More and more employers in cash-balance plans, which combine features of a defined-benefit plan with those of a defined-contribution account, are scrapping them in light of regulatory uncertainty around them. Most of these companies are switching to 401(k) plans because they offer more portability to employees and put the risk of choosing and managing investments on the worker rather than the employer, consultants say.
“Many employers have certain fears about cash-balance plans in the current regulatory environment and as a result some have exited the defined-benefit system completely or partially,” says Ethan Kra, chief actuary for retirement with Mercer Human Resource Consulting in Washington, D.C.
In cash-balance plans, the employer contributes all of the funds, but each worker has his or her own account and the ability to take a lump-sum payout. Some companies’ plans have met with stiff resistance from employees who have sued over them, saying they discriminate against older workers. Most notable of these suits is a case involving IBM, which adopted a cash-balance plan in 1999. In 2003, a U.S. District Court sided with the employees, and IBM agreed in September to pay $300 million to partially settle the suit, but is appealing the decision.
As long as this issue remains unresolved, more employers are going to drop these plans, consultants say. “It would behoove regulators and Congress to address this issue and provide some guidance,” Kra notes. In the meantime, companies such as IBM are dropping these plans for new employees and replacing them with 401(k)s.
SBC’s decision to freeze its cash-balance plan for new management employees was not related to those regulatory concerns, says Anne Vincent, a spokeswoman.
“It was a combination of several reasons,” she says, adding that SBC “wanted to shift the focus to benefit long-serving employees.” The cost of providing plans was a consideration as well, Vincent says. SBC also offers a 401(k) with an 80 percent match in company stock for up to 6 percent of employees’ contributions. And despite speculation that the change in the pension plan was related to the merger with AT&T, that’s not the case, Vincent says.
The move by SBC highlights a reality that many companies might consider, observers say.
“One thing SBC may be looking at is the fact that traditional pension plans provide the largest amount of benefit accrual in the last 10 years of service,” says Greg Braden, a partner in the Atlanta office of law firm Alston & Bird.
That means that those who really benefit are the people who spend their entire careers with SBC. “And that is extremely rare these days,” Braden says. “They may be looking at it from the big picture and say, ‘We may save money in the long run by staying with a traditional defined-benefit plan.’ ”
After doing the math, some employers may realize that it is cheaper to offer a traditional pension plan than switch to a defined-contribution one, he adds.
More companies may follow in SBC’s footsteps and choose traditional defined-benefit plans because of a shortage of experienced workers, says Mike Johnston, practice leader in the retirement business of Hewitt Associates. “Experienced workers are in demand right now,” he says, adding that traditional defined-benefit plans are valuable at keeping these employees around.
Johnston, however, believes that with so much uncertainty about the future of traditional pension plans, they will continue to lose steam. At the moment, the Bush administration’s pension funding reform proposal is causing some companies to stay away from these plans, at least for now.
So while defined-benefit plans may not die off as quickly as some thought, Johnston says, “I’m not sure I would erase the obituary yet.”