DB Plan to Cash Balance -- A+B question

[Guest RiskAdvisor]

We have a client that had a defined benefit plan. Benefit accruals were frozen in 2007. Effective Jan 1 2008 the company elected to switch to a cash balance plan. They chose the A+B method where the PVAB of the DB Plan became the opening balance in the CBP.

The client now is considering distributing the initial balance/defined benefit plan portion of the plan to participants to avoid being responsible for interest credits on a go forward basis. Is this doable and if so, what is required on the employer and TPA's part?

Thanks,

RiskAdvisor

[Effen]

Probably not. You said they "had" a defined benefit plan, then you said they "switched it to a cash balance plan". Did you terminate the first defined benefit plan and start a second defined benefit plan (cash balance plans are still defined benefit plans) or did you just amend the original defined benefit plan into a cash balance plan?

If you amended the original defined benefit plan into a cash balance, I doubt they could pay out the prior accruals. What would be the distributing event? All you did was change the benefit formula.

[david rigby]

Even if only one plan, you may be able to split it into two plans ("spinoff) and then terminate "plan A". I doubt that would be advisable, but it may be possible.

[Effen]

I agree with David.

Since you are the "RiskAdvisor" you should also know another way to avoid the risk is to stay out of the equity market. Cash balance accounts generally only guarantee around 5%. I saw a 1-yr money market last week guaranteeing almost 4%. I see a lot of people terminating their db plans because they are afraid of the investment risk. What they seem to not want to hear is that you can avoid a lot of the risk by investing in a very conservative portfolio. Uneducated financial advisors continue to push equities for pension investments and don’t seem to consider more conservative alternatives. Equities loose money, client screams and curses the plan. Pick conservative investments, just hit consistant singles.

[mwyatt]

Of course, as we're finding out now, some of these "safe" fixed income investments are anything but...

[ak2ary]

Couple of points

Converting the prior accrued benefit to an opening balance is NOT the A+B method of cash balance conversion.

Second, I believe that in a spinoff, you cannot split the accrued benefit for a single participants between two plans you can send some people to one plan and others to another...but their whole accrued benefit must end up in one plan or another.. 1.414(l)-1(n)