Bank of America Slapped with Cash Balance Lawsuit

November 4, 2004 ( - Bank of America (BOA) employees are suing the giant banking company over its cash-balance pension plan in a sign that the plans continue to be a hot-button controversial issue in the retirement-services space.

The lawsuit, filed in US District Court in the Southern District of Illinois, alleged that BoA relied on the plan as part of an “arbitrage scheme” designed to boost the bank’s profits, the Wall Street Journal reported.

According to the suit, employees were required to invest their pension assets in hypothetical portfolios tracking the returns of in-house mutual funds managed by the bank. Not only that, but NationsBank – which later merged with BoA – encouraged its employees to transfer $1.4 billion in 401(k) accounts to the cash-balance plan, the suit charged. Then, following the merger, former BankAmerica employees were encouraged to transfer $1.3 billion in 401(k) accounts from the old BankAmerica 401(k) to the cash-balance plan at the new Bank of America, the suit alleged, according to the Journal.

Heloise Hale, spokeswoman for Bank of America, said in a statement to the Journal that cash-balance plans “offer many advantages to our associates and we believe they meet the needs of today’s diverse and mobile work force better than traditional pension-plan designs. We believe that our plans have been designed and operated in accordance with applicable law. We intend to defend ourselves vigorously against the claims in this lawsuit.”

An Early Cash Balance Plan

According to the Journal, BankAmerica Corp., as it was then called, converted its traditional pension to create one of the first cash-balance plans in 1985. In a cash-balance plan, employees get individual accounts and are generally provided regular statements showing their account’s value. The employer credits the employee’s account with income based on a pre-determined formula. Unlike a traditional pension plan where much of the benefit accrual occurs in the latter years of a worker’s career, in a cash-balance plan the company steadily funds the plan over the worker’s tenure. So, if employees decide to leave the company, the accounts can be taken with them. Opponents have asserted that the plans discriminate against older workers because they exclude the company’s hefty contributions at the end.

In 1998, BankAmerica merged with NationsBank Corp. and became Bank of America, based in Charlotte, North Carolina. Before the merger, NationsBank had converted its pension to “an unusual and particularly aggressive sort of cash-balance pension plan,” the suit charged.The NationsBank pension credited the accounts with the returns on a limited number of hypothetical investment options chosen by the worker, whose returns mirrored those of the mutual funds managed by the bank or its affiliates.

According to the suit, it was improper for the bank to charge its employees fees on the virtual funds, which created a conflict of interest, the suit said, because the bank had control over the levels of fees and thus, to some extent, over the returns in the “funds.”

The design created a “massive, leveraged arbitrage opportunity that cynically depended on the company…profiting from its employees’ investment mistakes and presumed naivety,” the complaint alleged. The bank benefited from this arrangement in another way, the suit says. The infusion of almost $3 billion in assets into the pension plan boosted the company’s income. Under accounting rules, companies earn “expected” rates of return on pension assets. As a result, the $1.4 billion in 401(k) assets that was transferred into the Bank of America pension in 1998, and the $1.3 billion infusion in 2000 both earned “expected returns” of 10%, which provided a lift to income, according to the Journal.

The complaint also alleged that the cash-balance pension plan violated age-discrimination laws, and that the bank shortchanged people by incorrectly calculating lump sums when they departed.