Cash Balance coversion

[Guest Quacka]

It is likely my employer will convert a traditional DB to CB in the near future, and I will be running the plan. Now is my opportunity to advise on the conversion...and to impact the design of the plan.

The traditional DB has about 1,000 actives. Several years ago it was frozen for new entrants, with new hires receiving a DC pension benefit instead.

It looks like the CB contribution will be a fixed % of compensation with a fixed interest credit. All eligible employees will receive this...no one will receive future accruals under the traditional DB formula.

It's been years since I dealt with CB plans, and I know the law has changed with PPA, etc. What are the basic design considerations for the conversion and the attendant pros and cons? Thanks.

[ETA Consulting LLC]

It's just a big Money Purchase Plan on a DB platform. Instead of an actual account with real investment gains and losses, the plan provides a calculated rate of return. The trust may actually lose money, but the participants' balances will remain unaffected (as the employer continues to bear the risks of investment losses). So, the account is "hypothetical", but reflects the particpants' entitlements under the plan.

The big difference is that all employees earning the same level of pay will typically receive the same level of benefit (regardless of their proximity to retirement). Someone who is 25 years of age making $50K per year will receive the same accrual as someone who is 60 years of age making $50K per year. So, unlike traditional DB, the costs do not explode for older employees who are closer to retirement.

The big point of contention (IBM case) has been that a DB plan, by definition, cannot provide a decreasing benefit as employees get older. Even though the allocations are the same, a DB plan defines the benefit as the amount payable at retirement. Since the 60 year old is closer to retirement than a 25 year old, the same "allocation" violates this rule and therefore fails to meet the requirements. PPA changed this rule to basically define "simularly situated" employees with respect to "compensation" as to avoid the age issue.

Good Luck!

[Guest Quacka]

What about the current actives in the traditional DB...how to treat them at conversion?

Convert the traditional DB accrued benefit to an opening CB? Would that mean the traditional DB formula would not have to be computed again when the person commenced?

Use a "greater of" formula? Would that only be applicable if accruals under the traditional DB continued?

Grandfather only the older, longer service participants in the traditional DB formula?

A combination of approaches?

How do transition credits work?

How do you avoid a wearaway situation?

[SoCalActuary]

Here on the discussion board, you can get some pointers on areas to investigate.

But you need to use good advice from the actuary, and you need to review the issues in last year's guidance.

Some of this comes from papers published in the trade journals, some from books like the Answer Book series, and some from just poking around.

Start with the IRS regs issued in 2010.

[david rigby]

The big difference is that all employees earning the same level of pay will typically receive the same level of benefit (regardless of their proximity to retirement).

This is a design decision (as summarized in the orginal post), but it is not required.

Follow SoCal's advice. If you need it, don't hesitate to engage another actuary for a second opinion.