Free Motion for Partial Summary Judgment - District Court of Colorado - Colorado

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champagne bottles stay corked, for a little while anyway. Judge Easterbrook's opinion is commendably candid in explaining how he concluded that cash balance pensions do not discriminate on the basis of age. The candor of the Cooper opinion reveals that opinion's weaknesses to the other courts of appeals which will confront this issue. Judge Easterbrook's candor, I also suggest, should leave many advocates of cash balance plans disconcerted. In the Pension Protection Act of 2006 ("PPA"), Congress amended the relevant statutes for "periods beginning on or after June 29, 2005."5 Going forward from that date, as a matter of federal law, cash balance arrangements do not discriminate on the basis of age. However, the PPA provides no guidance as to the legal status of cash balance plans for prior periods.6 Many pensions were converted to the cash balance format before June 29, 2005. Thus, for these plans, the question addressed by the Seventh Circuit in Cooper ­ Do cash balance pensions age discriminate under pre-PPA law? ­ is still with us. Cooper rests on openly-stated but unconvincing premises, i.e., that cash balance pensions and defined contribution plans

Pension, N.Y.TIMES, August 8, 2006 at C1 (quoting James A. Klein, president of the American Benefits Council, that Cooper "should settle this matter once and for all.")
5

Section 701(e)(1) of the PPA. President Bush signed the PPA on August 17, 2006.
6

Section 701(d) (The PPA creates no "inference with respect to" prior law). 2

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are materially equivalent, that the differing statutory standards for pension age discrimination are best read as a single rule for both defined contribution and defined benefit plans, that "benefit accrual" means plan contributions. On the other hand, Cooper makes a strong case that, as a matter of policy, it is unpersuasive to declare cash balance pensions age discriminatory when defined contribution plans using similar allocation formulas are not. Since Cooper will be the starting point for the other appellate courts addressing the pre-PPA status of cash balance pension plans, Cooper merits close scrutiny. Such scrutiny indicates that Cooper is laudably transparent in its reasoning and contains many important insights. However, given what the pre-PPA pension age discrimination statutes say, in the final analysis, Cooper is wrong on the merits. Background7 Cash balance pensions are defined benefit plans which mimic defined contribution plans. The traditional defined benefit pension specifies for the participant a particular kind of benefit, i.e., a deferred annuity starting at retirement. That For more detailed background, see Edward A. Zelinsky, The Defined Contribution Paradigm, 114 YALE LAW J. 451, 455-469, 499502 (2004); Edward A. Zelinsky, Defined Contribution Plans After Enron: Exploring a Paradigm Shift, in NEW YORK UNIVERSITY REVIEW OF EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATION, Section 1.02[5] (Alvin D. Lurie ed., 2004); Edward A. Zelinsky, The Cash Balance Controversy, 19 VA. TAX REV. 683, 687-695 (2000) (hereinafter, Controversy). 3
7

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annuity is typically determined by the participant's salary and service history with the sponsoring employer. A defined benefit plan constitutes a guarantee by the employer to pay this annuity for the remainder of the employee's lifetime. For example, a typical, traditional defined benefit pension might promise a participant an annuity at retirement of two percent (2%) of the participant's final average salary multiplied by his years worked for the sponsoring employer. Suppose that, at age sixty-five (65), an employee covered by this plan has a final average salary of $50,000 per year and that the employee worked for the employer for twenty (20) years. In that case, the defined benefit plan must pay the employee a yearly annuity of $20,000 for the rest of his life.8 Since this defined benefit plan promises the employee this specific amount starting at the employee's retirement, the employer must contribute the funding necessary to pay that promised pension benefit. In contrast, a defined contribution plan formulates the employer's obligation as an input, not a guaranteed output. Under a defined contribution arrangement, each participant has an

8

$50,000 x 20 x 2% = $20,000. For ease of exposition, I ignore in this example the possibility that the employee is married and that his pension annuity might be paid as a joint-and-survivor annuity. Such a joint-and-survivor annuity would entail smaller payments during the employee's retirement with a survivor's benefit continuing at his death for his widow. See Code Sections 401(a)(11) and 417 and ERISA Section 205. 4

