Published in April 2000

Henry Herrin, 54, Gives Cash Balance Formula a Thumbs Down

By Randy Myers | April 2000

Like many of his colleagues at Motiva Enterprises, 54-year-old Henry Herrin cannot quite shake the notion that he has been wronged.

Like many of his colleagues at Motiva Enterprises, 54-year-old Henry Herrin cannot quite shake the notion that he has been wronged.

Herrin is a buyer at the Port Arthur, Texas, oil refinery operated by Motiva, a Houston-based joint venture between Shell Oil Company, Saudi Aramco and Herrin's former employer, Texaco. Shortly after the joint venture was created in 1998, Herrin and his Texaco colleagues were told that their participation in Texaco's traditional defined benefit pension plan was being frozen and that, beginning in March 1999, they would participate in a cash balance plan sponsored by Motiva.On its face, the change did not seem too worrisome, since it meant that Herrin would now receive two pensions when he retired. The first would be from Texaco. The second would take the form of whatever benefits he would be able to accumulate under the new cash balance plan, which the company would be funding with employer contributions equal to 7% of his annual salary.

Texaco also took measures designed to help prevent long-time employees like Herrin from being shortchanged by the switch to the cash balance plan. For example, in figuring out their Texaco pension benefits once they finally retired (based on a traditional years-of-service and final-average-pay formula), Texaco agreed to use their final pay levels at Motiva, which presumably would be higher.

Finally, Herrin says, Motiva also agreed to contribute money to a 401(k) plan for Texaco employees who were folded into the joint venture, regardless of whether the employees themselves made any contributions. These company contributions are made on a graduated scale beginning with an amount equal to 3% of salary after one year of service and climbing to 10% after eight years of service. Previously, Texaco had matched employee contributions to its 401(k) plan dollar for dollar up to a maximum 6% of salary.

The stated objective of these various moves, Herrin says, was to make sure that long-time employees like him did not walk away from their careers with lower pension benefits than they would have enjoyed had they remained active in the old plan. That was a big issue, since Herrin estimates that the average age of the Texaco employees folded into Motiva was about 51. But, based on the calculations that he has been able to make, Herrin expects to retire at age 60 with a smaller lump sum payout anyway—as much as $26,000 to $43,000 less than the approximately $252,000 he would have walked away with under the old plan.

Herrin concedes his projections are not precise, but complains that his employer has not provided sufficient information for him to make exact calculations. In fact, Herrin says he based his calculations on a benefits table the company published in 1984.

"With this alliance (joint venture), it seems like there's nothing but chaos when you try to figure out what you're going to have," he gripes. Herrin, who currently earns about $51,000 a year, says he is not too concerned about his ability to fund his retirement, in part because he has socked some money away in mutual funds outside his company-sponsored retirement plans and because his wife Kay, a schoolteacher, also will draw a pension after she retires. And, of course, Herrin will draw a Social Security benefit.

"I feel like I'm okay," Herrin says. "I have other investments. When I first retire, I'll probably use a portion of my pension money, but I don't know how much yet. My main idea is to use some of the interest off the money, but not the principal.

"My big deal is just to make sure that I get all that I should," Herrin concludes. "Cash balance plans may be good for the young worker, because he has time to build up his funds. But it only hurts older people."