feels that a permanent fix is the right way to go,” his spokeswoman said. “A three-year fix, he fears, would just become an extender.”

Participant Investing: Self-destructive?

Emotional Rescue: Keep your own wits about you when investing“: this is a very interesting article at National Review Online which discusses how “[w]hen it comes to money, our emotions often cause us to take stupid, self-destructive actions.” Quote of Note: “The mere chance of a loss is so frightening that many people prefer to make what they believe are riskless investments, rather than making investments which, over the years, have proven far more profitable with only slightly more risk. What does this mean in real life? For one thing, a lot of people in their thirties and forties direct part of their 401(k) retirement contributions to money-market funds, a foolish choice. Also, “through mid-2003,” says the Bernstein Journal article, “investors were still pouring more money into bond funds than stock funds, even though interest rates had fallen to less than nothing after inflation and taxes while the stock market was finally showing signs of life. . . “

Barrons’ Online via the Wall Street Journal Online (Subscription required) has this: “Retiring With Help: Pension investing should be simple.” The article points out how badly participants need help in investing their 401(k) accounts and notes that in May, “the House of Representatives passed a bill containing language to loosen .. . .restrictions on advice.” The article goes on to say that “the House has made this effort during past legislative sessions but the bills have fallen short of becoming law” and that “[s]ome lawmakers, especially in the Senate, are more concerned with preventing conflicts of interest on the parts of investment advisors than with getting advice to those who need it.” Quote of Note: “Recently, a young professional woman handed me a folder of disheveled 401(k) enrollment materials and asked me to translate them for her. If the instructions hadn’t read like a financial analysts’ exam, she might have discovered the life cycle account buried at the bottom of the form, which was all she really needed.”

Cross-Border Pension Pooling

Northern Trust has announced today that it is the first custodian to develop and implement a cross-border pooling solution for pension assets. The Newswire says “Northern Trust’s solution has identified structures flexible enough to support individual client needs as well as accommodate a myriad of complex individual country, regulatory, and tax requirements.” The Newswire quotes Steve Potter, Executive Vice President of Northern Trust, as saying that the arrangement “allows smaller country plans to enjoy economies of scale as part of a larger pool.”

The Risks of 'Ignorance is Bliss' and 'Catch Me If You Can' Enumerated

Some additional thoughts regarding discussions with the IRS at the Mid-Atlantic Pension Liaison Group Meeting:

(1) The question has been asked by a reader as to why the fees listed in the Nonamender Fee Schedule at this post and given to practitioners at the Mid-Atlantic Pension Liaison Group meeting are higher than the fees listed here in Rev. Proc. 2003-44 (link via Benefitslink.com). The question has to do with my discussion of the IRS’s new Nonamender Fee Schedule detailing fees that the IRS will impose if a plan sponsor makes a favorable determination letter application for a qualified plan and, in the process, it is discovered that certain amendments are missing. With respect to the question asked, Rev. Proc. 2003-44 contains the following language:

A submission of a plan under the determination letter program does not constitute a submission under VCP. If the Service in connection with a determination letter application discovers a Qualification Failure, the agent may issue a closing agreement with respect to the failures identified or, if appropriate, refer the case to Employee Plans Examinations. In either case, the fee structure in section 12, applicable to VCP, will not apply. Instead, the fee structure in section 14 relating to Audit CAP will apply. (See sections 13 and 14.) If the Plan Sponsor discovers a Qualification Failure, the Plan Sponsor should submit an application under VCP to correct the failure.

The Nonamender Fee Schedule posted here at Benefitsblog only applies to the determination letter application process. In other words, the fees would only be utilized in the situation where a determination letter application is filed and it is discovered that the amendments are missing. Under the Revenue Procedure, the plan would no longer be eligible for the voluntary submission procedure known as “VCP” and would then be thrown into “audit CAP.” Without the Nonamender Fee Schedule, the sanction under Audit CAP would normally be a negotiated percentage of the Maximum Payment Amount according to the Revenue Procedure.

Thus, the difference in fees has to do with the point at which the document failure is disclosed to the IRS. If the document failure is submitted to the IRS under VCP, then the fees listed in Rev. Proc. 2003-44 would apply (i.e. the lesser fees.) However, if the document failure is discovered in the determination letter process, it is my understanding that the higher fees listed in the Nonamender Fee Schedule and posted previously would be applied.

According to comments made at the Liaison meeting, there is also a third level fee schedule being developed by the IRS which would be applied in cases where document failures are discovered in an audit situation (as opposed to the determination letter application process.) The IRS indicated that the fees imposed in an audit would likely be even higher than those listed in the Nonamender Fee Schedule posted previously.

Comment: The bottom line in all of this is that playing a round of “Ignorance is Bliss” or “Catch Me If You Can” may end up being more costly for plan sponsors than imagined, when evaluated in light of the less costly route of “Bearing the Soul” under VCP. In addition, when submitting plans under the determination letter process, practitioners would be wise to have in hand copies of previous versions of the documents and any required amendments at the time of filing in order to avoid the perilous “where is the amendment” routine which can occur, in some instances, if and when the IRS asks for copies of prior documents.

