Buffalo Law Review Symposium: Pension

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E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                Vol. 2, No. 21: November 15, 2001
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Publisher:     LSN Subject Matter Journals
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Editor:        PAMELA J. PERUN
               Urban Institute
               Mailto:pamela@planetnow.com

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                      Topic of This Issue:
              Buffalo Law Review Symposium: Pension
                    and Employee Benefit Law
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES

"Striking a Balance in the Cash Balance Plan Debate"
      Buffalo Law Review, Vol. 49, P. 513, 2001
     REGINA T. JEFFERSON
        Catholic University of America

"Is Cross-Testing a Mistake? Cash Balance Plans, New
Comparability Formulas, and the Incoherence of the
Nondiscrimination Norm"
      Buffalo Law Review, Vol. 49, P. 575, 2001
     EDWARD A. ZELINSKY
        Yeshiva University
        Benjamin Cardozo School of Law

"Cross-Tested Defined Contribution Plans: A Response to Professor
Zelinsky"
      Buffalo Law Review, Vol. 49, P. 629, 2001
     PETER ORSZAG
        The Brookings Institution
        Sebago Associates
     NORMAN P. STEIN
        University of Alabama, Tuscaloosa
        School of Law

"Cross-Testing, Nondiscrimination, and New Comparability: A
Rejoinder to Mr. Orszag and Professor Stein"
      Buffalo Law Review, Vol. 49, P. 675, 2001
     EDWARD A. ZELINSKY
        Yeshiva University
        Benjamin Cardozo School of Law

"'The Most Glorious Story of Failure in the Business': The
Studebaker-Packard Corporation and the Origins of ERISA"
      Buffalo Law Review, Vol. 49, P. 683, 2001
     JAMES A. WOOTEN
        State University of New York at Buffalo
        Law School

"Nor Rhyme Nor Reason: Simplifying Defined Contribution Plans"
      Buffalo Law Review, Vol. 49, P. 741, 2001
     DAVID A. PRATT
        Albany Law School

"The Limits of Saving"
      Buffalo Law Review, Vol. 49, P. 873, 2001
     PAMELA J. PERUN
        Urban Institute

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EDITORIAL POLICIES
To provide the broadest coverage of research in Employee
Benefits, Compensation and Pension Law we do not referee working
papers. We accept abstracts of working papers in Employee
Benefits, Compensation and Pension Law whose topics suit the
coverage of the journal and which are part of the worldwide
scholarly discourse.

N E W and F O R T H C O M I N G Articles
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"Striking a Balance in the Cash Balance Plan Debate"
Buffalo Law Review, Vol. 49, P. 513, 2001

BY: REGINA T. JEFFERSON
Catholic University of America

Contact: REGINA T. JEFFERSON
   Email: Mailto:jefferson@cua.edu
Postal: Catholic University of America
           Columbus School of Law
           3600 John McCormack Road, N.E.
           Washington, DC 20064 USA
   Phone: 202-319-5436
     Fax: 202-319-4459

ABSTRACT:
Cash balance plans are hybrid plans designed to offer the best
characteristics of both defined benefit and defined contribution
plans. However, conversions of existing defined benefit plans
into cash balance plans are highly controversial because they
can significantly reduce the expected retirement benefits of
older workers. Because future plan costs are reduced and plan
surpluses are often created, the use of surplus plan assets by
employers has raised serious concerns. This article describes
and analyzes the advantages and disadvantages of using cash
balance plans as primary retirement savings vehicles. It argues
that the controversy over conversions is really about the extent
to which the rights and expectations of plan participants should
be protected. It proposes striking a balance between the rights
of employers and employees in a plan conversion by 1) requiring
employers to provide sufficient notice to affected participants
about changes in their projected retirement benefits; and 2)
limiting the amounts by which retirement benefits can be
reduced.

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"Is Cross-Testing a Mistake? Cash Balance Plans, New
Comparability Formulas, and the Incoherence of the
Nondiscrimination Norm"
Buffalo Law Review, Vol. 49, P. 575, 2001

      BY: EDWARD A. ZELINSKY
              Yeshiva University
              Benjamin Cardozo School of Law

Contact: EDWARD A. ZELINSKY
   Email: Mailto:zelinsky@ymail.yu.edu
Postal: Yeshiva University
           Benjamin Cardozo School of Law
           55 Fifth Ave.
           New York, NY 10003 USA
   Phone: 212-790-0277

ABSTRACT:
The increasing tendency of large employers to convert their
traditional defined benefit pension plans to the cash balance
form has engendered substantial controversy. The rise of "new
comparability" plans has yet to generate the same level of
concern, perhaps because such plans have largely been embraced
by smaller employers, except among pension mavens. It is the
premise of this article that both controversies raise a common
issue: the propriety of cross-testing, i.e. analyzing defined
benefit arrangements as if they were defined contribution plans
and vice versa, permitted by the nondiscrimination regulations.
This article reviews the background for these new hybrid plans
and the cross-testing approach, their treatment under the
nondiscrimination regulations and the debate over age
discrimination they have raised. The author argues that
cross-testing is appropriate, as the relevant concern should be
the substance of the allocation of pension resources rather than
the form by which that allocation is achieved. Further, an
exploration of its merits reveals the theoretical and practical
incoherence of the nondiscrimination mandate. The author
concludes that the nondiscrimination mandate has outlived its
usefulness and should be abolished and contends that
cross-testing has properly introduced a modicum of flexibility
to the body of law which over-regulates qualified plans.