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individual account to which are allocated the employer's contributions, the employee's contributions and the investment earnings (and losses) generated by those contributions. The employee is entitled to the balance in his individual account, however large or small that may eventually be. Today, this account balance is usually paid to the defined contribution participant as a single lump sum. Suppose, for example, that this employee, instead of being covered by a defined benefit pension, participates in his employer's defined contribution plan. Suppose further that, every year during the employee's twenty (20) year career with the employer, the employer contributed to the employee's individual account five percent (5%) of the employee's salary for that year. Finally, let us assume that, at retirement, these cumulative employer contributions plus the investment earnings they have generated amount to $100,000. If so, the employee is, on retirement, entitled to a payout of this $100,000 in a lump sum. If the employee's account in the defined contribution plan had grown to more (or less), the employee would have been entitled to that higher (or lower) balance in his account. A concise way of summarizing the distinction between prototypical defined contribution plans and traditional defined benefit plans is that the former place longevity, investment and funding risks upon the employee while the latter assign such

5

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risks to the employer. In terms of longevity risk, an employee, by definition, cannot outlive the annuity paid by a traditional defined benefit plan since that annuity continues for the employee's lifetime. In contrast, an employee can outlive his lump sum distribution, a one-time payment which the employee must himself manage for the remainder of his life. In terms of investment risk (and reward), the employee in a defined contribution plan is ultimately entitled to whatever balance her account has grown (or fallen). Hence, good investment performance by the plan's assets redounds to the employee in the form of a larger retirement account. Conversely, in the defined contribution setting, poor investment performance of plan assets is the employee's problem since her entitlement is the balance of her account, however low it may have fallen. There are no ultimate guarantees in the defined contribution setting. In contrast, the employer must fund the promised benefit under a defined benefit plan. Consequently, the employer sponsoring such a plan reaps the reward of good investment performance as the employer need contribute less to pay promised benefits when plan assets are more ample. Similarly, poor investment performance hurts the employer maintaining a defined benefit plan since, having assured the employee of a specified benefit starting at retirement, the employer must remedy any shortfall in the plan assets needed to pay that promised benefit.

6

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Finally, in terms of funding risk, today the most common form of defined contribution plan is the ubiquitous 401(k) arrangement, named after the Code provision9 which governs employees' salary reduction contributions. If an employee fails to fund his 401(k) account through adequate salary reduction contributions during this career, that is the employee's problem: at retirement, he will have an inadequate account balance as a result of his failure to self-fund that account. Frequently, the employer sponsoring a 401(k) plan matches the employee's salary reduction contributions to the plan. In some cases, the employer obligates itself to make a minimum "safe harbor" contribution to the account of each participating employee.10 However, the onus for funding an employee's 401(k) account rests principally upon the employee. On the other hand, in the defined benefit setting, the employer is obligated to finance the benefit promised to the participating employee. One type of defined contribution plan ­ the money purchase pension plan ­ assigns to the employer the duty to fund. The employer sponsoring a money purchase pension commits to an annual funding obligation, e.g., a commitment to put yearly into each employee's individual account an amount equal to seven percent (7%) of the employee's salary. However, the participant in a

9 10

Code Section 401(k). Code Section 401(k)(12)(C). 7

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money purchase plan still absorbs both investment risk (his ultimate entitlement is the balance in his account, however high or low that might eventually be) and longevity risk (the employee must make his lump sum distribution last for the remainder of his life).11 A cash balance pension is a defined benefit plan; it promises a specified benefit which the employer is obligated to fund. However, instead of the annuity promised by the traditional defined benefit plan, a cash balance plan defines the benefit promised to the employee as a notional account balance. Suppose now that the employer maintains a cash balance plan under which the employee's notional account is credited each year with five percent (5%) of his salary. Assume further a year in which the employee's salary is $50,000. Based on these numbers, the cash balance plan promises to pay the employee $2,500.12 Unlike a true defined contribution arrangement, this $2,500 does not go to a segregated individual account for the employee. Rather, the notional account balance of $2,500 constitutes the employee's guaranteed claim against the pool of assets funding the plan. No separate account for the employee actually exists.
11

As a matter of law, money purchase pension plans must distribute benefits as joint-and-survivor annuities unless the participant elects otherwise. The participant's spouse must consent to this election. In practice today, most payments from money purchase pensions take the form of lump sum distributions. See Code Sections 401(a)(11) and 417 and ERISA Section 205.
12

