Companies are adding features to their retirement programs that allow retirees to access - or in at least one case, accumulate - assets in ways that best suit their financial needs.
Such changes are making pension programs more user-friendly and more beneficial to companies.
* Kennecott Holdings Corp. and BP America Inc. allow employees at retirement to switch all or a portion of the lump-sum value of their pension benefits to their defined contribution accounts.
* Dow Chemical Co. allows retirees to do the reverse. At the time they wish to begin receiving monthly pension payments, Dow retirees can switch assets (within a certain range) from their defined contribution account into the defined benefit annuity option they have chosen.
* Shell Oil Co. soon will give employees a voice in determining how their pension assets accumulate. Starting Jan. 1, employees annually will be able to choose between two funding formulas that will determine the amount of their defined benefit pension. While the existing formula would better suit longer-term employees, the new option could better accommodate shorter-term workers or midterm hires.
Other companies are examining such concepts.
Novartis Corp. is "looking into this and will probably address it more fully next year," said William McHugh, vice president and treasurer of the Summit, N.J.-based company.
"Some of our bigger (business) sectors (within the company) are getting PEPs as of Jan. 1." As part of this change, "one of the things we will look at is whether it makes sense to allow people who take a lump sum from PEP (at retirement) to roll it into their 401(k)" account, he said.
(A PEP, or pension equity plan, is a plan whose benefits are expressed as a lump sum, but unlike with cash balance plans, the amount of that lump sum is tied to the plan participant's final average pay.)
BP employees request help
Just over a year ago, BP America Inc., Cleveland, began allowing those leaving the company (including retirees) to switch assets to the defined contribution plan from the approximately $2 billion cash balance plan. The move came up at the request of employees.
"It's something we felt we needed to do," said Howard Harpster, director of pension investments. "We saw a number of instances where things didn't work out well for people who left at retirement because some were taken advantage of by financial planners. . . . They came to the company and asked for help."
The help was to allow them to shift assets to their 401(k) account, with which they were familiar. This switching feature gave workers time to sort out their financial matters, he said.
For the past two to three years, Kennecott Holdings Corp., Salt Lake City, has allowed employees at retirement to switch assets to the defined contribution plan from the $300 million cash balance plan.
As Jack Welch, manager-cash and investments, explained: "Any time you can offer greater flexibility, it should be considered an advantage."
Earlier this year, CountryMark Cooperative Inc., Indianapolis, began allowing individuals at termination to roll their lump-sum balance from the cash balance pension plan into their 401(k) plan accounts. In addition, they got the ability to make withdrawals of at least $1,000 from their 401(k) accounts anytime after termination.
Moreover, starting Jan. 1, the cooperative will allow employees who are retiring to roll at least some of their 401(k) assets into the pension plan to annuitize that benefit.
Kelly Nicodemus, CountryMark's senior benefits administrator, said the cooperative made the changes because it "gives our plan participants more say in how their monies are managed after retirement."
Shell offers options
Houston-based Shell Oil is adopting an innovative design that involves workers in a different way. It allows employees each year to choose between two formulas for funding their retirement benefit. Effective Jan. 1, the options will be: the original "80-point" feature, which uses a standard average-final-salary formula for determining the pension benefit; and the new alternate formula, whereby employees accumulate a percentage of their average final compensation each year, and that percentage is based on a schedule that uses employees' age and accredited service in that plan.
In Shell's original formula, benefits that had been accumulating slowly begin rapidly rising after workers attain 80 points, (i.e., one's age and accredited service add up to 80) making this more suitable for longer-time employees.
By contrast, pension benefits in the alternate arrangement gradually mount over the course of accredited service; thus, this choice should better suit shorter-term workers or midterm hires.
Benefit to companies
Such moves come as a number of companies seek, for various reasons, to maximize their pension benefits.
In some cases, innovations come at the request of employees; but in others, they accompany a broader revamping, often of a company's retirement or total benefits program.
By adding features to their existing plans - often linking defined benefit and defined contribution plans - they can better address needs of individuals, which in turn can pay off for employers.
For example, better retirement benefits can help companies attract workers, including midterm hires. And, having benefits that better fit retirees' needs can help companies and workers ensure employees can retire when they and the company wish.
Indeed, that was one reason behind Shell's broad redesign of benefits, said Ron Jeffers, project manager in the company's human resources department.
"Shell has gone through a major transformation in the way the company looks at things," he said. "And this is part of it - examining how up-to-date the benefits are and how well they meet the needs of employees. The work force is changing in America, and we wanted a benefits program that touches everyone," said Mr. Jeffers.
Consultants promote concept
The Kwasha Lipton Group, Fort Lee, N.J., promotes the switching concept as part of its Personal Retirement Asset Management program that integrates and coordinates companies' defined contribution and defined benefit plans.
Other design features cited by Stephen Gould, retirement practice leader in the Boston office of Towers Perrin, are: allowing individuals, while working, to have their choice annually of which retirement plan to place some or all of their pension contributions; allowing employees (as often as the plan permits) to choose the interest crediting rate used in their cash balance plan; and permitting people, while working, to transfer defined contribution assets to their defined benefit plan.
In fact, said Mr. Gould, "the only thing you can't do legally, because of U.S. tax law, is to take DB plan money while (employees are) working and move it into the 401(k)."
The transfer process doesn't have to be complicated. Vince Tobin, national director of consulting activities, Buck Consultants Inc., Secaucus, N.J., described a straightforward actuarial process.
"All a company has to do to accommodate transfers is amend the plan," he said. Then, at a designated time, such as the beginning of the year, the company would "adopt the interest rate and mortality table by which the conversion would be calculated; and then that factor would be adjusted for the age of the person involved. This shouldn't be a difficult process."
The transfer process is of growing interest to those with PEP and cash balance plans, said Mr. Tobin. The process is "definitely going to grow, especially attractive "when transfers to a DC plan allow an employee to take out money as he sees fit vs. having to take out money on a pre-set periodic basis."