Pensions: Big Holes in the Net
By Mary Williams Walsh
New York Times
Tuesday, April 12, 2005

JAMES McDONALD, a former New York longshoreman, worked for 23 years under a pension plan that greatly penalized people who took time off in midcareer.  He himself had such a gap:  he worked for 13 years, then took three years off for medical reasons before working another 10.  When he retired in 1997, he began receiving a pension of $263 a month, an amount reflecting just his last 10 years of service.  The plan said his first 13 years did not count.

Such plan rules have been unlawful since 1976, but federal regulators police this provision desultorily, if at all.  So Mr. McDonald found a lawyer, filed suit against the plan and began a long, slow slog through the legal system.  Finally, last month, a judge confirmed that his pension plan was indeed illegal, ordered it changed and increased Mr. McDonald's benefit nearly fourfold, to $1,000 a month, retroactive to 1990 with interest.

But by then, Mr. McDonald was no longer around to enjoy the victory.  "He died in the meantime," said his lawyer, Edgar Pauk.

In the world of pension law, rules and regulations abound to protect participants, and no fewer than three federal agencies are charged with their enforcement.  But when a problem arises, pensioners can still find themselves on their own.

"There is no federal agency enforcing participants' rights," Michael S. Gordon testified in the McDonald case in 2001.  Mr. Gordon, who died in 2004, was a principal architect of the federal pension law known as Erisa, or the Employee Retirement Income Security Act, in his six years as minority counsel to the Senate Labor Committee in the 1970's.

"As a practical matter," Mr. Gordon said, "Erisa's enforcement of participants' rights has been placed entirely on the shoulders of the participants themselves."

As the number of Americans nearing retirement grows and concerns about the pension system persist, shortcomings in the law's enforcement are drawing increasing attention.  In a series of recent semi-annual reports, the Labor Department's inspector general has cited evidence that many companies have miscalculated the benefits paid by certain plans.  The department referred the matter to the Internal Revenue Service, which has not acted.

The inspector general has also repeatedly challenged the quality of pension-plan annual audits, to no avail, and issued a stream of warnings that the consultants who provide advisory services to pension plans may be bilking them.

"We continue to identify multimillion-dollar abuses by plan service providers whose complex financial schemes may impact more than one benefit plan," the inspector general said in the report for 2004.

In response, the Labor Department has stepped up efforts to protect pension funds, through expanded information and feedback programs for participants and amnesty programs for employers.  And last month, a bill was introduced to create an Office of Pension Participant Advocacy, which would address problems that now fall through regulatory cracks.  "Time and again, the needs of pension participants are ignored, and pensioners don't get help in navigating the government's pension bureaucracy," said Senator Tom Harkin, Democrat of Iowa, who is sponsoring the measure.

Perhaps as important, the office would be able to recommend adjustments to Erisa.

When the pension law was enacted in 1974, Congress was unable to agree on which federal agency should be responsible for its administration. So the duties were divided three ways, with some going to the Labor Department, some to the I.R.S. and some to the Pension Benefit Guaranty Corporation (PBGC).

There were warnings at the time that this would undermine the law's effectiveness, creating gaps in the system where workers with problems would have no recourse.  Those same gaps have been cited repeatedly in recent years by critics who say the system encourages buck-passing.

Not only are Erisa's jurisdictional boundaries unclear, but the three agencies are poorly equipped to fulfill some of the duties they have been assigned.

For example:

The pension guaranty corporation has the job of paying people their benefits when a pension plan defaults.  It has a strong institutional interest in making sure companies follow the rules governing how pensions are funded because it wants to keep claims to a minimum.  But the corporation can only get involved when a plan is so far gone it is a candidate for government takeover.

The I.R.S. has the job of policing pension funding.  But according to James A. Wooten, a professor at the University at Buffalo Law School of the State University of New York, and the author of a book on the history of Erisa, the tax agency has almost no institutional stake in making sure plans are well financed.  The more a company contributes to a pension plan, the less income tax the I.R.S. collects.  Mr. Wooten said that, if anything, the agency has an institutional interest in letting pension funding lapse.

The Labor Department has the job of making sure pension plans live up to their financial disclosure requirements, and fulfill their legal duties of good faith to the plan participants.

Each year in its annual report, the department's Office of Inspector General issues a list of its 10 greatest "management challenges," and the protection of pensions is always on the list.  Other difficulties come and go, but year after year the pension challenge seems intractable.

One example involves cash-balance pension plans - a relatively new type of pension that has generated conflict at many companies that introduced it.  A cash balance plan combines some features of a traditional pension with those of a 401(k).  For the last three years, the inspector general has cited evidence that some of these plans are miscalculating payouts to employees, shortchanging them if they leave before the normal retirement age.

But the Labor Department has resisted the inspector general's calls for action.  Problems concerning underpayments fall to the I.R.S., it said.  In February 2002, the Labor Department asked the tax agency to determine whether any laws were being broken.  It has duly followed up every three months since then.  But so far, the I.R.S. has not answered.

