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Employees' objections to the terms of their retirement plans will hit more firms of all sizes in the next several years, and many companies will have to settle the disputes in court.
"This has to do with the baby boomers approaching retirement and people paying a lot more attention to retirement security issues," says Geoffrey Manville, spokesman for the ERISA Industry Committee, an association that represents the employee benefits interest of America's largest employers. The boomers tend to be well educated and have an activist bent. They also have to worry more about retirement security than did their parents, who counted on being covered by a defined-benefit pension plan and Social Security.
Defined-benefit plans calculate an employee's benefit at retirement through a formula weighted toward the employee's pay in the last few years before retirement. Many employers are switching to cash-balance plans, in which credit for service accrues more evenly over a worker's years with the company. These plans have become popular because they save money and are attractive to younger workers. For longtime employees, however, converting to cash balance can mean reduced benefits at retirement.
The squabble that has grabbed most of the headlines recently involves IBM. Company workers near retirement age are objecting to IBM's decision to switch its defined-benefit pension plan to a cash-balance plan because they believe that they will lose benefits as a result.
Pension industry officials say that cash balance is just the tip of the iceberg. Signs that the problems will be much broader include the following:
- Pension COLAs. General Electric (GE) recently caved in to union demands that it make a cost-of-living adjustment (COLA) in the pension benefits of GE retirees, the first such increase in four years. According to the Coordinated Bargaining Committee of General Electric Unions, GE's announcement came after union members demonstrated against the company in two cities.
- Lump sum vs. annuity. The Treasury Department announced in early May that it would look into whether companies are adequately informing employees about the relative benefits of receiving monthly retirement benefits versus receiving a lump sum when they reach retirement age. The decision to launch a probe was prompted by Sen. Tom Harkin (D-IA), who complained to the department that many companies are misleading workers into believing that a lump-sum payment is preferable, when in fact they should be sticking with a monthly payment plan. The government spotlight will likely generate additional complaints by employees in the near future.
- Post-merger moves. In at least two cases, employees have sued a company over the way it handled a retirement plan after a merger. In April, SBC Communications was sued by former Pacific Telesis employees after SBC merged with PacTel and moved 401(k) money out of shares of AirTouch Communications and into SBC stock. The PacTel employees had been heavily invested in AirTouch, a PacTel subsidiary that had been spun off before the merger with SBC. When AirTouch stock began to significantly outperform SBC, the employees took legal action. In another case, First Union was sued by former Signet Bank employees who complained that their 401(k) investments were shifted without their knowledge from mutual funds they had selected to funds owned and controlled by First Union. Both suits are pending.
The SBC and First Union cases also point to a worrisome prospect for employers if stock market volatility continues. Pension industry officials are concerned that more workers will start questioning the types of investments that companies choose for their 401(k) plans if returns on their investments fall short of expectations. Employees have become accustomed to years of good returns on stock index funds and similar investments and haven't second-guessed employers during the good times; however, a market downturn could change all that.
How can employers avoid tussles with workers about the handling of retirement plans? Pension industry officials say that a common theme runs through many, though not all, of the disputes that have surfaced: communication. Employees want to be leveled with about the benefits they can expect at retirement, and they want to understand why employers offer certain types of investments and not others for a defined-contribution plan. Keeping employees up to speed, especially when changes in a retirement plan occur or your company merges, will be key to staying out of court.
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