Cash Balance & Pension Equity Plans

[Chester]

The March-April 1999 issue of the ASPA newsletter "The Pension Actuary" has an article beginning on page 4 which explains the various types of hybrid plans, including both the cash balance and the pension equity plan. Maybe that will help you.

[Lorraine Dorsa]

There has been a lot of discussion in the newspaper (I read the Wall Street Journal) about large companies converting their defined benefit plans to cash balance or pension equity plans and I've received several questions about them addressed to my Advanced Plan Design Q&A column. I have very limited practical experience with these types of plans so I thought I throw the questions out comments by the learned and esteemed DB gurus who frequent this message board (it's my experience that flattery might not get you everywhere, but it can get you pretty far).

Questions: What is a cash balance plan? What is a pension equity plan? How do they work? Why is there so much interest in them lately?

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[Larry M]

The Society of Actuaries' Pension Section's newsletter had a fairly good analysis of these plans in a recent edition. Copies of the newsletter are available from the Society for a nominal fee.

Attn: Webmaster -

Since cash balance plans and other hybrids have their peculiar problems, why not establish a separate discussion board for them?

...and, no, thank you, I am not conversant in them and can not volunter to moderate the board.

[This message has been edited by Larry M (edited 04-06-99).]

[Guest JPCMPLS]

Lee Shepard did a very good job in analyzing these plans and explaining how they work in a February or March article in Tax Notes. I believe there was a direct link to the article from this website.

[Larry M]

Lorraine, Towers Perrin has answered your question. It has published an article, on line, which discusses cash balance plans and some of their variants.

Go to

http://www.towers.com/cgi-bin/towers.cgi?F...___htcocbp.html

or check out benefitslink's what's new site for the easier link.

[Guest jkirschbaum]

I just have to shake my head at how the mass media and Congress are all up in arms over this issue. The mass media in particular have been beating the defined contribution drum (and in particular the 401(k) drum) for so many years that the average reader really believed DC plans were better than DB plans. They demanded DC plans and employers responded by giving them DC plans. They even went so far as to turn their DB plans into something that looked like a DC plan (ie, the cash balance and pension equity design). However, now that the baby boomers are getting close to retirement they realize that the DB design is actually better for them (albeit not in all circumstances). So, what happens? They now begin to complain and the pendulum swings the other way. I see the whole controversy as a case of the selfish baby boomers (and I am one) demanding something that was good for them when they were younger (the DC plan) and now that they are older, they want to go back and also get the plan that will be better for them now (the DB plan).

This did not respond to your question at all, but I saw that several people cited good sources so I just took the opportunity to add my 2 cents.

[richard]

I agree with jkirshbaum's comments. Let it never be said that the public (or the mass media) get it right.

Now, here's some food for thought.

Does anyone feel that there will be a resurgence of DB plans? Cash balance plans, currently being criticized, do allow easy portability and are understandable. Will employees want them if (or when) the equity markets tumble? Will employers be able to afford them at that time?

Any thoughts?