BERKELEY HEIGHTS, N.J. - AT&T Corp. will convert its management defined benefit plan to a cash balance plan Jan. 1.
At $10.6 billion, the AT&T fund is the largest ever to switch. A cash balance plan is a defined benefit pension plan with such defined contribution characteristics as individual accounts for each participant and quarterly statements.
The board of trustees approved the change earlier this month. No changes in service providers are expected, a spokeswoman said.
Assets will continue to be overseen by AT&T Investment Management Corp., with administrative, actuarial and communications support from Actuarial Sciences Associates, a wholly owned subsidiary of AT&T.
The company does not expect any "immediate" changes in investment policies or portfolio mix as a result of the conversion, said the spokeswoman.
"It is too early to talk about possible changes in investments," she said, "although there is no reason to expect any changes in investment policies resulting from the change to cash balance."
The cash balance plan will provide at least the same levels of income replacement for retirees as the defined benefit plan. "It could even be higher under cash balance, but would never be less than under the existing formula," the spokeswoman said.
She said specific plan design information, such as vesting and guaranteed accrual rates, would not be disclosed until the summer.
The conversion to cash balance was not done because of cost considerations, and "does not have any immediate or material impact on costs or earnings" at AT&T, she said.
"We think it is good for the company and good for our employees," said the AT&T spokeswoman. She said converting to cash balance "increases employee awareness and understanding of the benefits" and "simplifies mergers and acquisitions and divestitures, as well as facilitating employee movement within the corporation. It also simplifies pension administration and record keeping."
"It looks like a defined contribution plan but will continue to be funded like a defined benefit plan with easy-to-understand account balances," she said.
The move by AT&T continues a trend among the telecommunications and deregulated utility companies toward cash balance or other hybrid alternatives to defined benefit plans.
At least three regional Bell operating companies divested by AT&T in 1984-'85 have adopted cash balance or other hybrid plans, and the other four had at least considered it.
BellSouth Corp., Atlanta, was the first baby Bell to adopt a cash balance plan - in July 1993. Ameritech Corp., Chicago, also replaced its traditional final-average-pay plan with a pension equity plan. Bell Atlantic Corp., converted its then-$5.8 billion defined benefit plan to cash balance in January 1996.
Some industry sources said the shift to cash balance helps preserve large employers' defined benefit plans in the face of pressure to replace them with defined contribution plans as the primary retirement vehicle.
"Employers with defined benefit plans who convert to cash balance usually have found that employees appreciate their defined contribution plan more and say if we are going to continue to have a defined benefit plan, why not have it look like the DC plan and get more bang for the buck," said Dennis Coleman, principal at Kwasha Lipton Group, Fort Lee, N.J. Kwasha Lipton is usually given credit for developing the cash balance concept in 1984.
As with electric utilities and baby Bells, the conversion by AT&T probably was designed to make the existing defined benefit plan more attractive to a more mobile work force.
"It is a better way to skin the cat. Cash balance plans are more visible and more highly appreciated by the participants. Rather than offering them something that is distant sometime in the next century, the cash balance account is visible and communicated to the participant. You see your account growing and, typically, companies communicate balance and account information to participants alongside their defined contribution savings plan information," said Mr. Coleman.
"Cash balance dovetails very well with the defined contribution plan."
In addition, he said, cash balance plans offer benefits to a maturing high-tech industry such as telecommunications companies.
Cash balance plans accrue on a more "age-neutral basis" than traditional final-average-pay pension plans, he said. That helps companies attract and retain employees.
Cash balance plans usually are front-loaded, with more dollars allocated to those with less service and at younger ages.
"In a traditional plan, the financial firepower is targeted more toward employees nearing retirement," he said, while in a cash balance plan benefits accrue at the same rate for those doing the same type of work.
Another benefit high-tech companies might find is that cash balance plans usually offer lump-sum payouts for vested participants who leave for other employment opportunities.
"This shows that AT&T is not abandoning its defined benefit plan," said Mr. Coleman, "but is modernizing and adapting its plan to the needs of its work force and may be an indication of future trends in the industry."