Communications Firm Freezes DB Plan; Beefs Up K Program

September 12, 2003 ( - A New Jersey-based communications networks provider is freezing its underfunded US employee pension plan at the end of the year to instead focus on a considerably beefed-up 401(k) program.

Avaya Inc., announced in a news release Friday that it would end its defined benefit pension accruals December 31 for about 8,300 US salaried workers even though an employee’s age and service would continue to count toward pension eligibility and vesting.     As of a day after that, January 1, all new and existing US salaried employees can participate in its 401(k) plan, the Basking Ridge company said.

Avaya’s US pension plan had assets of $1.94 billion and was underfunded by $798 million as of September 30, 2002, the end of its last fiscal year, company spokeswoman Lynn Newman told the Associated Press.

As part of its retirement plan changes, Avaya announced K plan enhancements including a new company match program for up to 6% of salary and bonus under a complex formula.   Avaya will automatically contribute 2% of an eligible employee’s salary and bonus to the 401(k) plan whether or not an employee participates. Then, Avaya will match dollar for dollar the first 2% of employee deferral. Avaya will match $0.50 on the dollar for the next 4%.

Avaya also is removing the current $2,500 company match cap and is likewise dropping a variable match based on the performance of the business.   Avaya also announced it will pay for professional financial planning services for employees to help them “integrate retirement planning into their overall financial management.”

The company is making no changes to the pension for its 5,200 union employees whose pension is covered by collective bargaining agreements. Current retirees also are not affected by the change.

“The decision to change the pension plan was not made lightly. We sought to further strengthen Avaya’s financial position while continuing to provide an attractive overall pay package for employees,” said Don Peterson, Avaya chairman and CEO, in a statement. “The change to the plan represents a portion of the $25 million to $30 million in permanent quarterly cost reductions we said we would take out of the business beginning in fiscal 2004.”  

According to the company, its pension changes and a $105-million additional voluntary contribution to the pension plan it announced earlier this week will, over time, reduce the company’s future benefit obligations and help improve the pension plan’s funded status.