Administration April 6, 2002
FAILURE TO COMMUNICATE – Report Sheds Light on Cash Balance
June 28, 2000 (PLANSPONSOR.com) - Plan sponsors and employees have been subjected to a great deal of information - and potential misinformation - about cash balance conversions over the past several months, according to a new report.
Reported by email@example.com
The report was prepared by the UNIFI Network, previously PricewaterhouseCoopers’ Global Human Resources Solutions practice. Kwasha Lipton, now a part of the UNIFI Network, developed the first cash balance plan in 1985.
UNIFI surveyed 100 plans of various sizes that have converted to a cash balance program over the past 15 years, covering 1.25 million employees and $133 billion in plan assets. The survey notes the following:
- The use of high interest rates to determine opening balances is not common practice; higher interest rate assumptions result in a lower converted balance for employees, sometimes referred to as the “wear-away effect.” Nearly three-quarters (72%) used an interest rate no higher than the 30-year Treasury at the point of conversion. In only 15% of the cases was the rate more than 1 percentage point higher than the Treasury rate (which would tend to create wear-away). In fact, 87% of the plans established beginning balances that were at least equal to the lump sum present value at the point of conversion.
- Grandfathering and transition pay credits to minimize the impact of a conversion are the norm; 81% use one/both of those approaches to minimize the impact of a conversion.
- Employers weren’t focused on saving money in considering the conversion; two-thirds (67%) expected the long-term costs of the new retirement programs to be the same or more.
- Benefit reductions can occur; cuts of 20% or more can occur with employees closer to retirement – but that is a future benefit potential. ERISA doesn’t allow accrued benefits to be taken away. The survey also noted that workers that are lower paid, mobile, or female were most likely to benefit from the conversion to cash balance.
Failure To Communicate
The survey did identify some shortfalls in communicating the change to employees:
- In most cases, employees aren’t getting details about significant benefit reductions
- In about half of the cases, employees found out their beginning balance 3-6 months after the conversion, along with some details about the calculations
- Typically account balances are communicated annually – but grandfathered benefits are generally not communicated.
– Nevin Adams firstname.lastname@example.org
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