(2) On another note, I was reminded by a practitioner who was in attendance at the meeting of another comment made by the IRS which readers may find important. IRS News Release 2003-112 announced an extension of the deadline to file selected returns and to pay certain taxes for affected taxpayers located in (or whose records were housed in) the Hurricane Isabel disaster area. At the meeting, the IRS emphasized the point that this extension does include an extension of the 401(b) remedial amendment period. Apparently, it was not clear from the original News Release that 401(b) remedial amendment period relief was available. However, the IRS has posted the following statements regarding the 401(b) remedial amendment period relief at its website:

The tax relief granted by the Service to victims of Hurricane Isabel includes an extension of the GUST remedial amendment period under section 401(b) of the Internal Revenue Code. If the GUST remedial amendment period for a plan of an affected employer expired on or after September 18, 2003, the deadline to amend the plan to comply with GUST is extended to November 18, 2003.

This extension also applies to any other remedial amendment period under section 401(b) for a plan of an affected employer that expired on or after September 18, 2003.

Affected employers who qualify for the extension and who file a determination letter application should write “Hurricane Isabel” at the top of the determination letter application.

According to the News Release, plan sponsors located in certain specified parts of Delaware, Maryland, North Carolina and Virginia would be able to take advantage of this relief.

Passage of the Harkin's Amendment Regarding Cash Balance Plans

Yesterday, I noted that the Senate had voted to block the Treasury Department from issuing regulations governing cash balance plans. The amendment–referred to as the “Harkin’s amendment” since it was introduced by Senator Tom Harkin (D-IA)–is Amendment No. 1905 to H.R. 2989, the Transportation, Treasury, and Independent Agencies Appropriations Act of 2004. The Amendment reads as follows:

(Purpose: To prohibit the Internal Revenue Service from using funds to go forward with its proposed cash balance regulation) SEC. . None of the funds made available in this Act may be used by the Secretary of the Treasury or his delegate to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, filed December 10, 2002, or any amendments reaching results similar to such proposed amendments.

You can find out more about the bill at this link.

As most will recall, a decision was issued this summer–Cooper et al. v. the IBM Personal Pension Plan and IBM Corporation–holding that the IBM cash balance plan violated certain provisions of ERISA.

To learn more about what was said on the Senate floor Thursday before passage of the Amendment, continue reading . . .

Mr. HARKIN. Mr. President, I send an amendment to the desk and ask for its immediate consideration.

The PRESIDING OFFICER. The clerk will report.

The assistant legislative clerk read as follows:

The Senator from Iowa [Mr. Harkin], for himself, Mr. Feingold, Mr. Kennedy, and Mr. Durbin, proposes an amendment numbered 1905.

Mr. HARKIN. Mr. President, I ask unanimous consent that reading of the amendment be dispensed with.

The PRESIDING OFFICER. Without objection, it is so ordered.

The amendment is as follows:

(Purpose: To prohibit the Internal Revenue Service from using funds to go forward with its proposed cash balance regulation)
At the appropriate place, insert the following:

SEC. . None of the funds made available in this Act may be used by the Secretary of the Treasury or his delegate to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, filed December 10, 2002, or any amendments reaching results similar to such proposed amendments.

Mr. HARKIN. Mr. President, this amendment has some history in the Senate and the House. I will try to enlighten Senators as to the background and what it is about. Hopefully, we can have support for the amendment and adopt it.

Basically, it stops the Treasury Department from moving forward with a regulation that would allow companies to convert from a traditional defined benefit pension plan to a cash balance plan in a way that would hurt older workers. We are not saying they can’t promulgate a rule that wouldn’t allow a company to go from a defined benefit plan to a cash balance plan. We are just saying, they should not do it in a way that hurts older workers. Let me talk about that a little bit and what is behind it.

I am not totally opposed to cash balance plans. Some designs can be very good. Some can be a great deal better for younger workers, for example, than an uninsured defined contribution plan. Some are not. I am not saying we should prohibit any cash balance plans from existing. However, we need to make sure employers put in place a fair and equitable manner for treating these.

I have been following this issue closely for several years. In the mid-1990s, a groundswell of companies started converting from traditional defined benefit plans to hybrid plans, including cash balance plans. A couple of years later, some older workers who were nearing retirement started looking at the effect of this conversion on their account. They were shocked to find they hadn’t been accruing any benefits for years. In other words, workers who were, say, in their forties or early fifties when the company converted from a defined benefit plan to a cash balance plan, didn’t really know how the conversion would affect them. Then after several years, these older workers looked and found out they had been working for several years and their pension had not increased one penny, even though they had been working. Yet younger workers, age 20, 25, saw their pension plans increase.

A lot of workers nearing retirement, thinking they were going to get what they had assumed was going to be their retirement and their pension, all of a sudden found out their pension had been worn away over several years. It turned out that employers were freezing the accounts in the old plan, then they established a lower opening account balance in the new plan which meant, simply, that the longer you were in the plan, the longer you were working without earning any new benefits. That became a term called “wearaway.” In other words, your pension benefits wore away.

Many people said: This is nothing less than age discrimination. In other words, I am working for the company. I have been there for 20 years. They switch their pension program. A younger person gets more in their pension program than I get in mine.

A new 25-year-old employee would be getting more money contributed to their pension account, while a 45-year-old who had been loyal to the company for 20 years would not get anything. I was shocked and appalled to learn about this practice, and so were thousands of loyal, hard-working Americans.

