                          In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 05-3588
KATHI COOPER, et al.,
on behalf of a class,
                                        Plaintiffs-Appellees,
                              v.

IBM PERSONAL PENSION PLAN
and IBM CORPORATION,
                                   Defendants-Appellants.
                        ____________
           Appeal from the United States District Court
                for the Southern District of Illinois.
       No. 99-829-GPM—G. Patrick Murphy, Chief Judge.
                        ____________
   ARGUED FEBRUARY 16, 2006—DECIDED AUGUST 7, 2006
                    ____________


 Before BAUER, EASTERBROOK, and MANION, Circuit
Judges.
  EASTERBROOK, Circuit Judge. The IBM Personal Pension
Plan is a cash-balance defined-benefit plan. It is almost, but
not quite, a defined-contribution plan. Although each
employee in a defined-contribution plan has a fully funded
individual account, the personal account in a cash-balance
plan is not separately funded. Instead IBM imputes value
to the account in the form of “credits”: there are pay credits
(set at 5% of the employee’s gross taxable income) and
interest credits (set at 100 basis points above the rate of
interest on one-year Treasury bills). A trust holds assets
2                                                No. 05-3588


that may (or may not) be enough to fund all of the individ-
ual accounts when workers quit or retire. IBM’s plan
permits an employee who quits or retires after working long
enough for pension benefits to vest (a maximum of five
years) to withdraw the balance in cash or roll it over into a
fully funded annuity. During the time before cash-out the
employee takes the risk that IBM will suffer business
reverses and be unable to pay the full stated value of the
account (if the amount already in trust for participants as
a group turns out to be insufficient); otherwise IBM’s plan
is economically identical to a defined-contribution plan
funded the same way and invested in a bond fund that
returns 1% above the Treasury rate.
  Plaintiffs in this class-action litigation contend that IBM’s
plan violates a subsection of ERISA (the Employee Retire-
ment Income Security Act) that prohibits age discrimina-
tion. The district court ruled in plaintiffs’ favor, see 274 F.
Supp. 2d 1010 (S.D. Ill. 2003), and proceedings continued as
the parties debated how much IBM owes (and how it must
change its plan in future years) as a remedy. That subject
has been resolved to mutual satisfaction—contingent on the
district judge being right on the merits—so this appeal is
limited to the question whether the plan is unlawfully
discriminatory.
  All terms of IBM’s plan are age-neutral. Every covered
employee receives the same 5% pay credit and the same
interest credit per annum. The basis of the plaintiffs’
challenge—and the district court’s holding—is that younger
employees receive interest credits for more years. The
language on which plaintiffs rely was added to ERISA in
1986; Congress also enacted a parallel provision covering
defined-contribution plans. Pub. L. 99-509, 100 Stat. 1874,
1975, 1976 (1986). We set these out alongside to facilitate
comparison:
No. 05-3588                                                  3



 Defined-benefit plans:          Defined-contribution
 ERISA §204(b)(1)(H)(i), 29      plans: ERISA
 U.S.C. §1054(b)(1)(H)(i)        §204(b)(2)(A), 29 U.S.C.
                                 §1054(b)(2)(A)


 [A] defined benefit plan        A defined contribution
 shall be treated as not sat-    plan satisfies the
 isfying the requirements of     requirements of this
 this paragraph if, under        paragraph if, under the
 the plan, an employee’s         plan, allocations to the
 benefit accrual is ceased, or   employee’s account are
 the rate of an employee’s       not ceased, and the rate
 benefit accrual is reduced,     at which amounts are
 because of the attainment       allocated to the
 of any age.                     employee’s account is not
                                 reduced, because of the
                                 attainment of any age.