$50,000 x 5% = $2,500. 8

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Let us further assume that the cash balance plan allocates to each employee's notional account balance an annual interest credit of ten percent (10%) yearly. Consequently, at the end of the year, the employee is entitled to another $250 from the plan.13 Since the cash balance pension is a defined benefit plan, the plan must pay (and the employer must fund) the total of $2,75014 promised to the employee. If the plan's assets earn less than the ten percent (10%) guaranteed to the employee, that is the employer's problem since the employer must remedy the shortfall by contributing more to the cash balance plan. By the same token, if the cash balance plan's assets earn more than a ten percent (10%) return, that good investment performance redounds to the employer's advantage since the employee has been promised a ten percent (10%) return ­ no less, no more. Cash balance plans are often characterized as "hybrid" arrangements. Such plans are defined benefit pensions since the employer guarantees a final output in terms of each participant's ersatz account balance. However, that notional account balance merely mimics the true account of a defined contribution plan. Funding and investment risk are absorbed by the employer sponsoring a cash balance plan since the employer is committed to funding the notional account balances promised by the plan and to

13 14

$2,500 x 10% = $250. $2,500 + $250 = $2,750. 9

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finance any shortfall if the plan's assets earn less than the notional interest promised by the plan. On the other hand, cash balance plans shift longevity risk to the employee since his distribution from the plan usually takes the form of a single, lump sum payment which the employee must use for the remainder of his life, not an annuity which automatically continues for the participant until his death.15 By way of summary, it is useful to envision these different kinds of plans along a spectrum. See figure one. At one end is the classic, annuity-style defined benefit plan, a pension under which the employer absorbs the funding and investment risk of providing a guaranteed benefit as well as the longevity risk of paying an annuity which lasts for the employee's lifetime. At the other end of this spectrum is the 401(k) plan, today the quintessential defined contribution plan. Under a 401(k) arrangement, funding risk falls upon the employee who must Figure One finance his own retirement through his salary reduction contributions to his own account. Also under a 401(k) plan, the risk of poor investment performance (and the rewards of good investment performance) fall upon the employee since he is
15

As a matter of law, cash balance pension plans must distribute benefits as joint-and-survivor annuities unless the participant elects otherwise. The participant's spouse must consent to this election. In practice today, most payments from cash balance pensions take the form of lump sum distributions. See Code Sections 401(a)(11) and 417 and ERISA Section 205. 10

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Defined Benefit

Defined Contribution

traditional defined benefit plan (longevity, funding, investment risk s assigned to employer)

cas h balance pension ( funding and investment risk s assigned to employer; longevity risk assigned to employee)

money purchase pension ( funding risk assigned to employer; investment and longevity risks assigned to employee)

401 (k) plan (longevity, funding, inves tment risks assigned to employee)

ultimately entitled to whatever balance his account may grow (or fall). Moreover, under a 401(k) plan, the employee typically receives his retirement benefit as a single lump sum payment of his entire account. Thus, the employee absorbs longevity risk since he must manage his lump sum payment for the remainder of his lifetime.

Moving from the 401(k) plan towards the middle of the spectrum, we come to the money purchase pension. Like the 401(k) plan, the money purchase pension is a defined contribution plan as no outputs are guaranteed to the participants. Rather investment risk and reward are absorbed by each employee since the employee's ultimate retirement payout is the balance of his individual account. Also like a 401(k) plan, the contemporary money purchase pension shifts longevity risk to the employee who, on retirement, receives a single lump sum distribution he must manage for the remainder of his lifetime. However, the money purchase plan imposes a funding obligation upon the employer, an annual commitment to contribute to each employee's account. This funding obligation moves the 11

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money purchase pension toward to the defined benefit pole on the spectrum. Moving on from the money purchase plan we next come to the cash balance pension. We have now crossed over to the defined benefit side of the spectrum where the employer guarantees a specified output. In defining the benefits they promise, cash balance pensions mimic defined contribution plans, specifying their promised benefits as notional account balances. Cash balance plans also emulate defined contribution arrangements by usually paying benefits as single lump sums. However, the cash balance pension is a defined benefit plan under which the employer funds promised benefits and absorbs the risks of poor (and the rewards of better) investment performance. Finally,

moving further we come back to the end of the spectrum, the traditional defined benefit plan under which longevity, investment and funding risks fall upon the employer who promises to pay a specified annuity commencing upon each employee's retirement.

The Statutes In essentially identical terms, the Internal Revenue Code ("the Code"), the Employee Retirement Income Security Act of 1974 ("ERISA") and the Age Discrimination in Employment Act ("ADEA")16

16

Much of ERISA has been enacted twice, once as a labor statute enforced by the Department of Labor as well as by private actors 12

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forbid age discrimination by retirement plans. As to defined contribution arrangements, the Code, ERISA and ADEA provide that "the rate at which amounts are allocated to the employee's account" cannot be "reduced, because of the attainment of any age."17 For defined benefit plans, the Code, ERISA and ADEA provide that "the rate of an employee's benefit accrual" cannot be "reduced, because of the attainment of any age."18 Applying these provisions to defined contribution plans and to traditional defined benefit pensions has proved straightforward. If, for example, a money purchase plan generally requires an employer contribution to each employee's account of five percent (5%) of the employee's salary, the plan cannot reduce that contribution rate when an employee turns fifty (50) (or any other specified age). In that case, "the rate at which amounts are allocated to the employee's account" would indeed be