In 1999, I introduced a bill to make it illegal for corporations to wear away the benefits of older workers during these conversions. We raised the profile of this issue. We raised it with Treasury. In September of 1999, the Treasury Department issued a moratorium on conversions from defined benefit plans to cash balance plans. The momentum against these unfair conversions was building as more and more companies changed, as more and more workers found their pensions were worn away.

In April of 2000, we in the Senate passed a sense-of-the-Senate resolution without objection, stating that the wearing away of current benefits during cash balance conversions is unfair and wrong–a unanimous sense-of-the-Senate resolution in April of 2000.

Well, now we go to 2001 and 2002, and not much is happening. That moratorium stayed on, by the way, through 2000, 2001, and 2002. However, last December, Treasury issued a regulation that would turn the clock back, undo the moratorium, allow more businesses to go forward with conversions in this wrong manner–the manner that would wear away the pensions of older workers.

Very soon after that, 191 members of the House of Representatives, and 26 Senators signed a bipartisan letter to President Bush asking that we do not reopen the floodgates, that we withdraw this rule and promulgate a rule that is fair and equitable. Well, now, as you might imagine, during this period of time some of these workers who found that their pensions had been worn away went to court. In August, a district judge in East St. Louis, in the case of Cooper v. IBM–IBM was one of the larger, well-known companies that engaged in this practice–ruled in favor of the plaintiff on her age discrimination claim.

Now, on September 9–I am talking about last month, and this case was decided in August–the House of Representatives voted 258 to 160–again bipartisan, with 65 Republicans voting for the amendment–saying that the IRS should not issue a regulation that would overturn this ruling by the district judge in East St. Louis.

So now we are into October. I might just say that all of these have been positive steps. We had a sense-of-the-Senate resolution in 2000. We had the moratorium. Last December, the Treasury Department–I might add, if I am not mistaken, I don’t think there was a Secretary of the Treasury at that time in place–issued this rule to turn the clock back, and 196 members of the House and 26 Senators signed a letter to President Bush saying withdraw this rule and have one that is fair and equitable.

In August, there was the district court ruling. On September 9, last month, the House voted 250 to 196 that the IRS should not issue a regulation that would overturn this ruling. There have been a lot of positive steps, but this regulation is still hanging out there.

One other thing happened. Last January, Senator Durbin and I indicated that we might place a hold on the nomination of Mr. John Snow to be Secretary of the Treasury. Well, Mr. Snow was a very popular person and we didn’t have anything personally against him; I want to make that clear. But we wanted to raise this issue. So Mr. Snow, a fine gentleman and outstanding business executive, someone who has gotten high accolades for his tenure in business as a business executive, met with Senator Durbin and me in my office. He said on this critical issue he would let fairness guide the regulatory process.

Mr. Snow had talked about what they had done at CSX, the company he had been CEO of, and how they had, I believe, instituted a cash balance plan, and a choice between the old plan and the new plan, which sounded fair and reasonable to me–let the worker decide what they want, which means many younger workers would probably pick the cash balance plan, and older workers might stay with a defined benefit plan. Mr. Snow said he would let fairness guide this regulatory process. That is the way we ought to go.

The fairness ought to be in working with Congress to develop this new regulation. So I think the best way to ensure that we do this is to ensure, No. 1, that Congress speaks on this issue; that Congress is involved in working with Treasury to make sure we come up with a fair and equitable rule dealing with pensions.

Secondly, I think the best way to make sure this happens, and to make sure that Congress is able to work and have a seat at the table is to adopt this amendment.

This regulation must be withdrawn. We need to work together to find a reasonable, bipartisan legislative solution to this complex problem. This is an incredibly important issue to American workers. It is very important for them to know that we stand united behind them in this struggle for fairness.

Mr. President, I spoke about this many times on the Senate floor. In terms of what distinguishes the American workplace in so many ways from others around the world, we have always valued loyalty and productivity in the American workplace–loyalty and productivity. If you are hard working and you are productive and you are loyal, U.S. companies have always valued that–at least they used to. That is one of the reasons companies have offered defined benefit pension plans. The longer you work and the more loyal you are to the company, you get a bigger pension. It makes sense.

So the longer you work someplace, the better you do your job, the more you learn about it, the more productive you are, that is what we value. We value that productivity and loyalty.

Now if companies are able to just break these promises at random, what kind of a signal does that send to U.S. workers? It tells workers they are foolish to be loyal because their employer could just change the rules of the game at any time and leave them out in the cold. It destroys the kind of work ethic that we have come to value and that I believe built this country, which distinguishes us from other countries around the world. We value fairness when it comes to workers. A deal is a deal.

I offer this analogy. Let’s say I am offered a job. The employer says to me: OK, Senator Harkin, we are going to hire you and we are going to have a 5-year job here for you to do. If you stay with us for 5 years and you work for 5 years, we will give you a $50,000 bonus. I think that is a pretty good deal, so we shake hands, and I agree on that. So I worked at the company for 3 years, then my boss comes to me and says: Harkin, you know that deal we made where we said if you would work here 5 years, you would get a $50,000 bonus? Well, you have been here for 3 years and, guess what, the deal is off. Just like that, the deal is off. But I went to work for that company depending upon that.

