NU Online News Service, March 29, 2004, 12:58 p.m. EST – Watson Wyatt & Company, Washington, has put out a study that defends cash-balance pension plan conversions.[@@]
Watson Wyatt, a benefits consulting firm, says 89% of the 55 large employers it studied spent large sums to protect older workers against the effects of conversions to cash-balance pension contribution formulas from traditional pension contribution formulas.
One-third of the employers that changed formulas gave workers the choice of staying with the old plan or joining the new plan, and 31% continued to apply the old formula to contributions for older workers.
Another 13% guaranteed that employees would get the highest possible benefit level, whether that benefit level came from applying the old formula or the new formula.
Most of the companies that did not provide “transition benefits” were having severe financial problems when they converted their pension plans, Watson Wyatt says.
Employers that sponsor traditional defined benefit pension plans assume that employees will accumulate guaranteed pension benefits over many years. Sponsors make smaller contributions for younger employees, on the assumption that the contributions will have decades to generate interest earnings.
Sponsors of cash-balance pension plans also promise that employees will receive a certain amount of income at retirement, but members of cash-balance plans accumulate pension benefits one year at a time. Sponsors contribute as much for new members of cash-balance plans as they contribute for longtime members.
The big benefits consulting firms and other supporters of cash-balance conversions argue that cash-balance plans are much better for modern employees, who usually change jobs several times over the course of their careers.
Opponents say the conversions may take benefits away from older employees.
Pension consultants at Watson Wyatt say encouraging cash-balance conversions may be an important strategy for protecting the defined benefit pension system.
If the federal government hinders employers’ efforts to convert to cash-balance designs, many employers will drop defined benefit plans altogether, and that means more employees will have to depend entirely on their ability to manage 401(k) plan assets, Watson Wyatt says.