(such as plan participants) and once as part of the Internal Revenue Code, enforced by the IRS as it monitors the income tax status of plans and the trusts which hold plans' assets. The pension age discrimination statutes have been identically adopted a third time as part of ADEA. For the history and complications of this arrangement, see John H. Langbein, Susan J. Stabile and Bruce A. Wolk, PENSION AND EMPLOYEE BENEFIT LAW (4th ed. 2006) 89-92; James A. Wooten, THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974: A POLITICAL HISTORY (2004) 242-243, 250-251; Lawrence A. Frolik and Kathryn L. Moore, LAW OF EMPLOYEE PENSION AND WELFARE BENEFITS (2004) 2224
17

Code Section 411(b)(2)(A), ADEA Section 4(i)(1)(B), and ERISA Section 204(b)(2)(A).
18

Code Section 411(b)(1)(H)(i), ADEA Section 4(i)(1)(A), and ERISA Section 204(b)(1)(H)(i). 13

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"reduced, because of the attainment of" age fifty (50). Similarly, if an employer sponsoring a 401(k) plan generally matches employees' salary reduction contributions dollar-fordollar but decreases its match to fifty cents ($.50) once the employee is sixty (60) years old (or any other specified age), that too would constitute a forbidden reduction based on age. As to traditional defined benefit plans, the application of the statute has proved equally straightforward. Assume a traditional plan which provides a retirement annuity based on the employee's final average pay multiplied by two percent (2%) for each year worked for the employer. In that case, the plan cannot drop that formula to one percent (1%) for each year worked after the employee attains forty-five (45) (or any other age). In that case, "the rate of an employee's benefit accrual" would, in violation of the statutes, be reduced "because of the attainment of" a particular age, namely, forty-five (45). In contrast, applying the pension age discrimination statutes to cash balance plans has proved controversial. Two district courts19 as well as some commentators, including myself,20 have concluded that such plans violate the pension age

19

Richards v. Fleetboston Fin. Corp., 427 F. Supp. 2d 150 (D. Conn. 2006) and Cooper v. IBM, 274 F. Supp. 2d 1010 (S.D. Ill. 2003).
20

Zelinsky, Controversy, supra, note at 733-743; Edward A. Zelinsky, Cash Balance Plans and Age Discrimination, 101 TAX NOTES 907 (November 12, 2003) reprinted in NEW YORK UNIVERSITY REVIEW OF EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATION (Alvin D. Lurie ed., 2004); 14

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discrimination statutes: Cash balance plans are defined benefit pensions under which the employer promises a specified benefit, namely, the employee's notional account balance. As a statutory matter, defined benefit plans, including cash balance pensions, cannot reduce "the rate of an employee's benefit accrual" because of the employee's age. Also as a statutory matter, defined benefit plans measure an employee's accrued benefit in terms of the deferred annuity he is promised at retirement.21 When nominally equal allocations to employees' notional cash balance accounts are translated into their deferred annuity equivalents, those annuities decline with age since there is less time for such allocations to earn interest as the employee grows older. Assume, for example, a cash balance pension plan in which there are three (3) participants, ages thirty-five (35), fortyfive (45) and fifty-five (55).22 Assume further that each participant earns the same annual salary and that the cash balance plan allocates to each of the participant's notional accounts a credit of $1,000. In defined contribution terms, this

Edward A. Zelinsky, The Cash Balance Controversy Revisited: Age Discrimination and Fidelity to Statutory Text, 20 VA. TAX REV. 557 (2001).
21

Code Section 411(a)(7)(A)(i) and ERISA Section 3(23)(A), codified at 29 U.S.C. Section 1002(23)(A)(for a defined benefit plan, an accrued benefit is "expressed in the form of an annual benefit commencing at normal retirement age.")
22