That is what happens to a lot of people. They depend upon the kind of pension program the company has. That is one of the things, when companies recruit workers out of college or vocational schools, people look at what kind of pension program they have. Well, if after a certain amount of time they say, sorry, it is off, you don’t get any of this, what does that say about loyalty and productivity?

I don’t think that is the way we want to treat workers in this country where the employer holds all the cards and can change the deal anytime they want.

Again, I didn’t have any stake–but, Harkin, you didn’t contribute anything to that bonus. We said if you worked here 5 years, we would give you a $50,000 bonus, but we paid you the salary we agreed upon, did we not?

Yes.

You didn’t put anything into that $50,000 bonus; that is something we were going to give you. Now we reneged on it. You don’t have anything to gripe about.

Wait a minute. I have given 3 years to this company. I worked hard. I was productive because I wanted to get that bonus for 5 years, so it is not true to say I didn’t put anything into the bonus.

This is like saying you didn’t put anything into the pension plan. This is something the company offered you. Oh, yes, you did. You may have put in 20 or 25 years of loyal, hard work and diligence. If you had known 20 years ago they were going to pull the rug out from underneath you, would you have stayed with that company or would you maybe have gone someplace else?

Again, I hope people disabuse themselves of the idea that somehow a pension is just what the company offers you and you don’t have any stake in it. You have a big stake in it. It is what they promised you when you went to work there, and you went to work there relying upon that promise. I am not saying they can’t change their pension programs. Times change, conditions change, the workforce changes. I understand all that. New kinds of pension programs come on the market dealing with existing circumstances or what the future might be. That is fine, just as long as, No. 1, they treat workers fairly, and No. 2, that a deal is a deal. It seems to me if you work for a company for 20 years and they want to switch their pension plan, but you made a deal on one and you want to stick with that one, they ought to at least let you continue to work and retire under that plan. If you want to switch, it ought to be up to the worker.

That is what this amendment is all about. It is simply about saying to the Treasury Department they can’t issue this proposed rule they have come up with which, as I said, last month the House voted 258 to 160 to say no to and which earlier this year 191 Members of the House and 26 Senators signed a letter to President Bush saying withdraw the rule.

That is what this amendment does. It simply says: Withdraw this rule; work with Congress. Let’s have something that is fair and equitable for our workers.

Again, I urge my colleagues to join in support of this amendment in fairness to American workers.

Mr. President, I ask unanimous consent that a letter from the AARP dated October 23, 2003, be printed in the RECORD.

There being no objection, the material was ordered to be printed in the Record, as follows:

AMERICAN ASSOCIATION

OF RETIRED PERSONS,

Washington, DC, October 23, 2003.
Senator TOM HARKIN,
Hart Senate Office Building,
Washington, DC.

DEAR SENATOR HARKIN: AARP supports your amendment to the Transportation, Treasury and Independent Agencies Appropriations Act for Fiscal Year 2004 that would prohibit the IRS from using funds to go forward with its proposed cash balance regulations. The House passed a similar amendment on September 9, 2003 by a strong bipartisan vote of 258-160.

This amendment would not change existing law. It is in keeping with the court decision in Kathi Cooper, et al. v. IBM Personal Pension Plan, et al. The court concluded that cash balance pension plans discriminate against older workers, cut older workers’ benefits, and serve to lower the costs and contribute to the profits of companies sponsoring cash balance plans.

In September 1999, the IRS imposed a moratorium on corporate plans that convert traditional defined benefit plans to a cash balance formula in order to allow Congress and others to review cash balance plans to make sure that the conversions comply with current pension and age discrimination laws. The moratorium suspended consideration of approximately 300 pending applications submitted by corporations to convert an existing plan to a cash balance formula. The Treasury proposed regulations in December 2002 that would lift the moratorium and allow corporations to establish plans that the federal courts have ruled discriminate against older workers.

AARP believes that Treasury should not act on regulations that would encourage companies to change their pension plans in a manner that is contrary to age discrimination laws and the federal court ruling. Rather, Congress should review the ruling and enact the pension reform measures necessary to protect older workers.

AARP urges you to vote for this timely and important amendment. AARP hopes that this amendment will send a strong message that we value older workers and that we reaffirm those older workers should not be subject to age discrimination in their pension plans and their pension benefits should be calculated fairly as directed by Congress and the Federal courts.

Please let me know, or have your staff call Frank Toohey (202-434-3760) of our Federal Affairs office if we can be of further assistance.

Sincerely,

Michael W. Naylor,
Director of Advocacy.

Mr. KENNEDY. Mr. President, it is a privilege to join Senator Harkin on this amendment to protect workers’ retirement.

We know that for millions of American workers, their pension benefits are in danger. The continuing weak economy and rising health costs are pressuring thousands of employers to reduce or terminate their traditional defined benefit pension plans.

One way that companies are slashing costs is by converting traditional pension plans to cash balance plans. Older employees are the hardest hit by these conversions. According to the General Accounting Office, annual pension benefits of older employees can drop as much as 50 percent after a company converts to a cash balance plan.

Companies are doing it to save hundreds of millions of dollars in pension costs. But those savings are being taken out of the retirement security of American workers.

