Study: Cash Balance Plans Aren't Great Cost Savers
The Watson Wyatt study found that the majority of employers (55%) experienced a minimal effect on costs or actually saw costs increase during hybrid plan conversions, while less than half (45%) realized cost savings. Even then, those savings weren’t much to trumpet about; the average was 1.4% after factoring in enhancements that some employers made simultaneously to their 401(k) plans, Watson Wyatt said.
“Critics try to paint all conversions to cash balance plans as attempts by companies to cut costs at the expense of workers, but the facts simply do not support these assertions,” said Sylvester Schieber, Watson Wyatt vice president of research in a statement.
In fact, according to Watson Wyatt’s 2000 research, the
typical company realizes little, if any, net cost savings
when it shifts from a traditional pension to a cash balance
or other hybrid plan design. When employer costs remain
neutral, almost 80% of participants do better under the
hybrid plan formula, Watson Wyatt said.
The study found that when companies reduced costs in the conversion it was largely due to the prospective elimination of subsidies for early retirement, which typically augment benefits at around age 55. The effect on normal retirement benefits was much more muted.
Plan Design versus Plan Costs
It is important to separate the distinct issues of pension plan type and the amount of cost savings, according to Eric Lofgren, Watson Wyatt global director of benefits consulting. “With traditional pension plans, more than three-quarters of benefits can go to only 10% of workers and, naturally enough, that 10% would like to keep them. But how is that fairer than newer designs that seek to distribute benefits more democratically among workers?” asked Lofgren in a statement. “No one type of pension plan is inherently more costly than another, and the oft stated equation that cash balance plans reduce benefits by 20% to 50% is proved false by our research. An employer can just as easily design a rich cash balance plan or a stingy traditional pension.”
The Watson Wyatt survey also found that most responding
companies provided for the older employees – most often
portrayed as the victims of cash balance conversions. The
vast majority of plan sponsors studied (88%) included
transition benefits to minimize the effect of the
transition for these longer tenured employees. In
nearly two-thirds of the cases analyzed, workers age 50
with 25 years of service would have received an equivalent
or higher benefit at 55 after the transition than if they
retired at age 55 under the prior plan. Nearly another
third would have had some benefit reduction but were at
least partially protected by a transition benefit.
The Watson Wyatt study was based on an analysis and
financial modeling of the benefit provisions in 78 hybrid
plans, representing approximately one-fifth of such plans
in existence in 2000. The study also included an opinion
survey of 79 employers that had made the shift to a hybrid
plan to provide additional perspective on motivations for
adopting
one of these plans.
Copies of the research report, The Unfolding of a
Predictable Surprise: A Comprehensive Analysis of the Shift
from Traditional Pensions to Hybrid Plans, can be
downloaded from Watson Wyatt’s web site at
www.watsonwyatt.com
.
Separately, there was word from the US Department of Treasury and the Internal Revenue Service that they were withdrawing because of public protests proposed regulations on how employers can prove a cash balance plan is not discriminatory (See Regulators Pull Back Some Cash Balance Conversion Rules ).
According to an announcement by both agencies, comments from the public showed that the proposed 401(a)(4) rules would make it difficult – if not impossible – for plan sponsors converting from a traditional pension plan to a cash balance plan to give participants aid to help ease the changeover.
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