These appear to say the same thing, except that the rule for
defined-benefit plans tells us what is not allowed, while the
rule for defined-contribution plans tells us what works.
Either way, the employer can’t stop making allocations (or
accruals) to the plan or change their rate on account of age.
The IBM plan does neither of these things and therefore,
one would suppose, complies with the statute. If this were
a real, rather than a phantom, defined-contribution plan,
that much would be taken for granted. Yet if the 5%-plus-
interest formula is non-discriminatory when used in a
defined-contribution plan, why should it become unlawful
because the account balances are book entries rather than
cash?
4                                                No. 05-3588


  Plaintiffs persuaded the district court, however, that the
two subsections are radically different. That difference is
attributable to the phrase “benefit accrual,” which appears
in the subsection for defined-benefit plans but not the one
for defined-contribution plans. Neither ERISA nor any
regulation defines this phrase, so the district judge went
looking for some equivalent elsewhere in the statute. It
found the phrase “accrued benefit,” which is defined in
§3(23)(A), 29 U.S.C. §1002(23)(A). An “accrued benefit” is an
amount “expressed in the form of an annual benefit com-
mencing at normal retirement age.” Plug this back
into §204(b)(1)(H)(i), and the rule against discrimination
then refers not to what IBM puts into the plan, but what
the employee takes out on retirement. Someone who leaves
IBM at age 50, after 20 years of service, will have a larger
annual benefit at 65 than someone whose 20 years of
service conclude with retirement at age 65. The former
receives 15 years’ more interest than the latter—and the
judge assumed that this is not counterbalanced by the
fact that older workers generally draw higher salaries.
Under the district court’s analysis, compound interest
becomes a scourge, for the younger the employee when any
given year’s salary is earned, the greater the payout
“expressed in the form of an annual benefit commencing
at normal retirement age.”
  This approach treats the time value of money as age
discrimination. Yet the statute does not require that
equation. Interest is not treated as age discrimination for a
defined-contribution plan, and the fact that these subsec-
tions are so close in both function and expression implies
that it should not be treated as discriminatory for a defined-
benefit plan either. The phrase “benefit accrual” reads most
naturally as a reference to what the employer puts in
(either in absolute terms or as a rate of change), while the
defined phrase “accrued benefit” refers to outputs after
No. 05-3588                                                5

compounding. That’s where this litigation went off the rails:
a phrase dealing with inputs was misunderstood to refer to
outputs. As long as we think of “benefit accrual” as refer-
ring to what the employer imputes to the account—an
understanding reinforced by the use of the word “allocation”
in the subsection addressing defined-contribution
plans—there is no statutory difference between the treat-
ment of economically equivalent defined-benefit and
defined-contribution plans. For defined-benefit plans, where
the account is an accounting entry rather than cash,
“benefit accrual” matches the money “allocated” to a
defined-contribution plan.
   Nothing in the language or background of §204(b)(1)(H)(i)
suggests that Congress set out to legislate against the fact
that younger workers have (statistically) more time left
before retirement, and thus a greater opportunity to earn
interest on each year’s retirement savings. Treating the
time value of money as a form of discrimination is not
sensible. Cf. Hazen Paper Co. v. Biggins, 507 U.S. 604, 611
(1993) (variables correlated with age must be kept “analyti-
cally distinct” from age when searching for discrimination).
The parallel between the subsections for defined-benefit
and defined-contribution plans shows as much. All sorts of
things go wrong unless we treat both §204(b)(1)(H)(i) and
§204(b)(2)(A) as addressing the rate at which value is added
(or imputed) to an account, rather than the annual pension
at retirement age. Consider a formula that adds $500 to
annual pension benefits for every year worked. This setup
economically favors older workers (as does a top-five-year-
salary multiplier) because it ignores the time value of
money and treats the last year of work as contributing
equally with the first. Yet on the plaintiffs’ understanding
it would be a form of discrimination against the old, because
the $500 is a smaller “rate of benefit accrual” as time
passes. Someone who worked two years would get a “100%
rate of increase” in his second year (his annual benefits on
6                                               No. 05-3588