These proposed Treasury regulations would give companies legal protection against claims of age discrimination by older employees. Thousands of companies would have a strong incentive to convert to cash balance plans. Millions of workers could lose huge chunks of the pensions they have been promised.

Cash balance pension plans do have some advantages for some workers. Increased portability of pensions is important. So is providing pension benefits for parents, particularly women, who move in and out of the workforce. We support greater benefits for younger workers, who are more likely than ever to have several employers throughout their careers. But Treasury can and must do more to protect the workers who are hurt by these conversions.

The Harkin amendment would halt Treasury’s proposed regulations. Workers should have choice about benefits under their pension plans, and they deserve protections when their company converts to a cash balance plan. It is wrong to let companies freeze the benefits for older workers, or reduce future benefits, when these workers have already contributed so many years of service to their companies.

I urge my colleagues to support this amendment, and do the right thing to protect the retirement of our Nation’s workers.

The PRESIDING OFFICER. The Senator from Alabama.

Mr. SHELBY. Mr. President, the managers have no objection to the amendment offered by the Senator from Iowa. I urge the amendment be adopted.

Mr. President, we need to check something. I suggest the absence of a quorum.

The PRESIDING OFFICER. The clerk will call the roll.

The legislative clerk proceeded to call the roll.

Mr. SHELBY. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

The PRESIDING OFFICER. Without objection, it is so ordered.

Mr. SHELBY. Mr. President, I want to say again the managers have no objection to this amendment, and I urge the amendment be adopted.

The PRESIDING OFFICER. Is there further debate? If there is no further debate, without objection, the amendment is agreed to.

The amendment (No. 1905) was agreed to.

The PRESIDING OFFICER. The Senator from Iowa.

Mr. HARKIN. Mr. President, I thank the managers of the bill for accepting this amendment. Again, this amendment is going to send a strong signal that both bodies want to work with the Treasury Department to establish a fair and equitable rule on pensions. I thank the managers.

Mr. SHELBY. I move to reconsider the vote.

Mrs. MURRAY. I move to lay that motion on the table.

The motion to lay on the table was agreed to.

Mrs. MURRAY. I suggest the absence of a quorum.

The PRESIDING OFFICER. The clerk will call the roll.

The legislative clerk proceeded to call the roll.
Ms. MIKULSKI. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

The PRESIDING OFFICER. Without objection, it is so ordered.

Passage of the Harkin's Amendment Regarding Cash Balance Plans

Yesterday, I noted that the Senate had voted to block the Treasury Department from issuing regulations governing cash balance plans. The amendment–referred to as the “Harkin’s amendment” as introduced by Senator Tom Harkin (D-IA)–is Amendment No. 1905 to H.R. 2989, the Transportation, Treasury, and Independent Agencies Appropriations Act of 2004. The Amendment reads as follows:

(Purpose: To prohibit the Internal Revenue Service from using funds to go forward with its proposed cash balance regulation)

SEC. . None of the funds made available in this Act may be used by the Secretary of the Treasury or his delegate to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, filed December 10, 2002, or any amendments reaching results similar to such proposed amendments.

You can find out more about the bill at this link. You can access the Congressional Record here and here.

As most will recall, an opinion was issued last summer–Cooper et al. v. the IBM Personal Pension Plan and IBM Corporation–holding that the IBM cash balance plan violated certain provisions of ERISA.

According to the Congressional Record, Senator Harkin made these comments about the measure before its passage:

I offer this analogy. Let’s say I am offered a job. The employer says to me: OK, Senator Harkin, we are going to hire you and we are going to have a 5-year job here for you to do. If you stay with us for 5 years and you work for 5 years, we will give you a $50,000 bonus. I think that is a pretty good deal, so we shake hands, and I agree on that. So I worked at the company for 3 years, then my boss comes to me and says: Harkin, you know that deal we made where we said if you would work here 5 years, you would get a $50,000 bonus? Well, you have been here for 3 years and, guess what, the deal is off. Just like that, the deal is off. But I went to work for that company depending upon that.

Comments: The analogy breaks down in two ways, in my opinion:

(1) Employment at will prevails in most states so that an employer would very rarely say to an employee “we are going to hire you and we are going to have a 5-year job here for you to do.”

(2) Employers would never establish pension plans if they were going to be viewed as an obligation for the duration of the employee’s service with the employer. Under current law, employers with non-collectively-bargained plans are free to terminate such plans at any time with proper notice and without taking away benefits that have already accrued. In addition, employees are always free to seek employment elsewhere.

The question that needs to be resolved is how these plans can be drafted so that they satisfy the requirements of ERISA. It seems that even one of our most esteemed judges would like for Congress to step in here and give some guidance quickly. . .

To learn more about what was said on the Senate floor Thursday before passage of the Amendment, continue reading . . .

Mr. HARKIN. Mr. President, I send an amendment to the desk and ask for its immediate consideration.

The PRESIDING OFFICER. The clerk will report.

The assistant legislative clerk read as follows:

The Senator from Iowa [Mr. Harkin], for himself, Mr. Feingold, Mr. Kennedy, and Mr. Durbin, proposes an amendment numbered 1905.

Mr. HARKIN. Mr. President, I ask unanimous consent that reading of the amendment be dispensed with.

The PRESIDING OFFICER. Without objection, it is so ordered.

