Are all hybrid plans as bad as
the negative publicity says they are? Not for three
employers that made successful launches
It frustrates Rita Metras that cash balance plans have a
negative reputation. At Eastman Kodak Co., where she is
director of worldwide benefits, she says the plan the
company started in 2000 has not stirred any
controversy.
"Because of a couple of situations, cash balance plans
have the reputation as something that is not as desirable
as traditional plans," Metras says. "[Yet,] more than 1,200
companies have converted, and only a few have gotten any
kind of negative press. That means that we are not hearing
anything about 99% of them."
This story is about three hybrid plans from that
99%three companies that say their plans have succeeded.
They point to a couple of main factors: offering existing
employees a choice between the cash balance plan and
traditional defined benefit plan, and conducting a
communications campaign that provides plenty of
individualized and objective information and help to
employees.
Amid all the publicity about hybrid plans that
shortchanged some workers, "We are trying to say, 'There is
also a good reputation out there,'" says Paul Zurawski,
Honeywell International Inc.'s Washington-based director,
tax and benefits policy. "Honeywell is proud of all its
benefit plans. We are also proud of the conversion process
that we went through. We are happy to discuss it. We have
nothing to hide."
Fairly or unfairly, cash balance plans have received a
lot of negative publicity. Critics say some companies have
done conversions that force older workers into plans that
leave them with lower benefits than they expected, while
others have not explained complex rules and formulas enough
so that employees can make an informed choice between a
traditional defined benefit plan and a cash balance
plan.
Ask some of cash balance plans' traditional critics
whether a good cash balance plan can exist, and you hear a
lot about the problems they see with existing plans. Yet,
they also allow that some cash balance plans may have good
elements.
"If you deal with the age discrimination issues, we do
not think it is a bad plan design," says Karen Friedman,
policy director at the Washington-based Pension Rights
Center. "Certain parts are good: They are employer-paid,
and there are guarantees through the PBGC (Pension Benefit
Guaranty Corp.). Some workers like them because they are
easy to understand, and they can carry the money with
them."
Janet Krueger, the former IBM Corp. employee who helped
expose problems with Big Blue's cash balance conversion,
puts it even more cautiously. "Some do seem to be in the
best interests of employees, and some do not," she says,
"but nobody has sat down and said what makes a conversion
fair and what makes it unfair. What is being done is ad
hoc."
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"It Is Your Decision"
Saving money was not what motivated Kodak when the
company started working on its new cash balance plan in the
late 1990s, Metras says. Rather, a mobile workforce needed
something different. "When we went out to recruit
employees, we felt that we wanted to look more like the
companies we compete against for talent," she adds, "[and
employees these days] are not really interested in, 'What
can you do for me at age 65 or later?' They want to know,
'What can you do for me now?'"
The plan started up in January 2000, and new employees
as of March 1999 automatically went into the cash balance
plan. The company makes a contribution equal to 4% of an
employee's pay, which grows at the 30-year Treasury rate.
Each employee gets the same contribution, regardless of
service. The cash balance formula differs from the
traditional defined benefit formula in that the latter
builds up benefits more at the end of an employee's
career.
Kodak's current employees could pick between the old and
new plans. "We offered a choice to everybody. If people had
any concerns about the plan, they did not have to go with
it," Metras says. "Choice was pretty uncommon when we did
ours. We thought this would be the cleanest thing to
do."
Metras declines to say how many employees stayed and how
many switched when they were given the one-time choice.
However, the company did offer them an incentive: Kodak
also has a 401(k) plan, and those who went with the new
plan receive a match, while those who stayed with the
traditional plan do not. The match is dollar-for-dollar up
to an employee's 1%-of-pay contribution, then 50 cents on
the dollar for the employee's next 4%-of-pay
contribution.
Beyond giving employees the right to choose, Metras
says, the other thing that made Kodak's new plan work was
the educational materials and resources it provided: "If
you are offering a choice, you need to give people enough
information to make a solid decision. We also did not rush
it. They had plenty of time to make their decision."
Kodak gave every employee a "detailed" decision guide,
Metras says, with a personalized fact sheet with numbers
and graphics that projected their benefits in the old
versus the new plan. If an employee could possibly get less
money under the new plan versus the old, the numbers and
graphics reflected that. The company also offered employees
modeling software they could use to change assumptions,
such as the interest rate. Other elements included employee
meetings, a help line staffed by financial experts, and a
Web site.
The communications campaign's main theme was, "This is
our plan for new hires. Some of you might want to be in
it," Metras says. "We tried very hard to make it completely
objective. We said, 'It is your decision. We will give you
the resources to help you decide, but we are not going to
decide for you.'"
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