retirement would jump from $500 to $1,000), while someone
who works 20 years receives only a 5% growth (from
$19,500 to $20,000) in Year 20.
  Our conclusion that “benefit accrual” (for defined-benefit
plans) and “allocation” (for defined-contribution plans) both
refer to the employer’s contribution rather than the time
value of money between contribution and retirement has
the support of regulations that the Treasury Department
proposed. (Appropriations riders have prevented
the Treasury from taking final action on the draft regula-
tions, but they still help to inform our understanding of the
statute.) The draft regulations treat the “rate of benefit
accrual” as “the increase in the participant’s accrued normal
retirement benefit for the year.’’ 67 Fed. Reg. 76123, 76125
(Dec. 11, 2002). For cash-balance plans in particular the
phrase would have been defined as “the additions to the
participant’s hypothetical account for the plan year.” 67
Fed. Reg. at 76126. The draft specifies that interest credits
must accrue “at a reasonable rate of interest that does not
decrease because of the attainment of age” and be provided
“for all future periods, including after normal retirement
age”. Ibid.
  Thus the Treasury’s view, like our independent reading,
looks at the rate of contribution (what goes into the ac-
count) rather than the annual rate of withdrawal at
retirement. The Treasury asks: “if this employee were
younger, would the hypothetical balance have grown more
this year?” For IBM’s plan, the answer is no. When an
employee is 20, his account is increased monthly by 5% of
his salary plus credits based on the account’s balance
multiplied by a prescribed interest rate. The same is true
when the employee turns 50, 60, or 70. Neither the contri-
bution rate nor the interest rate changes with age. (No one
contests the rate at which interest is credited—though 100
basis points over the Treasury rate looks low compared with
No. 05-3588                                                7

what investments could earn in the private market and
therefore could be understood to disfavor younger employ-
ees.)
  Plaintiffs proposes a different definition of “benefit
accrual”: annual pension (at retirement age) divided by
salary. Contributions at age 25 produce an annual pension
benefit that equals about 3% of each year’s income in
nominal dollars, while contributions at 65 produce annual
benefits only 0.4% of the year’s income. Not surprising, and
hardly illuminating; this is just another illustration of the
power of compound interest. The example depends on (a)
allowing the pension to be increased by compounding, while
(b) failing to discount the pension to present value. Stated
another way, this example compares 1966 dollars (when the
25-year-old earned the salary) with 2006 dollars (when that
person turns 65 and starts to draw a pension); of course the
return on investment looks good, but much of it is inflation
and the rest is real interest rates. The person who earns a
salary in 2005 and retires in 2006 is (materially) unaffected
by both inflation and compound interest. Nothing depends
on age. Someone who earns a salary at age 65 and waits 40
years to start drawing a pension would receive the same
3%-of-salary-per-retirement-year as the illustrative 25-year-
old who retires at 65; and someone who earns wages at 25
and retires the next year gets the same 0.4%-of-salary
annual pension, if not less (because of discounting).
  Much of the plaintiffs’ argument rests on the idea that the
account of a 25-year-old worker does not get 5% plus
periodic interest, but instead is immediately credited
with 5% of salary plus 40 years’ interest. That makes the
contributions look discriminatory: the 25-year-old worker’s
account receives 40 times as much interest credit in the
year the contributions accrue as a 65-year-old worker’s
account. Once again, however, this perspective misunder-
stands both the statute and the time value of money.
8                                                 No. 05-3588