The amendment is as follows:

(Purpose: To prohibit the Internal Revenue Service from using funds to go forward with its proposed cash balance regulation)
At the appropriate place, insert the following:

SEC. . None of the funds made available in this Act may be used by the Secretary of the Treasury or his delegate to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, filed December 10, 2002, or any amendments reaching results similar to such proposed amendments.

Mr. HARKIN. Mr. President, this amendment has some history in the Senate and the House. I will try to enlighten Senators as to the background and what it is about. Hopefully, we can have support for the amendment and adopt it.

Basically, it stops the Treasury Department from moving forward with a regulation that would allow companies to convert from a traditional defined benefit pension plan to a cash balance plan in a way that would hurt older workers. We are not saying they can’t promulgate a rule that wouldn’t allow a company to go from a defined benefit plan to a cash balance plan. We are just saying, they should not do it in a way that hurts older workers. Let me talk about that a little bit and what is behind it.

I am not totally opposed to cash balance plans. Some designs can be very good. Some can be a great deal better for younger workers, for example, than an uninsured defined contribution plan. Some are not. I am not saying we should prohibit any cash balance plans from existing. However, we need to make sure employers put in place a fair and equitable manner for treating these.

I have been following this issue closely for several years. In the mid-1990s, a groundswell of companies started converting from traditional defined benefit plans to hybrid plans, including cash balance plans. A couple of years later, some older workers who were nearing retirement started looking at the effect of this conversion on their account. They were shocked to find they hadn’t been accruing any benefits for years. In other words, workers who were, say, in their forties or early fifties when the company converted from a defined benefit plan to a cash balance plan, didn’t really know how the conversion would affect them. Then after several years, these older workers looked and found out they had been working for several years and their pension had not increased one penny, even though they had been working. Yet younger workers, age 20, 25, saw their pension plans increase.

A lot of workers nearing retirement, thinking they were going to get what they had assumed was going to be their retirement and their pension, all of a sudden found out their pension had been worn away over several years. It turned out that employers were freezing the accounts in the old plan, then they established a lower opening account balance in the new plan which meant, simply, that the longer you were in the plan, the longer you were working without earning any new benefits. That became a term called “wearaway.” In other words, your pension benefits wore away.

Many people said: This is nothing less than age discrimination. In other words, I am working for the company. I have been there for 20 years. They switch their pension program. A younger person gets more in their pension program than I get in mine.

A new 25-year-old employee would be getting more money contributed to their pension account, while a 45-year-old who had been loyal to the company for 20 years would not get anything. I was shocked and appalled to learn about this practice, and so were thousands of loyal, hard-working Americans.

In 1999, I introduced a bill to make it illegal for corporations to wear away the benefits of older workers during these conversions. We raised the profile of this issue. We raised it with Treasury. In September of 1999, the Treasury Department issued a moratorium on conversions from defined benefit plans to cash balance plans. The momentum against these unfair conversions was building as more and more companies changed, as more and more workers found their pensions were worn away.

In April of 2000, we in the Senate passed a sense-of-the-Senate resolution without objection, stating that the wearing away of current benefits during cash balance conversions is unfair and wrong–a unanimous sense-of-the-Senate resolution in April of 2000.

Well, now we go to 2001 and 2002, and not much is happening. That moratorium stayed on, by the way, through 2000, 2001, and 2002. However, last December, Treasury issued a regulation that would turn the clock back, undo the moratorium, allow more businesses to go forward with conversions in this wrong manner–the manner that would wear away the pensions of older workers.

Very soon after that, 191 members of the House of Representatives, and 26 Senators signed a bipartisan letter to President Bush asking that we do not reopen the floodgates, that we withdraw this rule and promulgate a rule that is fair and equitable. Well, now, as you might imagine, during this period of time some of these workers who found that their pensions had been worn away went to court. In August, a district judge in East St. Louis, in the case of Cooper v. IBM–IBM was one of the larger, well-known companies that engaged in this practice–ruled in favor of the plaintiff on her age discrimination claim.

Now, on September 9–I am talking about last month, and this case was decided in August–the House of Representatives voted 258 to 160–again bipartisan, with 65 Republicans voting for the amendment–saying that the IRS should not issue a regulation that would overturn this ruling by the district judge in East St. Louis.

So now we are into October. I might just say that all of these have been positive steps. We had a sense-of-the-Senate resolution in 2000. We had the moratorium. Last December, the Treasury Department–I might add, if I am not mistaken, I don’t think there was a Secretary of the Treasury at that time in place–issued this rule to turn the clock back, and 196 members of the House and 26 Senators signed a letter to President Bush saying withdraw this rule and have one that is fair and equitable.

In August, there was the district court ruling. On September 9, last month, the House voted 250 to 196 that the IRS should not issue a regulation that would overturn this ruling. There have been a lot of positive steps, but this regulation is still hanging out there.

One other thing happened. Last January, Senator Durbin and I indicated that we might place a hold on the nomination of Mr. John Snow to be Secretary of the Treasury. Well, Mr. Snow was a very popular person and we didn’t have anything personally against him; I want to make that clear. But we wanted to raise this issue. So Mr. Snow, a fine gentleman and outstanding business executive, someone who has gotten high accolades for his tenure in business as a business executive, met with Senator Durbin and me in my office. He said on this critical issue he would let fairness guide the regulatory process.