I develop this example in Zelinsky, Controversy, supra, note at 722. 15

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is nondiscriminatory since each employee receives the same input, regardless of age. However, a pattern of age discrimination emerges if these credits are translated into the annuity benefit which, with interest, each credit purchases for the respective participant at age sixty-five (65). Specifically, for the oldest participant, in the ten years until his retirement, the notional credit of $1,000 grows to a retirement annuity of only $235 per year. By contrast, for the youngest participant, that $1,000 credit becomes a retirement annuity of $1,094 at age sixty-five (65) since this thirty-five (35) year old has twenty (20) additional years to receive interest income on the original credit. Consequently, his notional credit of $1,000 will grow to a bigger balance at age sixty-five (65); that bigger balance will, in turn, purchase a larger annuity. In between is the forty-five (45) year old participant whose $1,000 cash balance credits grows to an annuity payable at age sixty-five (65) of $507 yearly. Thus, contrary to the statutory mandate, benefit accruals, measured in terms of the annuities participants would ultimately receive at retirement from their respective cash balance accounts, decline with the age of the cash balance participant. Three other district courts,23 as well as other

23

Eaton v. Onan Corporation, 117 F. Supp. 2d 812 (S.D. Ind. 2000, Register v. PNC Financial Services Group, Inc., 2005 U.S. 16

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commentators,24 conclude that cash balance plans do not violate the federal pension age discrimination statutes, even before the enactment of the PPA. Now, the Seventh Circuit has entered the

controversy through Cooper, an opinion which is candid but unconvincing.

The Seventh Circuit's Cooper Opinion The Seventh Circuit's Cooper opinion declares that the IBM cash balance pension plan does not discriminate on the basis of age. Since the IBM plan is typical of the cash balance format, Cooper effectively declares that most, if not all, cash balance pensions pass age discrimination muster under the pre-PPA statutes. Cooper advances four (4) basic propositions. First, Judge Easterbrook concludes, cash balance pensions and the defined contribution plans they mimic are equivalent. A cash balance plan

Dist. LEXIS 29678 (E.D. Pa. November 21, 2005), and Hirt v. Equitable Retirement Plan, 2006 U.S. Dist. LEXIS 49145 (July 20, 2006). See Alvin D. Lurie, Age Discrimination or Age Justification? The Case Of the Shrinking Future Interest Credits under Cash Balance Plans, 54 TAX LAWYER 299 (2001); Alvin D. Lurie, Murphy's Law Strikes Again: Twilight for Cash Balance Design? 101 TAX NOTES 393 (October 20, 2003) reprinted in NEW YORK UNIVERSITY REVIEW OF EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATION (Alvin D. Lurie ed., 2004); Alvin D. Lurie, Riposte to a Reply, 101 TAX NOTES 908 (November 17, 2003) reprinted in NEW YORK UNIVERSITY REVIEW OF EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATION (Alvin D. Lurie ed., 2004); Richard C. Shea, Michael J. Francese and Robert S. Newman, Age Discrimination in Cash Balance Plans: Another View, 19 VA. TAX REV. 763 (2000). 17
24

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"is almost, but not quite, a defined-contribution plan."25 Indeed, Judge Easterbrook tell us, the IBM cash balance pension "is economically identical to a defined-contribution plan funded the same way and invested in a bond fund that returns 1% above the Treasury rate."26 Even more strongly, Cooper refers to "economically equivalent defined-benefit and defined-contribution plans"27 and to defined contribution plans which are "functionally identical" to cash balance pensions.28 Second, for the Cooper court, not only are the relevant plans the same, but so are the relevant statutes. While the pension age discrimination statutes contain one provision for defined benefit plans and another for defined contribution arrangements, these provisions "appear to say the same thing."29 The statutory provisions for defined contribution and defined benefit plans, Judge Easterbrook states, are "close in both function and expression,"30 indeed are "materially identical."31 Third, these "materially identical" statutes both look to

25 26 27 28 29 30 31

Cooper, supra, note Id. at 2. Id. at 5. Id. at 9. Id. at 3. Id. at 4. Id. at 9.

at 1 (slip opinion).

18

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contributions to measure age discrimination: "The phrase `benefit accrual' reads most naturally as a reference to what the employer puts in"32 the cash balance plan and bears no relationship to the employees' accrued benefits under the plan. In the District Court, Judge Easterbrook writes, "this litigation went off the rails"33 because "benefit accrual," "a phrase dealing with inputs was misunderstood to refer to outputs."34 Rather, "`benefit accrual' (for defined-benefit plans) and `allocation' (for defined-contribution plans) both refer to the employer's contribution..."35 Fourth, finding cash balance plans to be age discriminatory is wrong as a matter of policy. Judge Easterbrook correctly notes that the formula used by the IBM cash balance plan ­ five percent (5%) of the participant's salary -- "is non-discriminatory when used in a defined-contribution plan."36 Why then, he rhetorically asks, should that formula "become unlawful because the account balances" of a cash balance plan "are book entries rather than

32 33 34 35

Id. at 4. Id. at 5. Id.