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"Cross-Tested Defined Contribution Plans: A Response to Professor
Zelinsky"
Buffalo Law Review, Vol. 49, P. 629, 2001

      BY: PETER ORSZAG
              The Brookings Institution
              Sebago Associates
           NORMAN P. STEIN
              University of Alabama, Tuscaloosa
              School of Law

Contact: PETER ORSZAG
   Email: Mailto:porszag@brook.edu
Postal: The Brookings Institution
           Economic Studies
           1775 Massachusetts Ave. NW
           Washington, DC 20036-2188 USA
   Phone: 202-797-6000
Co-Auth: NORMAN P. STEIN
   Email: Mailto:nstein@law.ua.edu
Postal: University of Alabama, Tuscaloosa
           School of Law
           P.O. Box 870382
           Tuscaloosa, AL 35487 USA

ABSTRACT:
The authors take issue with the practice of cross-testing
defined contribution plans, and especially with new
comparability plans. Cross-testing offers firms a method for
making larger contributions for highly paid employees, so long
as they are older than other employees participating in a plan.
Variations on cross-testing permit permit some firms to provide
lower contribution rates to older rank-and-file employees and to
provide high contribution rates to all higher paid employees.
Plans using such variations are often referred to as new
comparability plans.

The authors argue that cross-testing should be rejected, if
not universally, prohibited. They contend that weighting
benefits for higher paid employees in traditional defined
benefit plans can often be justified by various types of risk
shifting provided by the defined benefit format. These risks
include mortality, investment, and sometimes what the authors
refer to as compensation-escalation risk, which is the risk that
the employee will not be able to replace an adequate share of
pre-retirement income if the employee receives late career
compensation increases. Defined contribution plans do not
generally offer risk shifting of these types.

The authors note that many small defined benefit plans also
fail to shift risk of the types described but argue that this
does not mean that cross-tested defined contribution plans
should therefore be permitted. The authors also note that
establishing a small defined benefit plan imposes costs on the
employer and thus discourages some employers from adopting them.
Moreover, there are other important distinctions between defined
benefit and defined contribution plans. In addition, the authors
argue that small defined benefit plans should be prohibited
where they will not shift risk. The authors suggest that the
qualification condition that a plan be permanent would screen
out many non-risk shifting small defined benefit plans. The
authors also note that permitting a firm to sponsor both a
defined benefit plan and a cross-tested defined benefit plan can
be viewed as inconsistent with the separate section 415 limits
for defined contribution and defined benefit plans.

The authors defend the Department of Treasury's regulations
limiting new comparability plans but suggest that the
regulations do not go far enough in limiting cross-testing. On a
more general level, the authors express skepticism that the
nondiscrimination rules can bear the weight of the social good
they are supposed to promote: retirement savings for lower and
middle income people who otherwise would save inadequately for
retirement. They thus agree with Professor Zelinsky that some
type of safe-harbor approach might result in higher benefits for
rank-and-file employees than the current nondiscrimination
rules. They suggest a reverse match type of approach, in which
the firm would make an initial contribution to the plan, which
the employees could then match in some statutorily determined
multiple.

______________________________

"Cross-Testing, Nondiscrimination, and New Comparability: A
Rejoinder to Mr. Orszag and Professor Stein"
Buffalo Law Review, Vol. 49, P. 675, 2001

      BY: EDWARD A. ZELINSKY
              Yeshiva University
              Benjamin Cardozo School of Law

ABSTRACT:
In a reply to a critique of his article, Is Cross-Testing A
Mistake? Cash Balance Plans, New Comparability, and the
Incoherence of the Nondiscrimination Norm, the author discusses
the primary areas of disagreement: 1) whether defined benefit
plans by small employers and, as a logical extension,
cross-tested new comparability plans should be permitted; 2)
whether qualified plans constitute a tax expenditure; and 3)
whether the issue raised by new comparability plans is one of
form rather than substance. The author notes substantial
agreement on the lack of substance of the current
nondiscrimination norm and replacing that norm with minimum
distribution and contribution rules. The author also concludes
that regulation of qualified plans has become counterproductive
and unsuccessful and more regulation is not the answer to the
challenge of retirement savings for low-income Americans.

