Mehmed, Manager, Retirement Plan Administration and Vendor Relationships, FedEx Corporation, said the plans can be an important personnel retention tool for many employers.
In fact, Mehmed told those attending a cash balance plan discussion at PLANSPONSOR’s recent PLAN DESIGNS 2007 conference, her company’s 2003 move to add a cash balance component was a necessary step – despite the traditional controversy. Declared Mehmed: “Some companies need them to compete.”
While admittedly not every employee was overjoyed about the move, Mehmed said a FedEx survey found that 80% of employees understood how the plan works because of the transparency helped by each participant having an individual account. “It’s visible and easy to understand by the employees,” Mehmed said.
She said when the package delivery service added the cash balance element, new workers were directed to the cash balance program, while existing workers could choose that or the original defined benefit (DB) plan (see Off-Balance ).
As of June 2008, she said FedEx plans to roll out the cash balance program to all of its workers. In its initial announcement of that change earlier this year, FedEx said the Pension Protection Act (PPA) and pension accounting changes also played a part in the decision. (See PPA and Accounting Regulations Prompt FedEx Retirement Plan Changes ).
Mehmed said it was important for plans going to a cash balance arrangement to also beef up their 401(k) offerings. She said FedEx employees were told that the company would end up spending about the same amount as it did with a traditional DB plan with the cash balance program and its strengthened 401(k).
A ‘Positive’ Legal Landscape
Meanwhile, Richard J. Bottelli, Jr. Principal at Milliman, predicted that with the PPA’s prospective shield against age discrimination claims, and the general trends in the cash balance cases working their way through the courts, more companies will opt to unfreeze their DB plans and convert to cash balance.
In particular, Bottelli pointed to the August 2006 ruling by the 7th U.S. Circuit Court of Appeals overturning the lower court decision throwing out IBM’s cash balance arrangement (See IBM Cash Balance Discrimination Ruling Reversed ) as being important in the development of the law governing the plans.
The nation’s high court rebuffed requests to review the 7th Circuit case in January 2007 (See US Supreme Court Turns Away IBM Cash Balance Appeal ). “I think the legal landscape going forward is a very big positive,” said.Bottelli.
Robert O. McBride, Vice President and Senior Consulting Actuary at Diversified Investment Advisors, told the group that cash balance plans can help participants better deal with making sure they have enough money to last through their retirement years. “When faced with longevity risk, cash balance plans seem like a great benefit for employees,” he said.
While the PPA offered its prospective blessing to cash balance arrangements, historic disputes over the programs have been the subject of intense legal battles around the country (See Rules/Regs: Prevailing Wisdom ).