Citigroup Under Investigation for Cash Balance Conversion

July 8, 2005 ( - The law firm of Keller Rohrback L.L.P. announced today that it is investigating Citigroup, Inc. for violations of the Employee Retirement Income Security Act (ERISA) in regard to its pension plan amendments in 2000 and 2002 that created new cash balance benefit formulas.

According to a news release, the investigation focuses on a January 1, 2000 plan amendment creating a new cash balance formula for the calculation of benefits and a subsequent January 1, 2002 amendment that revised the formula. The firm is investigating whether these formulas violate age discrimination laws.

Traditional pension plan benefits formulas tend to use a final pay average formula, while cash balance plans use a career average formula. If the pension plan formula is converted to a cash balance formula, this can result in a reduction in the accrued benefit for workers who are older and nearer to retirement when the conversion happens.

When IBM converted its traditional pension plan to a cash balance plan in 1999, it started a movement by employees to fight age discrimination, and caused the IRS to delay examination of about 300 cash balance plans for which companies had filed for a determination letter. (See Movements: Cash Balance ) IBM lost the fight when a judge ruled that its plan conversion and operating assumptions violated age discrimination laws (See Murphy’s Law: IBM Loses Cash Balance Ruling ).

The whole issue has continued to be a significant emotional hot button in retirement plan circles and was a key part of the most recent pension reform bill introduced by US Representative John Boehner (R-Ohio) (See Boehner Pension Reform Bill Passes Committee on Party Line Vote ). That measure has been approved by Boehner’s House Education and Workforce Committee. From there, the measure moves to the House Ways and Means Committee, where influential chairman Representative Bill Thomas, (R-California). who co-authored the bill with Boehner, has said he wants to roll it into his Social Security reform plan.

Under the Boehner measure, employers can convert traditional defined benefit plans to cash balance plans. The bill would establish an age discrimination standard for all defined benefit plans. Older workers’ benefits would have to be greater or equal to benefits of younger individuals in comparable positions.The plan also prohibits companies from reducing benefits earned by workers if a plan is converted to a cash benefit account.