  Nothing in either ERISA or the IBM plan requires 40 years
of interest to be credited to the account as soon as the young
worker earns wages. What plaintiffs have in mind is the
rule that, when any beneficiary (young or old) elects to take
a cash distribution or roll the account into an annuity
before reaching age 65, the plan must distribute a lump
sum calculated to be the “actuarial equivalent” of the
annuity that would be available at normal retirement age.
ERISA §204(c)(3), 29 U.S.C. §1054(c)(3). To derive the
“actuarial equivalent” of a pension at age 65, a plan must
(a) add all interest that would accrue through age 65, then
(b) discount the resulting sum to its present value. Berger
v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d
755, 762-63 (7th Cir. 2003). Plaintiffs characterize step (a)
as extra interest credits for the young, but they ignore step
(b). The discount rate may be close to (if it does not exceed)
the rate at which interest is imputed, so the amount paid
out in cash may be close to if not below the nominal balance
in the account. Berger did not consider §204(b)(1)(H)(i) and
does not hold that the process of grossing up the balance
and then discounting is a form of age discrimination. To the
contrary: Berger described this process as the means to
avoid age discrimination.
   As far as we can see, ours is the first appellate decision to
address the status of cash-balance plans under
§204(b)(1)(H)(i). The class directs our attention to two
decisions from other circuits that it says supply helpful
analysis. Miller v. Xerox Corp. Retirement Income Guaran-
tee Plan, 447 F.3d 728 (9th Cir. 2006); Esden v. Bank of
Boston, 229 F.3d 154 (2d Cir. 2000). As the class reads
them, these opinions stand for two important proposi-
tions. First, that an “accrued benefit” in a cash-balance plan
is an annuity at normal retirement age. Second, that there
is a “fundamental” distinction between defined-contribution
and defined-benefit plans. Both of these propositions are
correct, and both of them are irrelevant.
No. 05-3588                                                 9

  Start with the first proposition. What the true meaning of
“accrued benefit” may be is not controlling; §204(b)(1)(H)(i)
does not use that phrase, and we have explained why
“benefit accrual” means something other than “accrued
benefit.” Once we start to calculate accrued benefits for
people who quit or retire early, it is necessary to impute
extra interest and discount. Berger describes how this is
done. But “benefit accrual” refers to the annual addition to
the pot, not to the final payout. The holding of Esden, see
229 F.3d at 168, mirrors that of Berger and requires no
further comment. Miller extends the framework of Esden
and Berger to evaluate reductions in notional account
balances caused by previous lump-sum distributions. 447
F.3d at 733-34. See 26 C.F.R. §1.411(a)-7(d)(6) (offset may
equal the “accrued benefit attributable to the distribution”).
  As for the second proposition, plaintiffs cite language
describing the regulatory framework as “rigidly binary”
(Esden, 229 F.3d 154, 159 n.6). True enough. A defined-
contribution plan entails fully funded individual accounts;
everything else is a defined-benefit plan. 29 U.S.C.
§1002(25). Miller adds that “interest credits are defined
benefit entitlements . . . and are not analogous to the
investment growth of a defined contribution plan”. 447 F.3d
at 735. Maybe so; that depends on what the court meant by
“analogous.” Interest in a defined-contribution plan is real,
while interest credits in a defined-benefit plan are book-
keeping entries (effectively debt obligations of the employer
to the extent that the pension trust fund does not cover
them). But so what? IBM does not contend that its plan is
governed by §204(b)(2)(A), just that §204(b)(1)(H)(i) does not
whimsically require a court to find age discrimination for a
defined-benefit plan when materially identical statutory
language allows functionally identical defined-contribution
plans to operate without any taint of discrimination. To say
that defined-benefit and defined-contribution plans are
governed by different subsections of ERISA is not to say that
10                                               No. 05-3588


