Cash Balance Conversions Increase Retirement Plan Costs

The post-conversion cost increase takes into account measures firms take to protect workers during conversions and to enhance their 401(k) plans.   In fact, Watson Wyatt’s study of 55 companies that converted to cash balance or pension equity plans after 1999 found the average cost increase would have been much higher – 5.9% – if not for the inclusion of seven companies that were at or near bankruptcy when they converted to hybrid plans.

“The charges that most companies convert to cash balance plans to slash costs, or that they don’t protect current employees near retirement, are simply not true,” Eric Lofgren, retirement practice director at Watson Wyatt said in a news release.  “The vast majority of employers take great pains to protect workers during conversions.  The issues we hear so much about are, if anything, yesterday’s problems.”

To illustrate this point, Watson Wyatt points to an earlier study conducted by the firm examining cash balance conversions prior to 1999.   In that study, employers were saving 1.4% after the cash balance conversion.   Even though companies in the two studies are paying essentially the same for pay credits – on average 5% in the latest release, 5.1% in the previous study – Watson Wyatt says the main difference is companies are now paying more in transitional benefits.  

Overall, Watson Wyatt found nearly nine out of 10 (89%) firms provided special transition benefits to protect workers during conversions.   For example:

• 33% gave workers the choice of staying with the old plan or opting for the new
• 31% grandfathered older workers under the prior formula
• 13% guaranteed the better of the old and new benefits.

Of the companies that did not explicitly provide transition benefits, most were in severe financial distress at the time of conversion, Watson Wyatt said.

Pointing to these findings, Watson Wyatt finds Treasury Department proposals requiring companies to offer transition benefits to all workers, regardless of their age or job tenure are unnecessary.

“The Treasury proposal is a ‘blanket fix’ aimed primarily at isolated problems that have long been resolved,” Steve Mirante, managing consultant of Watson Wyatt’s New Jersey office said in the news release.  “The added mandates would certainly drive more employers out of the defined benefit system.”

Copies of the full research report will be available on  www.watsonwyatt.com  in mid-April.