Mr. Snow had talked about what they had done at CSX, the company he had been CEO of, and how they had, I believe, instituted a cash balance plan, and a choice between the old plan and the new plan, which sounded fair and reasonable to me–let the worker decide what they want, which means many younger workers would probably pick the cash balance plan, and older workers might stay with a defined benefit plan. Mr. Snow said he would let fairness guide this regulatory process. That is the way we ought to go.

The fairness ought to be in working with Congress to develop this new regulation. So I think the best way to ensure that we do this is to ensure, No. 1, that Congress speaks on this issue; that Congress is involved in working with Treasury to make sure we come up with a fair and equitable rule dealing with pensions.

Secondly, I think the best way to make sure this happens, and to make sure that Congress is able to work and have a seat at the table is to adopt this amendment.

This regulation must be withdrawn. We need to work together to find a reasonable, bipartisan legislative solution to this complex problem. This is an incredibly important issue to American workers. It is very important for them to know that we stand united behind them in this struggle for fairness.

Mr. President, I spoke about this many times on the Senate floor. In terms of what distinguishes the American workplace in so many ways from others around the world, we have always valued loyalty and productivity in the American workplace–loyalty and productivity. If you are hard working and you are productive and you are loyal, U.S. companies have always valued that–at least they used to. That is one of the reasons companies have offered defined benefit pension plans. The longer you work and the more loyal you are to the company, you get a bigger pension. It makes sense.

So the longer you work someplace, the better you do your job, the more you learn about it, the more productive you are, that is what we value. We value that productivity and loyalty.

Now if companies are able to just break these promises at random, what kind of a signal does that send to U.S. workers? It tells workers they are foolish to be loyal because their employer could just change the rules of the game at any time and leave them out in the cold. It destroys the kind of work ethic that we have come to value and that I believe built this country, which distinguishes us from other countries around the world. We value fairness when it comes to workers. A deal is a deal.

I offer this analogy. Let’s say I am offered a job. The employer says to me: OK, Senator Harkin, we are going to hire you and we are going to have a 5-year job here for you to do. If you stay with us for 5 years and you work for 5 years, we will give you a $50,000 bonus. I think that is a pretty good deal, so we shake hands, and I agree on that. So I worked at the company for 3 years, then my boss comes to me and says: Harkin, you know that deal we made where we said if you would work here 5 years, you would get a $50,000 bonus? Well, you have been here for 3 years and, guess what, the deal is off. Just like that, the deal is off. But I went to work for that company depending upon that.

That is what happens to a lot of people. They depend upon the kind of pension program the company has. That is one of the things, when companies recruit workers out of college or vocational schools, people look at what kind of pension program they have. Well, if after a certain amount of time they say, sorry, it is off, you don’t get any of this, what does that say about loyalty and productivity?

I don’t think that is the way we want to treat workers in this country where the employer holds all the cards and can change the deal anytime they want.

Again, I didn’t have any stake–but, Harkin, you didn’t contribute anything to that bonus. We said if you worked here 5 years, we would give you a $50,000 bonus, but we paid you the salary we agreed upon, did we not?

Yes.

You didn’t put anything into that $50,000 bonus; that is something we were going to give you. Now we reneged on it. You don’t have anything to gripe about.

Wait a minute. I have given 3 years to this company. I worked hard. I was productive because I wanted to get that bonus for 5 years, so it is not true to say I didn’t put anything into the bonus.

This is like saying you didn’t put anything into the pension plan. This is something the company offered you. Oh, yes, you did. You may have put in 20 or 25 years of loyal, hard work and diligence. If you had known 20 years ago they were going to pull the rug out from underneath you, would you have stayed with that company or would you maybe have gone someplace else?

Again, I hope people disabuse themselves of the idea that somehow a pension is just what the company offers you and you don’t have any stake in it. You have a big stake in it. It is what they promised you when you went to work there, and you went to work there relying upon that promise. I am not saying they can’t change their pension programs. Times change, conditions change, the workforce changes. I understand all that. New kinds of pension programs come on the market dealing with existing circumstances or what the future might be. That is fine, just as long as, No. 1, they treat workers fairly, and No. 2, that a deal is a deal. It seems to me if you work for a company for 20 years and they want to switch their pension plan, but you made a deal on one and you want to stick with that one, they ought to at least let you continue to work and retire under that plan. If you want to switch, it ought to be up to the worker.

That is what this amendment is all about. It is simply about saying to the Treasury Department they can’t issue this proposed rule they have come up with which, as I said, last month the House voted 258 to 160 to say no to and which earlier this year 191 Members of the House and 26 Senators signed a letter to President Bush saying withdraw the rule.

That is what this amendment does. It simply says: Withdraw this rule; work with Congress. Let’s have something that is fair and equitable for our workers.

Again, I urge my colleagues to join in support of this amendment in fairness to American workers.

Mr. President, I ask unanimous consent that a letter from the AARP dated October 23, 2003, be printed in the RECORD.

There being no objection, the material was ordered to be printed in the Record, as follows:

AMERICAN ASSOCIATION

OF RETIRED PERSONS,

Washington, DC, October 23, 2003.
Senator TOM HARKIN,
Hart Senate Office Building,
Washington, DC.

