DBSummit07: Striking the Right Balance

Is cash balance a workable design alternative to traditional pension plans?

align=”center”> Audio Recordings of the 2007 DB Summit Are Available Here


Regulations changing funding and accounting rules for defined benefit pension plans and protection afforded prospectively by the Pension Protection Act against age discrimination claims have led some plan sponsors to consider cash balance as a workable design alternative to traditional pension plans.

Speaking to audience members at PLANSPONSOR’s 2007 DBSummit in Washington, D.C., panel member Renee Mehmed, Manager Retirement Plans at FedEx Corporation, said her firm moved to a cash balance plan, primarily due to accounting rule changes. Mehmed said the cash balance plan has been easier for employees to understand because they can actually see a nominal plan balance. Additionally, the cash balance design has increased portability, and resulted in cost-sharing of retirement benefits.

The effect was substantial on FedEx’s balance sheet, according to Mehmed. In years the firm recorded profits, it would have had none to reinvest in the company or employees, had it remained with the traditional pension plan design, she said.

In communicating the move to employees, Mehmed said FedEx emphasized that the firm was keeping a defined benefit plan when others were not. The firm was honest about its reasons for the move, and included an estimator tool for employees to see the effect the move would have on them. FedEx also added target funds and advice to their offering to give employees all the tools they need (see FedEx: Cash Balance Plan ‘Visible and Easy to Understand’ .

Even if employees were not happy with the change, they understood the business reasons for the move, Mehmed noted.

Panel member Richard Bottelli, Principal, Consulting Actuary at Milliman, warned that the Internal Revenue Service is looking at whether certain cash balance plan designs pass minimum accrual rules. The IRS is not approving of the “greater of” formula where grandfathered employees get the best of the old pension plan benefit or new cash balance benefit, he said (see Industry Groups Ask for Treasury for Cash Balance Intervention ).

Benefit groups are considering asking the IRS to stop plan qualification analysis until it issues guidance on its position on different cash balance plan designs, according to Bottelli.

Rick Simons, VP Sales, Nationwide Retirement, pointed out that different employer needs determine which type of plan design works best. Bottelli added that a plus in sticking with the traditional DB plan design is the incentive it gives employees to stay with their employer.

Ironically, the increased portability and ability to take a lump sum distribution could drive employees to leave, he warned.