Retirement Heist: how companies plunder and profit from the nest eggs of American workers

Employee advocates, including the Pension Rights Center and AARP, demanded better disclosure rules, but employers fought back. Lobbyists for the American Society of Pension Actuaries, the ERISA Industry Committee, and the U.S. Chamber of Commerce told Senate staffers that employees would only become confused if they were presented with too much complex information, and that providing more disclosure would be a “daunting task.” Lawmakers didn’t completely buy this, so in 2004 the IRS began requiring employers to tell people more clearly if the value of the lump sum wasn’t equal to the monthly pension.

In 2006, the Pension Protection Act banned wear-away prospectively, meaning that if an employer set up a cash-balance plan after the 2006 law went into effect, it couldn’t include a wear-away period.

But the issue of pension deception is still playing out in the courts. Cigna employees, who hadn’t been told their pensions were essentially frozen when the company changed to a cash-balance plan, sued the company in 2001. In 2008, a federal court concluded that Cigna deliberately deceived its employees when it changed its pension plan in 1998, gave them “downright misleading” information about their pensions to negate the risk of an employee backlash. “CIGNA’s successful efforts to conceal the full effects of the transition to [the new pension] deprived [plaintiffs] of the opportunity to take timely action . . . whether that action was protesting at the time [the change] was implemented, leaving CIGNA for another employer with a more favorable pension plan, or filing a lawsuit like this one.”

The district court ordered Cigna to restore the pension benefits it had led employees to believe they would be receiving. Cigna appealed to the Second Circuit, and lost, but that wasn’t the end of it. Cigna didn’t try to appeal the court’s finding that it deceived its employees—the memos and documents that surfaced in the case were too damning.

But in a kind of hail Mary pass, Cigna appealed to the Supreme Court, arguing that in order to get the benefits, each individual employee must prove he’d acted on the misinformation–that is, didn’t change jobs or save more money, and thus suffered financial harm.

During oral arguments before the Supreme Court late in 2010, it became clear that the majority of justices were troubled by the fact that if they adopted the “detrimental reliance” standard Cigna was advocating, then employers would suffer no consequences even for the most egregious deception. “Doesn’t this give an incredible windfall to your client, Cigna, or to other companies that commit this kind of intentional misconduct?” Justice Elena Kagan asked Cigna’s attorney. In May 2011, the justices sent the case back to the lower court with instructions that it review its decisions, based on the portion of pension law that requires employers to tell employees, clearly and unambiguously, when it is cutting their pensions.

If the judge comes to the same decision to award the benefits to the employees—a total of $82 million—this would be the biggest award for employees whose employer hid pension cuts.

But Cigna has already taken steps to soften the blow: It froze the pension plan in 2009 and cut health, disability, and life insurance benefits for retirees, giving it a gain of $92 million.

CHAPTER 3

Profit Center: HOW PENSION AND RETIREE HEALTH PLANS BOOST EARNINGS

IN ACTUARIAL CIRCLES, there’s a joke that goes something like this: A CFO is interviewing candidates for a job as a benefits consultant. He calls the first one, an accountant, into his office and asks, “What’s two plus two?” The accountant says “Four.” The CFO sends him away, calls an actuary into the room, and asks, “What’s two plus two?” The actuary closes the door, pulls down the blinds, then leans in and whispers, “What do you want it to be?” He gets the job.

As much as this anecdote unfairly maligns the vast majority of actuarial professionals, it nonetheless sums up the view that some in the profession have toward their more aggressive brethren. Until the 1990s, benefits consulting firms generally handled standard pension tasks, like helping companies figure out how much to put into their pension plans, based on the ages and life expectancies of their employees, plus other factors. More closely aligned with the human resources department, they were one of the costs of operating a business, like accountants and the janitorial staff. But over the next two decades, large benefits consulting firms began aggressively marketing themselves to the finance departments. Their pitch? They could help employers turn pension plans into profit centers.