Cover | Published in July 2004

One Bad Apple

Are all hybrid plans as bad as the negative publicity says they are? Not for three employers that made successful launches

By Judy Ward | July 2004
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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."


"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.'"