______________________________

"'The Most Glorious Story of Failure in the Business': The
Studebaker-Packard Corporation and the Origins of ERISA"
Buffalo Law Review, Vol. 49, P. 683, 2001

      BY: JAMES A. WOOTEN
              State University of New York at Buffalo
              Law School

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=290812

Contact: JAMES A. WOOTEN
   Email: Mailto:jwooten@buffalo.edu
Postal: State University of New York at Buffalo
           Law School
           713 John Lord O'Brian Hall
           Buffalo, NY 14260 USA
   Phone: 716-645-2318

ABSTRACT:
The Studebaker-Packard Corporation occupies a distinctive place
in the lore of the Employee Retirement Income Security Act of
1974. No single event is more closely associated with ERISA than
the shutdown of the Studebaker plant in South Bend, Indiana.
Soon after the plant closed in December 1963, Studebaker
terminated the retirement plan for hourly workers, and the plan
defaulted on its obligations. The plight of Studebaker employees
quickly emerged as a symbol of the need for pension reform. This
article examines the history of the Studebaker-Packard
Corporation to understand why and how the shutdown came to play
a role in the political history of ERISA. Briefly, the shutdown
played an important role in pension reform because the United
Auto Workers union was prepared to take advantage of the
political opportunity the shutdown created. By the time the
plant closed, the UAW was well aware that "default risk" the
risk that a pension plan will terminate without enough funds to
meet its obligations threatened union members.
Studebaker-Packard had terminated the retirement plan for
employees of the former Packard Motor Car Company in 1958.
Packard workers got even less than their counterparts at
Studebaker would receive in 1964. The Packard termination
convinced UAW president Walter Reuther that the union needed to
protect its members from default risk. In the early 1960s, the
UAW devised a remedy a proposal for "pension reinsurance" that
is a precursor of the termination-insurance program created by
Title IV of ERISA. The Studebaker shutdown gave the union an
opportunity to move default risk and termination insurance onto
the legislative agenda. The success of this effort in
agenda-setting indelibly linked Studebaker to the cause of
pension reform.

______________________________

"Nor Rhyme Nor Reason: Simplifying Defined Contribution Plans"
Buffalo Law Review, Vol. 49, P. 741, 2001

BY: DAVID A. PRATT
Albany Law School

Contact: DAVID A. PRATT
   Email: Mailto:dprat@mail.als.edu
Postal: Albany Law School
           80 New Scotland Avenue
           Albany, NY 12208 USA

ABSTRACT:
Prior to the enaction of ERISA, tax-qualified retirement plans
were classified as pension plans, profit-sharing plans, or stock
bonus plans. Different rules applied to pension plans, largely
because pension plans were viewed as true retirement plans
whereas profit-sharing and stock bonus plans were regarded
primarily as a way for the employer to share its profits with
employees. Under ERISA, the focus has changed and the most
important distinction is now between defined benefit plans and
defined contribution plans. Despite this change, the pre-ERISA
distinctions are still in effect. In addition, legislation
enacted and regulations issued since ERISA have created new
distinctions, and new types of defined contribution plans. This
article illustrates the complexity of the rules governing
defined contribution plans. The author argues that these
differences are a trap for the unwary, and the different rules
should be harmonized where ever possible to ensure that all
qualified defined contribution plans are subject to the same
rules. Simplification of rules, and elimination of unnecessary
differences, is important, first, to ease the severe compliance
burden for current plan sponsors and, second, to make retirement
plans more attractive to those employers that do not currently
sponsor a plan.

______________________________

"The Limits of Saving"
Buffalo Law Review, Vol. 49, P. 873, 2001

BY: PAMELA J. PERUN
Urban Institute

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=290817

Contact: PAMELA J. PERUN
   Email: Mailto:pamela@planetnow.com
Postal: Urban Institute
           2100 M Street, NW
           Washington, DC 20037 USA
   Phone: (202) 261-5320

ABSTRACT:
Congress recently raised the legal limits on contributions to
defined contribution plans in the private pension system to
increase the amount people can save for retirement. Using a
model of hypothetical lifetime savings, this paper analyzes the
new limits in a sample of defined contribution plans which
permit individuals to choose how much to save every year. The
analysis demonstrates first that the prior limits comfortably
accommodated reasonable, plausible savings rates. The new limits
will only benefit individuals who can save at extremely high
rates. Second, the new limits do not increase the average or
marginal tax subsidies for savings available through the private
pension system and may well decrease them for individuals at the
lowest income levels. Third, the new limits will, however,
increase the absolute amount of dollars received in tax
subsidies but the distribution pattern of those dollars across
income groups will remain the same. The paper concludes that the
new limits fail to deliver the fundamental reform needed by the
private pension system. It suggests that any reform efforts
should focus more on incentives and subsidies for those who are
left out and left behind in the current system rather than for
those who don't need them to save.