Gene Kalwarski and his staff had been waiting for the better part of two years for the IRS to act.
Last week, the agency finally approved the Adjustable Pension Plan his firm had co-designed for the New York Times and its employees in the Newspaper Guild.
The IRS signoff came at the 11th hour; a July deadline was fast-approaching.
“We were sitting on the edge of our seats for quite a while,” said Kalwarski, CEO of Cheiron, an actuarial consultancy based in MacLean, Va. “The IRS just met the deadline. We knew that the APP we designed would be viewed favorably, but the government was concerned the certification of the Times plan would have implications for traditional hybrid plans.”
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Cheiron is certainly counting on it.
That the IRS took so long to consider those implications suggests the true distinction between APP plans and traditional, hybrid pension plans. Too often, plan sponsors regard each to be one and the same.
In an APP like the one Cheiron helped design for the Times, there are no individual account balances. That is the core distinction between APPs and most hybrid benefit plans.
But APPs are distinct from traditional defined benefit plans in another important way.
The risk in an APP is balanced between the employer and plan participants in a way that doesn’t exist in traditional defined benefit plans.
“Everything is pooled — all of the employees contributions and all of the employer’s contributions,” Kalwarski said. “That’s a vital distinction between what we designed for the Times and a traditional hybrid plan.”
Also, APPs are built with an “adjustable” component designed to help ensure a plan meets its obligations. Ongoing reviews of the performance of the pooled investment in an APP — typically done annually — determine how much more or less the sponsor and the employees have to contribute to maintain the health of the plan.
“Once you retire the benefit is set,” says Kalwarski. “While you are working it is not.”
While APPs are new to the scene, regular hybrid plans have been around for some time. In fact, they’ve become substantially more prevalent since 2000, according to the Pension Benefit Guarantee Corp.