Cash-Balance Pension Plans: Who Benefits, Who Doesn't

Unlike "traditional" defined-benefit pension amounts, vested defined-contribution pension plan accounts are portable and can usually be left in the hands of the former employer, rolled-over into an Individual Retirement Account (IRA) or, in come cases, transferred to a new employer's plan. In any case, the accounts have the potential of increasing in value over time as a result of positive investment performance.

An employer is not legally obligated to provide either a defined-benefit or a defined-contribution plan for its employees. But, in the past, many larger employers have provided both a "traditional" defined-benefit pension plan plus a defined-contribution plan such as a 401(k). In recent years, however, much financial-press attention has been directed toward those employers who have converted their "traditional" defined-benefit plans to a "hybrid" form of defined-benefit plan referred to as a cash-balance pension plan.

Under a cash-balance pension plan, each year an employer contributes a certain percentage of an employee's current pay to the plan coupled with an interest guarantee. Interest guarantees may be fixed or tied to a variable rate such a U.S. Treasury rate. Like defined-contribution pension plan balances, vested cash-balance plan balances are portable and follow the employee after he or she leaves the employer. These withdrawn account balances can then be rolled-over into an IRA or transferred to a new employer's plan if that plan accepts such transfers. Because they are considered defined-benefit pension plans, cash-balance plans must also offer terminating employees the option of receiving their distribution in the form of a monthly annuity.

Cash-balance pension plans favor younger employees who change jobs more frequently then their "baby boomer" coworkers and appreciate the ability to take their vested cash-balance plan accounts with them when they move from one company to another. In addition to enabling employers to attract younger workers, cash-balance plans generally reduce an employer's pension costs. As a result, a NEW YORK TIMES article published on February 3 reported that more than 300 companies with billions of dollars in assets have adopted cash-balance pension plans.

The problem encountered by employers planning to replace a "traditional" defined-benefit pension plan with a cash-balance plan involves age discrimintion.

When a "traditional" defined-benefit pension plan is converted to a cash-balance plan, the value of the benefit calculated under the old formula may exceed the benefit amount determined under the cash-balance plan formula. This pension discrepancy increases based on the age of the plan participant. In such a case, plan participants may

Go To Page: 1 2 3