Cash Balance Plans Are Not Discriminatory
In the 80s and 90, many employers instituted cash balance plans as a means of providing richer benefits to employees with a shorter service time. These types of plans had two prime benefits to employees: they allowed for faster accrual of benefits and they expressed the benefits in a lump sum value. The problem was that they clearly appeared to provide younger workers higher benefits than older workers because the benefits earned by younger employee (shown as retirement annuities). Naturally litigation ensured.
Last week, the 9th Circuit Court of Appeals affirmed that these plans do not discriminate against older workers. This is the fifth Court of Appeals to reach this conclusion and with the pro-employee 9th Circuit signing on, this appears to be the tail end of any challenge. To quote the Court, "although a younger worker's total accrued benefit at retirement age will be greater under the cash-balance formula than an older worker's if both started at the same time, the difference is due to the time value of money rather than age discrimination." This follows the 7th Circuit's 2006 decision that confirmed nothing in federal law suggests opposition to younger workers having greater opportunity to save for retirement because they have more time left to work.
As part of the Pension Protection Act of 2006, Congress did protect cash balance plans from age discrimination suits which may lead to an increase in their use. At a time when employees have seen their 401(k) account balances hammered in a down market, the security of this benefit structure would certainly be more attractive.
