Court Gives Thumbs Down to Citigroup Cash Balance Plan

The suit was brought before US District Judge Shira Scheindlin in New York by employees of the financial services giant, charging that the cash balance plan discriminated against older workers, according to Business Insurance.

Scheindlin ruled that Citigroup’s plan was impermissibly backloaded, that the plan’s method of computing accrued benefits violates the Employee Retirement Income Security Act (ERISA) and is being incorrectly applied, and that the plan discriminates on the basis of age. Backloading is a benefits accrual formula those postpones the bulk of an employee’s accrual to his or her later years of service.

In order to satisfy ERISA’s requirement that plans accrue benefits relatively evenly over the course of an employee’s career – a standard used to prevent backloading – a plan must satisfy at least one of three formulas used to keep benefit accrual at a steady pace, Scheindlin said. The Citigroup plan uses the “fractional rule,” which means, the court said, that the benefit accrual is “based upon the assumption that the participant will continue, until normal retirement age, to earn the same rate of compensation that would have been taken into account under the plan had the employee retired in that year.”

Scheindlin asserted that Citigroup’s plan misapplied the “fractional rule,” in a way that not only failed to guard against backloading, but actually enabled backloading.” She stopped short of directing the plan on which formula it should use, and said only that the plan must comply with ERISA.

Scheindlin rejected Citigroup’s request to drop age discrimination charges, asserting in the opinion it was a “matter of plain arithmetic” that when an account balance is converted to a retirement age annuity, a younger worker will make out better than an older one because “younger workers are credited with more years to accumulate interest on their hypothetical accounts.”

She also reasoned that the “problem is exacerbated further by the phenomenon of compound interest: as the same interest rate is applied to participants’ ever-increasing principal balances, the rate at which older workers accrue benefits is slower than that of younger workers. In this light, the rate of contributions to an individual’s account is dependent on age.”

As a result, an older worker receiving the same salary and with the same number of years of service will receive a smaller retirement benefit than a younger employee simply because he or she is older, Scheindlin claimed.

A Line of Rulings

Scheindlin’s decision is the latest in a line of federal court rulings handed down since a district judge in the US District Court for the District of Southern Illinois came out against IBM’s cash balance program in August 2003.

A ruling by a different federal judge in the Southern District of New York struck down the PricewaterhouseCoopers’ cash balance plan for violating ERISA because it defined the “normal retirement age” as five years of service rather than as a specific age.

An important contribution to the case law came in August when the 7th US Circuit Court of Appeals held in favor of the cash balance programs. The ruling made companies already using them breathe a little easier and prompted applause from retirement industry professionals that support them.

The 13-page 7th Circuitdecision said that IBM’s benefit accrual policy is age neutral and does not violate ERISA because every “covered employee receives the same 5% pay credit and the same interest credit per annum.”

Since then, several US district courts have issued conflicting rulings about the plans:

• The US District Court for the Eastern District of Kentucky ruled in favor of World Color Press Inc.'s plan in September.

• The US District Court for the District of Connecticut rejected in October a request by FleetBoston Financial Corp. to reconsider a March 2006 ruling giving an employee the go-ahead to take her cash balance discrimination suit to the 2nd US Circuit Court of Appeals.

• The US District Court for the Southern District of New York ruled in November that a cash balance plan sponsored by JPMorgan Chase & Co. was age discriminatory, debunking the reasoning used by the 7th Circuit.

While Congress protected new cash balance plans from age discrimination suits in the Pension Protection Act, that protection still effectively leaves it up to the courts to deal with discrimination charges at existing cash balance programs.