Converting a Traditional Defined Benefit Plan to a Cash Balance Plan

[Mcomeau]

Hello

What are the cost benefits of converting a Defined benefit plan to a Cash Balance Plan? What are specific issues to watch out for when doing so? Thanks

[My 2 cents]

1. Under no circumstances can you do it on a wear-away basis. All benefits already accrued (including the right to possible subsidized early retirement benefits) must be protected AND accruals under the cash balance "pay credits" must be determined without regard to the existence of an accrued benefit under the prior formula.

2. Communication is critical. Want legal trouble? Try to disguise what the change will do to the rate at which future benefits will accrue.

3. Are you going to grandfather anyone with respect to the prior formula? If some people will continue on the old formula, you must worry about non-discrimination.

Not numbering this, but there seems to be a mistaken idea out there that contribution levels under a cash balance plan are more stable than under a true defined contribution plan. They aren't. There is no direct link between the "pay credit" under the cash balance formula and even the Target Normal Cost for minimum funding purposes. And, of course, if the funds lose money, you have to amortize the loss (which is measured relative to the funding discount rates, not break-even) over 7 years. And pay PBGC premiums. Etc. All that, and most participants will be worse off under the cash balance approach than under the current formula.

[SoCalActuary]

Well, you get better risk management by reducing benefit volatility, but the administration is more complex. If you are over-funded, this is a good option compared to freeze plus new plan, because you can use the surplus to fund the CB benefits.

If you are not over-funded, then it is much easier to freeze, so you can manage the limited risks of that group. Then start a new and separate cash balance with its different record-keeping for the current employee group.

[david rigby]

Don't forget vesting.

Don't forget TH.