Nationwide calls for preservation of pension plan
Company advocates to keep “greater of” approach for its employees
FOR IMMEDIATE RELEASE
September 10, 2007
Jennifer Monnin (614) 677-5391
Jeff Botti (614) 249-6339
Columbus, Ohio— Nationwide is asking Congress to help reverse an IRS action that could potentially decrease the pension benefits of nearly 15,000 company employees hired before 2002. Nationwide is joined by leading employer and employee organizations including AARP, the American Benefits Council, the Business Roundtable and the ERISA Industry Committee.
“It is very important to Nationwide that our employees have the opportunity to enjoy a financially secure retirement,” said Jerry Jurgensen, Nationwide President and CEO. “Accordingly, we provide our employees with two retirement plans – both a defined benefit pension plan and a 401(k) retirement savings plan.”
The issue at stake involves not the 401(k) plan but the formulas used for the defined benefit pension plan.
In 2002, Nationwide added a cash balance formula to its pension plan. Previously, the Nationwide pension plan had a traditional final average pay benefit formula. For those hired before Jan. 1, 2002, Nationwide kept both benefit formulas so participants would automatically receive the “greater of” the two benefit formulas. This “greater of” approach:
- Ensures a gradual and long transition to the cash balance formula;
- Is generally considered the most expensive method to convert to a cash balance formula;
- Provides the greatest transition benefit to participants.
Contrary to prior practice, the IRS now asserts that the "greater of" feature violates a federal rule that prohibits backloading (referred to as “anti-backloading rules”). The anti-backloading rules generally require that benefits be earned evenly over a participant’s period of service. The anti-backloading rules were established in 1977, before cash balance plans existed, to prevent a plan from concentrating benefit accruals only at the end of a long period of service. Without the backloading rules, short-service participants could be deprived of a meaningful benefit.
Both of the Nationwide formulas fully comply with the “anti-backloading” rules. Nationwide's "greater of" formula creates an uneven pattern of benefit accrual only where the formula that provides the “winning” benefit changes during a participant’s period of service. The IRS is now saying that the uneven pattern of benefit accrual violates the backloading rules even though the "greater of" formula helps participants, both young and old, regardless of their length of service.
“The IRS has somehow lost track of the purpose of the backloading rules,” Jurgensen said. “We strongly encourage public policymakers to advocate for pro-employee benefit approaches in an era when the nation’s retirement security is increasingly placed on the shoulders of employers and employees. If the IRS does not reverse its current position on “greater of” pension benefits, it will hurt employees and undermine their retirement security.”
Nationwide, based in Columbus, Ohio, is one of the largest diversified insurance and financial services organizations in the world, with more than $160 billion in assets. Nationwide ranks #104 on the Fortune 500 list. The company provides a full range of insurance and financial services, including auto, motorcycle, boat, homeowners, life, commercial insurance, administrative services, annuities, mortgages, mutual funds, pensions, long-term savings plans and health and productivity services. For more information, visit www.nationwide.com.