BP Sued over Switch to Cash Balance Plan
BP sued over cash balance plan switch. In efforts to avoid funding liability under defined benefit (DB) plans, corporate America has switched to cash balance plans, which resemble 401k plans, claiming that the benefits are comparable. A current and former employee of BP, which has $7.7 billion in their plan, is disputing that claim in federal court seeking class action status.
The lawsuit claims that Standard Oil of Ohio, later acquired by BP, made misleading statements about the value of the cash balance plan when they converted from their DB plan. The claim states that the benefits are significantly lower. The suit alleges that not only were statements misleading, the interest rate used to calculate the benefit of the cash balance plan were unreasonably high. They also claim that employees were not given timely and sufficient notice about the conversion.
Cash balance plans are more like 401k plans where their value is based on the balance in the account plus interest and earnings rather than the benefit promised based on prior wages. It shifts funding liability from the company to the employees and was made famous by IBM when they made a similar move.
The repercussions of the suit are huge for companies that have made similar moves from DB to cash balance plans opening up a whole new potential wave of lawsuits. Not only are there large pools of money at stake, there are tens of millions of potential plaintiffs perhaps dashing efforts by companies who sought to offload liability.
Beyond these types of lawsuits, companies that have moved to DC plans only to avoid funding liability are starting to realize that if employees do not have enough money to retire when they want or need to, they continue to keep working increasing benefits and wage costs while lowering overall productivity. Senior management is starting to get the message covered in 401kTV’s next master Class, “Engaging Senior Management in the Company’s DC Plan”.