Trust Updates Archive

20050808BSA Cash-Balance Plans--JPMorgan Chase Loses First Round

(Nov. 16, 2006--Chicago, IL)--Cash-balance plans are not age neutral, a federal judge in New York has ruled. The decision, in a case brought by former employees of JPMorgan Chase [JPMC], is in stark contrast to the Seventh Circuit Court of Appeals' ruling on IBM's cash-balance plan. Curiously, JPMC's own website defines cash-balance plans as "disadvantageous for older workers."
        Just days after the passage of the Pension Reform Act of 2006, the Court of Appeals for the Seventh Circuit ruled in Cooper v. IBM that what makes a defined-benefit plan more favorable to older workers may not be discriminatory.
        "Removing a feature that gave extra benefits to the old," according to the Seventh Circuit's unanimous ruling, "differs from discriminating against them."
        The Cooper ruling was welcomed relief for plan sponsors who converted their traditional defined-benefit plan to the hybrid cash-balance plan.
        Judge Harold Baer, Jr., of the Southern District of New York, in his JPMorgan Chase ruling, disagrees with the Cooper ruling finding that it "missed the point."
        “It is immaterial that the terms of the plan appear age neutral,” Baer ruled. “Despite the fact that every [JPMorgan Chase] employee receives pay credits based on their completed years of service and the same interest rate is applied to each employee's account balance, that is not the yardstick by which to test, nor the means to avoid, age discriminatory results pursuant to ERISA [rather] it is the retirement benefit with which we are concerned.”
        JPMC has appealed Baer's decision to the Second Circuit.
        Under the Pension Reform Act, a plan is deemed to not violate ERISA age discrimination rules if a participant's accrued benefit is equal to or greater than that of any similarly situated, younger individual who is or could be a participant. The Act is retroactive to June 29, 2005, according to Congressional sources. JPMorgan Chase converted to a cash-balance plan in 1997.
        Citicorp recently acknowledged that it will be scrapping its cash-balance plan in 2008, in favor of significantly increasing it's 401k matching contributions. (See Trust Updates, Nov. 8, 2006.)
        A legal risk to JPMorgan Chase comes oddly enough from its own website. In this age of “internet information,” banks and other financial institutions attempt to assist consumers in understanding financial terms by providing “standard” definitions on their websites. Unfortunately, JPMC's website defines cash-balance plans as “advantageous for younger workers who can build up retirement savings, but disadvantageous for older workers who have less years to accumulate and don't receive a benefit at their highest salary level.” The bank declined to comment.

 For more on this topic, see the upcoming issue of Trust Regulatory News.

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