"We believe plan participants who left the plans before normal retirement age may have been underpaid significant amounts" because of a "continued lack of attention," by the two agencies, the inspector general wrote in the department's most recent report for 2004.

The Labor Department is also responsible for providing information that individuals can use to make sure their pension plan is solid - a question of increasing concern in the face of recent failures and cutbacks.  But the labor secretary herself, Elaine L. Chao, has complained that the data her agency now makes available is based on calculations that are "virtually incomprehensible" and so out of date as to be of little use to participants.  She and other officials, however, say better information cannot be released unless Congress amends Erisa.

"I always thought Erisa was a law to protect me.  Not anymore," said Kathy Joy-Kirkendall, an engineer with Dresser-Rand, which makes equipment for the oil industry and was acquired by Halliburton in 1998 and sold less than two years later.  Ms. Joy-Kirkendall and several hundred co-workers in western New York State lost part of their expected benefits when Halliburton sold its stake in the company.

Halliburton has said it complied with the letter and spirit of the pension law, but the employees are not convinced.  For almost three years, they have been making the rounds of congressional representatives, state labor and consumer advocates, private pension lawyers and the Labor Department, asking whether Halliburton's move was legal and what they should do if it was not.  Some New York State officials also questioned the legality of Halliburton's actions, but said their hands were tied because the pension law gives full jurisdiction to the federal government, pre-empting the states.  The Labor Department began an investigation of the Halliburton affair in 2002 but has not completed it yet.

"No one tells us anything," Ms. Joy-Kirkendall said.  "That is what is so frustrating."

Ann L. Combs, assistant secretary of the Employee Benefits Security Administration, the branch of the Labor Department that handles pensions, said that her office did not discuss investigations.

"I appreciate that this can be frustrating to people," Ms. Combs said, adding that the Halliburton case was complicated and time-consuming.

Still, Ms. Combs said her office opposed Senator Harkin's proposal to create an advocacy office for pension participants, calling it "unnecessary."

"The department already provides these services," she said.  Another office could confuse participants, she added, and would "slow our response time."

Ms. Combs's office has strengthened certain enforcement programs.  An amnesty program for noncompliant plan sponsors, all but unused in fiscal 2000, has been widely promoted in the last few years, and now attracts hundreds of companies a year.  In fiscal 2004, the program restored $265 million of missing pension assets, compared with just $9 million in 2003, and even less before that.  Last week, the department announced that it was expanding the amnesty program to cover additional types of violations.

Even the department's critics applaud the program, saying it appears to recover missing money for retirees more efficiently than full investigations.  And the number of civil investigations that have produced results has also risen in the last four years.  But the total amount recovered has stayed relatively flat, suggesting the department has been pursuing smaller cases.

Mr. Pauk, the lawyer in the McDonald case, said that the Labor Department and the I.R.S. could still do much more to enforce the law for pensioners, as well as be more responsive to complaints or requests for help.  In that case, the judge, Naomi R. Buchwald of the United States District Court for the Southern District of New York, had to enlist the help of the Justice Department before the Labor Department and the I.R.S. responded to her requests for clarification of the relevant laws.

Employees can have an even harder time getting answers.  Ken Raschke, a former vice president for manufacturing at AT&T Network Systems, found himself and his pension transferred to Lucent Technologies after he retired in 1989.  Then the technology crash came, and the Securities and Exchange Commission began leveling accusations of accounting fraud at Lucent.  Lucent settled with the S.E.C. in 2004, paying a $25 million fine but neither admitting nor denying wrongdoing.

Mr. Raschke began to worry that if Lucent had misstated its own financial performance, the company might have also misstated the health of his pension plan.  When he checked the public records, he found a disturbing discrepancy:  Lucent had reported to the Labor Department that his pension plan was fully funded, but S.E.C. filings showed a $1.7 billion pension shortfall.

Mr. Raschke said he understood that the discrepancies were based on different methodologies, but he still wanted to know how strong the pension fund was and whether it was invested prudently.

"The more I learned, the questions just kept popping up," he said.

Along with some other retirees, Mr. Raschke asked Lucent for an independent audit of the plan.  Lucent declined.  A spokesman for Lucent, Bill Price, said the request "goes beyond normal corporate practices."  He noted that Lucent "is in full compliance with Erisa guidelines for all the required financial statements and disclosures around our pension funds," which he said are adequately financed.

After Lucent turned him down, Mr. Raschke turned to the Labor Department, which has jurisdiction over disclosure.

After several letters, Ms. Combs, the assistant secretary, replied that the department had no authority to look beyond the annual plan reports and audits that a company files - the ones that raised Mr. Raschke's doubts.

Earlier this year, the Labor Department's inspector general warned that "an unacceptably high number" of these audits "do not meet professional standards."  It has been making this same complaint since 1984.