Pointers For Planners On Cash Balance Plan Conversions
By April Caudill
One of the questions planners are hearing on a regular basis from some of their clients is how to choose the best of several options when the clients employer decides to convert a defined benefit plan to a cash balance plan.
This choice is particularly critical for participants between the ages of 40 and 55. Less frequently, but just as important, employers need advice on whether to convert from a defined benefit plan to a cash balance plan, or which to implement from the start.
Planners offering advice in either of these situations should have at least a basic working knowledge of how cash balance plans and conversions operate.
Cash balance plans are essentially defined benefit plans that account for benefits like a defined contribution plan. The biggest difference is that with a cash balance plan, benefits typically accrue evenly over the employees working career instead of being backloaded in the final years before retirement.
In spite of a recent Internal Revenue Service announcement that it was withdrawing a section of its controversial proposed regulations for cash balance plans, it appears the plans are here to stay. The offending provision caused a technical conflict with some other nondiscrimination rules, and it appears likely the IRS will correct it and reissue the proposed regulations shortly.
Despite strong (and sometimes misinformed) objections by much of the press, cash balance plans by themselves are not necessarily unfair. Over a typical employees working life, they offer considerably more security than, for example, a 401(k) or other defined contribution plan, especially in a down market. The cost over time is only a little lower than that of a defined benefit plan, but benefits are more evenly spread over the employee population. Both plans involve required contributions, meaning that they are ill-suited to employers who do not have a stable cash flow.
The problem that has generated so much publicity for cash balance plans is that depending on how the employer chooses to handle the transition, converting from a traditional defined benefit plan to a cash balance plan can be anything from a no-lose proposition to a devastating blow to employees between the ages of about 40 and 55.