Statement of the Hon. Gil Gutknecht,
a Representative in Congress from the State of Minnesota
Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means
Hearing on Retirement Security and Defined Benefit Pension Plans
June 20, 2002
Chairman Houghton, Ranking Member Coyne, and Members of the Subcommittee:
Thank you for allowing me to testify at this very important hearing on retirement security and defined benefit pension plans. I would like to focus on conversions from defined-benefit retirement plans to “cash-balance” plans.
Over the past several years, our country has witnessed the unfortunate spectacle of major corporations converting defined-benefit plans to cash-balance plans in order to recapture billions from supposedly “over-funded” pension plans. Hundreds of thousands of employees, many of whom were older and “vested” in their plans saw the value of their retirement benefits drop precipitously.
In my dictionary, “vested” is defined as follows:
Vested. adj. 1. Settle, fixed, or absolute; being without contingency: a vested right.
Despite this definition, being “vested” in a pension plan does not mean what most Americans think it means. Companies can, at any time and for any reason, change a vested employee’s pension plan. Such conversions often result in anywhere from a 20 - 50% reduction in final benefits, with long “wear-away” periods during which employees do not accrue any new benefits.
This is wrong. When companies change their retirement plans in a way that may reduce employee benefits, vested employees should be allowed to stay in the original pension plan that they were promised.
Bureau of Labor statistics indicate there are more than 48 million American workers over the age of 45. The latest Bureau of Labor statistics also show that more than 40 million workers or their spouses participate or receive benefits from defined benefit plans. Many of these 40 million workers fall into the over-45 age category.
Several years ago, thousands of IBM workers in my district came into work one morning to find that the defined benefit pension plan they had been promised had been changed to a cash-balance plan without warning. For years these employees had been able to calculate their future benefits with a pension calculator located on their computer, compliments of IBM. When the plan changed, the calculator disappeared. So did the employees’ promised benefits.
Congress needs to take action that simultaneously gives all employees fair warning of pension plan changes and gives vested employees protection from company actions that rewrite the pension rules in the middle of the game. That is why I introduced H.R. 4181, the Vested Worker Protection Act of 2002. This bill would require healthy companies to:
This bill exempts companies in financial distress from penalties, while otherwise healthy companies will be subject to an excise tax should they violate the provisions of this bill.
Most Americans take protection of their pension plan for granted. The Enron situation has demonstrated the need for employees to carefully monitor how their employer handles their retirement benefits. As more companies change their pension plans and reduce future benefits for employees, Congress must provide, at a minimum, protection for vested workers who are planning for retirement based on promises made by their employers. Providing employee choice in the event of a plan conversion will go a long way toward re-establishing balance and fairness for workers with respect to pensions.
Thank you.