Id. at 6 (parentheticals in the original). See also id. at 9 ("But `benefit accrual' refers to the annual addition to the pot, not to the final payout.") Id. at 3. 19

36

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cash?"37 The analysis of the District Court "treats the time value of money as age discrimination;"38 this "is not sensible."39 "All sorts of things go wrong" if this is the law.40

Analysis41 Cooper is a commendably candid opinion, with important economic insights. However, Cooper also says much which should disconcert the advocates of cash balance plans. In the final analysis, Cooper is an unconvincing reading of the pre-PPA pension age discrimination statutes. Let us consider in turn each of Judge Easterbrook's four propositions: A) Plan equivalence. At best, it overstates to say that cash balance and defined contribution plans are equivalent. The Cooper court thus erred when it declared cash balance and defined contribution plans to be "functionally"42 and "economically

37 38 39 40 41

Id. Id. at 4. Id. at 5. Id.

For a favorable review of the Cooper decision by a prominent proponent of cash balance plans, see Alvin D. Lurie's commentary in Steve Leimberg's Newsletter, supra, note 1.
42

Cooper, supra, note 1 at 9. 20

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identical."43 Cash balance pensions are defined benefit arrangements under which the employer guarantees the employee an ultimate benefit, a benefit defined as a nominal account balance rather than a traditional deferred annuity. In contrast to an employer sponsoring an defined contribution arrangement, the employer maintaining a cash balance pension makes a commitment to its employees about their final retirement payout. As a result of this commitment to pay a defined benefit, the employer sponsoring a cash balance pension assumes upon itself risks which the defined contribution format assigns to the employees. Consider initially the now prevalent 401(k) plan, funded by the employee's own salary reduction contributions and ultimately distributing to the employee the amount to which his account balance has then grown or fallen. By way of comparison, the employee covered by his employer's cash balance plan, for better or worse, receives a fixed promise which shifts funding and investment risk to the employer. Advocates of cash balance pensions as a matter of retirement policy (I am one) should be disconcerted by the Cooper court's assertion that there is no material difference between such pensions and defined contribution devices. If so, what has the fuss been about? Why not simply convert everyone to the 401(k)

43

Id. at 2. 21

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format? The answer is that the advocates of cash balance plans have (correctly) touted such plans as providing employees with more economic security because such defined benefit plans assign to employers responsibility for funding guaranteed benefits and for financing any shortfall if investment performance is disappointing. It is troubling to now be told by the Cooper court that there is, after all, no material difference between an employer's sponsorship of a cash balance pension and its sponsorship of a defined contribution plan. Consider in this context Judge Easterbrook's observation that a cash balance pension is "is economically identical to a defined-contribution plan funded the same way and invested in a bond fund that returns 1% above the Treasury rate."44 If the phrase "funded the same way" implies a money purchase pension (rather than a 401(k) plan), Judge Easterbrook is correct that the sponsor of a money purchase pension commits to a specified annual contribution, e.g., five percent (5%) of participant compensation. In this respect, money purchase arrangements, like cash balance and traditional defined benefit plans, impose a funding obligation upon the employer. However, a money purchase plan, as a defined contribution arrangement without a guaranteed final benefit, is materially different from a defined benefit

44

Id. at 2. 22

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arrangement. A money purchase pension shifts investment risk to the employees. To see the significance of this difference, suppose that the bonds in the fund Judge Easterbrook postulates decline in value because interest rates rise or because the issuers become less creditworthy. With a defined benefit arrangement (including a cash balance plan), this decline is the employer's problem. Having promised employees a specified retirement benefit, the employer must add the additional funds to remedy poor investment performance. In contrast, this decline is the employees' problem with a defined contribution plan including a money purchase pension. Investment risk falls on the employees since their retirement payouts are the balances of their respective accounts, whatever those balances might be. Employers sponsoring defined benefit plans can default on their obligations. Participants in defined contribution plans can invest well their respective individual accounts. For purposes of this discussion, the issue is not which arrangement is better but whether, as Cooper maintains, they are materially equivalent. They are not. B) Statutory equivalence. Equally unpersuasive is Cooper's assertion of equivalence between the statutory mandate that defined contribution plans cannot reduce on account of age "the

23

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rate at which amounts are allocated to the employee's account"45 and the statutory mandate that defined benefit plans cannot reduce on account of age "the rate of an employee's benefit accrual."46 If these two provisions say the same thing, why did the draftsmen write and Congress add to the Code, ERISA and ADEA two different provisions addressing pension age discrimination?47 The Cooper court's theory of statutory equivalence becomes particularly problematic when we explore the rest of ERISA and the Code to which the pension age discrimination statutes were appended. From that exploration, a sensible and consistent pattern emerges. When a single policy applies to both defined benefit and defined contribution plans, a single statutory provision does the job for both kinds of retirement arrangements. In the Code and ERISA, different statutory provisions are used for defined contribution and defined benefit plans only to implement different policies for each.