DEAR SENATOR HARKIN: AARP supports your amendment to the Transportation, Treasury and Independent Agencies Appropriations Act for Fiscal Year 2004 that would prohibit the IRS from using funds to go forward with its proposed cash balance regulations. The House passed a similar amendment on September 9, 2003 by a strong bipartisan vote of 258-160.

This amendment would not change existing law. It is in keeping with the court decision in Kathi Cooper, et al. v. IBM Personal Pension Plan, et al. The court concluded that cash balance pension plans discriminate against older workers, cut older workers’ benefits, and serve to lower the costs and contribute to the profits of companies sponsoring cash balance plans.

In September 1999, the IRS imposed a moratorium on corporate plans that convert traditional defined benefit plans to a cash balance formula in order to allow Congress and others to review cash balance plans to make sure that the conversions comply with current pension and age discrimination laws. The moratorium suspended consideration of approximately 300 pending applications submitted by corporations to convert an existing plan to a cash balance formula. The Treasury proposed regulations in December 2002 that would lift the moratorium and allow corporations to establish plans that the federal courts have ruled discriminate against older workers.

AARP believes that Treasury should not act on regulations that would encourage companies to change their pension plans in a manner that is contrary to age discrimination laws and the federal court ruling. Rather, Congress should review the ruling and enact the pension reform measures necessary to protect older workers.

AARP urges you to vote for this timely and important amendment. AARP hopes that this amendment will send a strong message that we value older workers and that we reaffirm those older workers should not be subject to age discrimination in their pension plans and their pension benefits should be calculated fairly as directed by Congress and the Federal courts.

Please let me know, or have your staff call Frank Toohey (202-434-3760) of our Federal Affairs office if we can be of further assistance.

Sincerely,

Michael W. Naylor,
Director of Advocacy.

Mr. KENNEDY. Mr. President, it is a privilege to join Senator Harkin on this amendment to protect workers’ retirement.

We know that for millions of American workers, their pension benefits are in danger. The continuing weak economy and rising health costs are pressuring thousands of employers to reduce or terminate their traditional defined benefit pension plans.

One way that companies are slashing costs is by converting traditional pension plans to cash balance plans. Older employees are the hardest hit by these conversions. According to the General Accounting Office, annual pension benefits of older employees can drop as much as 50 percent after a company converts to a cash balance plan.

Companies are doing it to save hundreds of millions of dollars in pension costs. But those savings are being taken out of the retirement security of American workers.

These proposed Treasury regulations would give companies legal protection against claims of age discrimination by older employees. Thousands of companies would have a strong incentive to convert to cash balance plans. Millions of workers could lose huge chunks of the pensions they have been promised.

Cash balance pension plans do have some advantages for some workers. Increased portability of pensions is important. So is providing pension benefits for parents, particularly women, who move in and out of the workforce. We support greater benefits for younger workers, who are more likely than ever to have several employers throughout their careers. But Treasury can and must do more to protect the workers who are hurt by these conversions.

The Harkin amendment would halt Treasury’s proposed regulations. Workers should have choice about benefits under their pension plans, and they deserve protections when their company converts to a cash balance plan. It is wrong to let companies freeze the benefits for older workers, or reduce future benefits, when these workers have already contributed so many years of service to their companies.

I urge my colleagues to support this amendment, and do the right thing to protect the retirement of our Nation’s workers.

The PRESIDING OFFICER. The Senator from Alabama.

Mr. SHELBY. Mr. President, the managers have no objection to the amendment offered by the Senator from Iowa. I urge the amendment be adopted.

Mr. President, we need to check something. I suggest the absence of a quorum.

The PRESIDING OFFICER. The clerk will call the roll.

The legislative clerk proceeded to call the roll.

Mr. SHELBY. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

The PRESIDING OFFICER. Without objection, it is so ordered.

Mr. SHELBY. Mr. President, I want to say again the managers have no objection to this amendment, and I urge the amendment be adopted.

The PRESIDING OFFICER. Is there further debate? If there is no further debate, without objection, the amendment is agreed to.

The amendment (No. 1905) was agreed to.

The PRESIDING OFFICER. The Senator from Iowa.

Mr. HARKIN. Mr. President, I thank the managers of the bill for accepting this amendment. Again, this amendment is going to send a strong signal that both bodies want to work with the Treasury Department to establish a fair and equitable rule on pensions. I thank the managers.

Mr. SHELBY. I move to reconsider the vote.

Mrs. MURRAY. I move to lay that motion on the table.

The motion to lay on the table was agreed to.

Mrs. MURRAY. I suggest the absence of a quorum.

The PRESIDING OFFICER. The clerk will call the roll.

The legislative clerk proceeded to call the roll.
Ms. MIKULSKI. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

The PRESIDING OFFICER. Without objection, it is so ordered.

Senate Votes to Block Treasury Action on Cash Balance Plans

Reuters is reporting via Forbes.com: “U.S. Senate moves to stop Treasury pension rules.” The article reports that the U.S. Senate on Thursday voted to block the Treasury Department from issuing certain regulations governing cash balance pension plans. The House of Representatives approved a similar measure last month called the “Sanders Amendment.” You can read about the House measure here and here.

The Wall Street Journal also reports: “US Senate Votes To Block Cash-Balance Pension Regs.”