what is lawful for one must be forbidden to the other. We
conclude that §204(b)(1)(H)(i) and §204(b)(2)(A) indeed
provide similar treatment with respect to claims of age
discrimination.
  Only a brief mention of Arizona v. Norris, 463 U.S. 1073
(1983), another mainstay of the class’s briefs, is called for.
In Norris women making the same pension contributions as
men, all else held equal, had lower annual pension benefits.
Id. at 1082. Under IBM’s plan any differences in pension
benefits are a function of differing years of service, salary
history, or the years the balance has been allowed to
compound; age is not a factor.
  Here, as so often, it is essential to separate age discrimi-
nation from other characteristics that may be correlated
with age. That was the Supreme Court’s point in Hazen
Paper: wages rise with seniority (and thus with age) at
many employers, but distinctions based on wage levels (in
order to reduce a payroll) do not “discriminate” by age. See
also, e.g., Achor v. Riverside Golf Club, 117 F.3d 339, 341
(7th Cir. 1997) (need to show “the effect of age, isolated
from other influences”); Sheehan v. Daily Racing Form, Inc.,
104 F.3d 940, 942 (7th Cir. 1997) (expert should correct for
“potentially explanatory variables other than age” when
determining whether discrimination was because of age).
While those decisions involved different statutory regimes,
the objective is general: a plaintiff alleging age discrimina-
tion must demonstrate that the complained-of effect is
actually on account of age. One need only look at IBM’s
formula to rule out a violation. It is age-neutral.
  Now this may give a clue about why plaintiffs (a class
of older workers) have sued. The cash-balance plan replaced
a more traditional arrangement under which the annual
pension on retirement was a function of closing salary (say,
an average of the last five years before retirement) multi-
No. 05-3588                                               11

plied by the number of years of service. Because wages rise
with seniority, such a formula favors older workers. Work-
ers who quit or retire early not only miss out on the rising
wages that accompany seniority but also don’t receive credit
for the time value of money: years of service at age 30 and
at age 70 count equally in the traditional formula. Many
employers design such back-loaded systems to give the
most-experienced members of the labor force a reason (even
beyond rising salary) to stay on the job. Like a defined-
contribution plan, a cash-balance plan removes the back-
loading of the pension formula; older workers (accurately)
perceive that they are worse off under a cash-balance
approach than under a traditional years-of-service-times-
final-salary plan. But removing a feature that gave extra
benefits to the old differs from discriminating against them.
Replacing a plan that discriminates against the young with
one that is age-neutral does not discriminate against the
old.
  There is a transition issue. When IBM moved employees
from a more traditional plan to a cash-balance system, it
gave them the greater of the present value of their pension
entitlements as of the transition date or the account
balance that they would have had if IBM had a cash-
balance plan in effect since the employee came to work.
Plaintiffs complain that this gives the younger workers too
much credit for interest (because more time passes between
their work and retirement dates), but that rehashes
arguments that we’ve already rejected. Every employee
with the same salary and service record receives the same
opening account balance under the new plan. That the
change disappointed expectations is not material. An
employer is free to move from one legal plan to another
legal plan, provided that it does not diminish vested
interests—and this transition did not. Cf. Lockheed Corp. v.
Spink, 517 U.S. 882 (1996) (employers are not fiduciaries
under ERISA when they create or amend pension plans).
12                                              No. 05-3588


  Litigation cannot compel an employer to make plans more
attractive (employers can achieve equality more cheaply by
reducing the highest benefits than by increasing the lower
ones). It is possible, though, for litigation about pension
plans to make everyone worse off. After the district court’s
decision IBM eliminated the cash-balance option for new
workers and confined them to pure defined-contribution
plans. See Ellen E. Schultz & Theo Francis, How Safe Is
Your Pension?—Freeze of IBM Plan Leaves Workers Worry-
ing If Their Employer Is Next, Wall St. J., Jan. 12, 2006, at
D1; Ellen E. Schultz, IBM to Exclude New Workers From Its
Cash-Balance Pension—Move to Only 401(k) Plans Follows
Legal Questions, Wall St. J., Dec. 9, 2004, at A2. Whether
that is good or bad (for employees or society as a whole) is
not for us to say. What we can and do conclude, however, is
that the decision may again be made freely, governed by
private choice rather than legal constraint.
  The judgment of the district court is reversed, and the
case is remanded with directions to enter judgment in
IBM’s favor.
No. 05-3588                                        13

A true Copy:
      Teste:

                   ________________________________
                   Clerk of the United States Court of
                     Appeals for the Seventh Circuit




               USCA-02-C-0072—8-7-06