45

Code Section 411(b)(2)(A), ADEA Section 4(i)(1)(B), and ERISA Section 204(b)(2)(A).
46

Code Section 411(b)(1)(H)(i), ADEA Section 4(i)(1)(A), and ERISA Section 204(b)(1)(H)(i).
47

As observed supra, much of ERISA has been enacted identically as part of the Code. The pension age discrimination statutes have been identically enacted a third time as part of ADEA. See note , supra. The issue addressed in the text is whether the defined benefit anti-discrimination language adopted identically three (3) times in ERISA, the Code and ADEA should, as the Cooper court maintains, be read as the same as the defined contribution antidiscrimination language also adopted identically three (3) times in ERISA, the Code and ADEA. 24

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For example, the Code and ERISA provide that an employer's plan cannot exclude an employee from the plan on account of age or service if the employee has attained the age of twenty-one (21) and has completed one (1) year of service for the employer sponsoring the plan.48 The Code and ERISA do not redundantly state this rule twice, once for defined benefit pensions and once for defined contribution plans. Rather, a single statutory provision applies to both kinds of plans. Only when different rules apply to defined benefit and defined contribution plans do the Code and ERISA deploy different statutes for them. For example, one set of rules governs the minimum rates at which accrued benefits must accrue under defined benefit plans while a different set of rules applies to defined contribution arrangements.49 In sum, contra Cooper, the most natural reading of the statutes' two (2) different provisions pertaining to pension age discrimination is that two (2) different rules apply, one to defined contribution plans, the other to defined benefit pensions including cash balance plans. C) Defined benefit plans measure for age discrimination in terms of contributions. According to Judge Easterbrook, the
48

Code Section 410(a)(1)(A) and ERISA Section 202(a)(1)(A), codified at 29 U.S.C. Section 1052(a)(1)(A).
49

Code Sections 411(b)(1) and 411(b)(2) and ERISA Sections 204(b)(1) and 204(b)(2), codified as 29 U.S.C. Sections 1054(b)(1) and 1054(b)(2). 25

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single, statutory rule applying to defined contribution and defined benefit plans alike is to measure for age discrimination in terms of contributions. This is neither a credible nor a workable reading of the relevant statutes. When ERISA and the Code regulate the contributions made to defined benefit pensions, both use an unsurprising term to describe those contributions: "contributions." For example, the minimum funding requirements applicable to defined benefit pensions refer to a defined benefit "plan's required contribution."50 Similarly, Title IV of ERISA, which establishes the Pension Benefit Guaranty Corporation (PBGC) and its insurance program for defined benefit plans, uses the commonsensical term "contributions" to refer to employers' contributions to such plans.51 Against this background, if the draftsmen who wrote the pension age discrimination statutes and the Congress which added them to the Code and ERISA meant to say "contribution," why instead did they say "benefit accrual?" More convincingly, "contribution" means "contribution" and "benefit accrual" Code Section 412(b)(5)(B) and ERISA Section 302(b)(5)(B). See also Code Section 412(c)(10)(A) and ERISA Section 302(c)(10)(A) ("any contributions for a plan year") and Code Section 412(c)(11)(A) and ERISA Section 302(c)(11)(A) ("any contribution required by this section"). These ERISA Sections are codified at 29 U.S.C. Sections 1082(b)(5)(B), 1082(c)(10)(A) and 1082(c)(11)(A).
51 50

See, e.g., ERISA Section 4001(a)(2)(C), codified at 29 U.S.C. Section 1301(a)(2)(C) ("required contributions to the plan"). 26

