In 2005 the Government Accountability Office (GAO) released a report analyzing the effects of cash balance conversions on worker benefits.
Likewise, for the many employees who leave their job before retirement (whether voluntarily or not), many would be better off under the cash balance conversion than under the original defined-benefit plan.
In addition, about half of cash balance conversions have grandfathered in some or all of the existing participants in the defined-benefit plan.
As part of this process the plan is required to have an actuary perform annual "actuarial valuations" in which the present value of each worker's "accrued benefit" is estimated and then each present value for each worker covered by the plan is added up so that the minimum annual contribution can be determined.
This creates a hypothetical account balance from which the legally required benefit -- an annuity payable for the life of the participant or beneficiary who elects to commence payment at normal retirement age—can be calculated.
In 1993, the Third Circuit decided in Goldman v. First National Bank of Boston that the terminated worker did not demonstrate that the adoption of the cash balance plan violated age discrimination rules.
In 2000, the Eleventh Circuit in Lyons v. Georgia Pacific and the Second Circuit in Esden v. Bank of Boston decided that the employer violated rules for calculating lump sums, and a district court in Eaton vs. Onan Corp. decided that adopting the cash balance plan did not violate age discrimination rules.
"[4] The Lump Sum cases all held that because cash balance plans were defined-benefit plans, they had to abide by the rules for defined benefit plans when the employer calculates the lump sum actuarial present value by first accruing the account balance to normal retirement age and then converting the account balance at retirement age into a life annuity before then discounting back to the current date at a statutorily required discount rate.
In Berger v. Xerox, Judge Richard Posner noted in the case – "for hybrid read unlawful" – held that the lump sum amounts should have been larger.
The statutes forbid – in virtually the same words – any plan from reducing "the rate of benefit accrual" for any worker on account "of the attainment of any age".
In Onan Corp., District Court Judge Hamilton agreed with the supporters of cash balance plans and held that the cash balance plan design did not violate age discrimination because the terms "rate of benefit accrual" and "accrued benefit" were not defined in the relevant statutes.
If this rule is upheld, then all "flat rate pay credit" design cash balance plans would violate age discrimination.
[6][7] Because of the troublesome age discrimination suits and misunderstanding and frustration by older workers covered by such plans, Congress, notably Senator Charles Grassley (R) of Iowa, has a proposal to statutorily fix the problem.
The Pension Protection Act of 2006 was signed into law in August 2006 and prospectively made the flat salary credit type plans immune from age discrimination.
Also, the use of a higher interest rate for calculation of lump sums is now allowed as the new law eliminates the whipsaw.