Particularly if the 7 th US Circuit Court of Appeals refuses to reconsider its ruling in the long-running legal dispute involving IBM’s cash balance plan and the US Supreme Court turns away requests to hear the case, this week’s appellate decision should result in fewer cash balance programs getting frozen out of plan sponsor fear of potential legal liability, the observers said.
“Hybrid plans that already exist can breathe a little easier and will be less likely to freeze or terminate,” said Jan Jacobson, director of Retirement Policy at the American Benefits Council, in an interview with PLANSPONSOR.com.
The unanimous appellate decision, written for the court by Circuit Judge Frank Easterbrook, flatly rejected the reasoning applied by Chief District Judge G. Patrick Murphy of the US District Court for the Southern District of Illinois in Murphy’s original ruling in favor of a group of IBM workers.
Easterbrook didn’t need a legal tome to crisply turn aside Murphy’s judgment because the surprisingly succinct 13-page decision got the job done.
“The judges said, ‘Is compounded interest age discriminatory?'” said Ethan Kra, chief actuary at Mercer Human Resource Consulting in an interview with PLANSPONSOR.com. “With good clarity, they said ‘No.’ It’s so obvious that (Easterbrook) didn’t need to waste more paper and ink.”
A key to Easterbrook’s argument in Monday’s ruling was his rejection of the notion that cash balance plans are hardest on older workers because younger workers have more time to build up pension interest credits.
“Nothing in the language or background of Â§204(b)(1)(H)(i) suggests that Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus a greater opportunity to earn interest on each year’s retirement savings,” Easterbrook wrote. “Treating the time value of money as a form of discrimination is not sensible.”
The pension observers said Monday’s legal development with some level of retrospective protection was particularly important when viewed in concert with the prospective cash balance protection offered by the recently passed pension reform bill. Legally, the 7 th Circuit decision is only controlling in the states making up the circuit – Illinois, Indiana and Wisconsin – but will be considered advisory by appellate courts in other parts of the country.
“The hope is that we can get past all these costly and disruptive distractions,” asserted Larry Sher, director of Retirement Policy for Buck Consultants.
Ari Jacobs , US Retirement Practice Leader for Hewitt Associates, was also jubilant that lower court decision had – at least for now – been taken out of the picture. “I think it’s great from a plan sponsor perspective,” Jacobs told PLANSPONSOR.com. “I’m just pleased we are where we are.”
However, Jacobs said the fact the lower court decision was ever put out has had lasting effects. “I do think the damage has been done by the original ruling,” she said. “It’s given certain parts of DB plans a bad name.” Added Mark Ugoretz, president of the ERISA Industry Committee (ERIC), in a statement, “The swarm of litigation has caused many employers to throw up their hands in frustration at the prospect of years of litigation engineered by plaintiffs lawyers. As a result, employers are becoming exceedingly cautious about putting in new plans and benefits and retreating from anything that might attract the plaintiffs bar.”
Easterbrook referred to that issue in Monday’s ruling in a concluding paragraph widely hailed by the observers.
The appellate judge wrote:
“Litigation cannot compel an employer to make plans more attractive. It is possible, though, for litigation about pension plans to make everyone worse off. After the district court’s decision IBM eliminated the cash-balance option for new workers and confined them to pure defined-contribution plans. Whether that is good or bad (for employees or society as a whole) is not for us to say. What we can and do conclude, however, is that the decision may again be made freely, governed by private choice rather than legal constraint.”