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pertains to the accrual of benefits under defined benefit plans. Equally problematic is the application to traditional defined benefit plans of Cooper's theory that "benefit accrual" means "contributions." Consider in this context a defined benefit plan which promises each participating employee an annuity at normal retirement. Assume that, under this hypothetical plan, the benefit earned each year declines as a percentage of salary as the participant gets older. Thus, a thirty (30) year old participant earns a retirement annuity equal to three percent (3%) of his annual salary; a thirty-one (31) year old participant earns a retirement annuity equal to two and nine-tenths percent (2.9%) of his yearly compensation; a thirty-two (32) year old participant earns a retirement annuity to two and eight-tenths percent (2.8%) of his annual salary; and so forth. Before the Seventh Circuit's Cooper decision, most pension lawyers would have said that this pension plan is age discriminatory since each participant's "benefit accrual"52 decreases steadily solely on account of age. However, Cooper indicates that this plan may not age discriminate after all since we must look to the employer's contribution for each participant, not to the benefits participants accrue. The employer must contribute more to provide the same annuity benefit for older participants since there are fewer
52

Code Section 411(b)(1)(H)(i), ADEA Section 4(i)(1)(A), and ERISA Section 204(b)(1)(H)(i). 27

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years for such older participants' contributions to earn investment interest.53 Thus, it may cost the employer more to fund for a forty (40) year old a retirement annuity of two percent (2%) of salary than it costs the employer to provide for a thirty (30) year old a retirement annuity of three percent (3%) of salary. Consequently, this plan, with its annually declining benefit percentages, may not be age discriminatory according to Cooper since the contributions for older participants may be steady (or perhaps increase) even as such older participants' rate of benefit accrual continually decreases on account of age. I suspect that many defenders of cash balance plans would be reluctant to assert openly that, under the pre-PPA statutes, traditional defined benefit plans which, in this fashion, steadily decrease benefit accrual rates are nevertheless age nondiscriminatory. That, however, is the conclusion indicated by Cooper and its theory that defined benefit plans measure for age discrimination in terms of the employer's contributions. In sum, the natural reading of the term "benefit accrual" is that it pertains to benefits accruing, not to contributions. For pre-PPA years, defined benefit plans, as a statutory matter, measure accrued benefits in annuity terms. D) Policy considerations. Judge Easterbrook vigorously argues that, as a matter of policy, it makes no sense to declare

53

Zelinsky, Controversy, supra, note 28

at 690-691.

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cash balance plans to be age discriminatory while defined contribution plans utilizing similar allocation formulas are not. It is here that the Cooper court scores heavy points. It is not surprising that a judge as economically literate as Judge Easterbrook would have sound instincts on this matter. There are, as noted above, important differences between defined contribution and defined benefit plans in the assignment of longevity, investment and funding risks between the employer sponsoring the plan and its employees. There is, on the other hand, no convincing reason why an employer contributing five percent (5%) of each employee's salary to a 401(k) plan should pass age discrimination muster while an employer committing to fund five percent (5%) of each employee's salary under a cash balance pension should be deemed to be discriminating on the basis of age. The legal problem is that the pre-PPA statutes compel this result. These statutes were written in a different age, when the traditional annuity-paying pension dominated the defined benefit universe. The draftsmen of the pension age discrimination statutes did not overlook the possibility of the cash balance plan, a defined benefit pension which, instead of paying a deferred annuity, mimics the account balances and lump sum payments of a defined contribution plan. Rather, those draftsmen operated in a legal environment in which the cash balance plan

29

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literally did not exist. Hence, the statutes require that, for pre-PPA years, cash balance pensions, as defined benefit arrangements, test for age discrimination in annuity terms. Judge Easterbrook is correct that such testing produces results which are troubling as a matter of policy. However, for pre-PPA years, that is the policy which the pension age discrimination statutes implement. Conclusion Cooper is an important and candid exploration of the status of cash balance pensions prior to the PPA. However, in the final analysis, Cooper is an unpersuasive interpretation of the pre-PPA pension age discrimination statutes. The Cooper court erred when it declared cash balance pensions, hybrid defined benefit arrangements, to be materially the same as defined contribution plans. Equally unconvincing is Cooper's insistence that the different statutory age discrimination standards for defined contribution and defined benefit plans mean the same thing and that the single statutory test measures defined benefit plans for age discrimination in terms of employer contributions. Cooper argues convincingly that, as a matter of policy, cash balance plans should not be deemed age discriminatory when defined contribution plans using similar formulas pass age discrimination muster. In the PPA, Congress agreed prospectively

30

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for "periods beginning on or after June 29, 2005."54 Given what the pre-PPA pension age discrimination statutes say, in the final analysis, Cooper is wrong on the merits. ****

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University and visiting professor of law at the Yale Law School. For comments on prior drafts of this article, Professor Zelinsky thanks Professor Paul M. Secunda, Attorneys Alvin D. Lurie and Chantel Sheaks, and Aaron S.J. Zelinsky of the Yale Law School class of 2010.

54

Section 701(e) of the PPA. 31