Voluntary change to cash balance plan: how does one decide?

[Guest Franklin Evans]

An acquaintance is faced with deciding for himself whether he should convert from his existing pension plan to a new cash balance plan, both under his current employer. I've been away from administration for way too long to help him myself, so I offered to post a message here for him. Before you ask for details, I know that he is 40 with 20 years of service, but I know no details about either plan.

1) Where can he go for some objective advice? For example, which category(ies) in our Yellow Pages should he look into?

2) If I recall correctly, it used to be that the employer bore the responsibility for providing comparison calculations. Is this still true? What questions should he be asking? I get the impression that his HR dept is leaving him high and dry with this.

Many thanks,

Franklin Evans

[MGB]

Yellow pages: "Actuaries"

2. No, the employer has not been required to provide much detail in the past other than a general description of the change. Last year's tax bill (EGTRRA) expanded on this requirement. However, the law provided no details on what needs to be in the notice to participants and left it to the IRS to write regulations on the matter. The regulations are expected to be released any day now (they are reportedly completed and only need various sign-offs within the Treasury department).

Once these regulations are issued, it is expected that they would require comparative analysis that covers all issues. The toughest issue to illustrate is the difference between staying in the plan all the way to retirement or leaving within a few years after the new plan is in place. This is where the major decision process comes in because there are significant differences between the plans under these two situations (what is the probability that the person will terminate or be let go before retirement?). As you can imagine, the permutations for all hire dates, ages and possible termination dates is enormous. The reason why this legislation was passed is that plan sponsors had typically only shown the effects assuming everyone stayed until retirement (if they even showed this), which misses a major part of the analysis.

A "good" set of explanations from a plan sponsor would include some way (e.g., a website) to model an individual's own situation and expectations of the future. It is not expected that the regulations will go to this level of detail (although the original language in the bill said to do this before they stepped back and left it to regulations), but instead will require various combinations in sample illustrations.

One problem for your friend: If the plan sponsor has already issued this "notice" under a good-faith effort to comply with the new law, then they may not be required to revise it under the new regulations.

General impression: (Assuming the defined benefit plan was based on an average, such as five years, of final pay.) IF they intend to stay to retirement, for the age and service stated, they would be better off in the final-pay plan. They happen to have the worst demographics for this situation. Switching from a final pay defined benefit to a cash balance (or defined contribution) in mid-career is the worst possible scenario. Those switching very young or very old are not as negatively affected (the very old can be heavily negatively effected, depending on the grandfathering provisions of the old benefits). On the other hand, switching from a cash balance or defined contribution to a final pay defined benefit in mid-career is the best thing that can happen (although few employers have been going in this direction - but a person looking for a new job in mid-career should be looking for the final pay plan in the new job).