Campaign allows retirees to maximize pensions

COLUMBUS, Ohio—Like the alter-egos of a character created by author James Thurber, who also hails from this Midwestern city, Jack Towarnicky, associate vp of benefits planning at Nationwide Mutual Insurance Co., is undaunted by challenges.

Though he may not fantasize about being a Royal Air Force pilot in World War I as did Mr. Thurber's fictional character Walter Mitty, Mr. Towarnicky does set his sites on similarly challenging targets, such as the Internal Revenue Service, which he felt stood in the way of Nationwide retirees being able to maximize their pension benefits.

In 2002, when Nationwide amended its defined benefit pension plan to add a cash balance formula alongside the existing final average pay formula, it included a provision to allow employees to automatically receive the "greater of" either benefit formula when they retire.

Cash balance plans enable employees to accrue greater pension benefits earlier in their career, which can be beneficial to employees who do not stay with a company for a long time. Conversely, the final average pay formula favors longtime employees.

Rather that forcing employees to choose one plan when the cash balance plan was introduced, which is what most employers do, the insurer gave employees the option of waiting to make that decision until they retired, Mr. Towarnicky said.

"We decided against choice" because "you'd have to be able to predict your future service, your age at separation, your future compensation and future changes in those" formulas, he said. "That's a pretty tough burden for a benefits executive, let alone a rank-and-file employee. It would be tough enough for a retirement benefit actuary to try to estimate what's the right answer for them."

Although U.S. Treasury Department rules issued in 2004 for transitioning to a cash balance plan used the "greater of" formulas, the IRS in early 2007 indicated that such "greater of" structures might technically violate a rule known as backloading. That is, even if both formulas individually met the tax code limits, when one formula overtakes the other, is may provide too much accrual in that year.

"This put a shiver into a lot of folks, including me," Mr. Towarnicky said.

In response to the IRS's position, Mr. Towarnicky contacted Bridget Hagan, Nationwide's lobbyist in Washington and associate vp of government relations, who met with Ohio legislators and Treasury Department officials.

But perhaps more notably, Mr. Towarnicky mobilized Nationwide employees who could be adversely affected, urging them to contact their congressmen and demand that they persuade the IRS to permit the "greater of" pension formulas to be used.

"That got people's attention. I was pretty surprised. Not only did our associates reach out electronically in e-mail and paper letters, they also made personal appearances to their congressmen and the congressmen's staff as well," Mr. Towarnicky said.

After being overwhelmed by Nationwide's call to action "it got to the point where at least one senator's staff member called us up and said, 'Please, tell your employees that we get it and they can stop now,"' Mr. Towarnicky said.

The campaign worked. More than 30 lawmakers signed a letter sent to the Treasury Department clarifying that when the Pension Protection Act of 2006 passed, Congress never intended to eliminate the use of "greater of" formulas. In response, Treasury issued guidance in February of this year that allowed employers to use the "greater of" pension formulas, so long as each option meets a minimum threshold set by the IRS.

Today, Mr. Towarnicky regards the "greater of" campaign to be the most challenging mission of his benefits career, as well as the one having the greatest effect.

"People way beyond Nationwide benefited from the changes in the IRS' direction," he said.

One of Mr. Towarnicky's next challenges is to persuade Congress to amend existing tax code provisions so that retiree medical accounts that are currently used in some defined benefit pension plans, such as the Nationwide Retirement Plan, can also be incorporated into a 401(k) plan.

"I'm probably one of the top 10 proponents encouraging congressional staffs, other benefits people and organizations to come out in support of having Congress add two words to section 401(h) of the federal Tax Code—"profit sharing"—so that you can have a side account (in a 401(k) plan) to fund company financial support for retiree health care," he said.

Under current law, only employers offering defined benefit pension plans can put up an additional amount—up to 33% of what they contribute to fund pension obligations—into a 401(h) account, which is then used to finance the company's contribution to retiree health benefits.

Nationwide has been doing this since 1994, Mr. Towarnicky said.

By amending tax law to permit 401(h) retiree medical side accounts to 401(k) plans, employers that do not offer defined benefit plans, which are rapidly being phased out, would have a new way to fund retiree health care obligations.

Tell us what you think. Log in below to weigh in on this story.