CHARLOTTE, N.C. -- NationsBank Corp. has converted its defined benefit plan into a cash balance plan, the first known to give employees a one-time choice of rolling over their 401(k) account balances into the cash balance plan.
NationsBank officials declined to discuss the plan; Pensions & Investments based this story on documents and other information about the new plan given to NationsBank employees, as well as on conversations with numerous consultants, including those involved in designing the plan.
The bank's new plan also allows employees to invest the 401(k) rollover assets -- along with NationsBank's contributions to the cash balance plan and the pension benefit they had accrued under the earlier defined benefit plan -- in any of the 11 investment choices offered.
Accounts are credited with the returns of those options, rather than with a fixed rate as is usually done in cash balance plans.
The bank is retaining its 401(k) plan, and has expanded the investment choices offered so they mirror the 11 choices offered through the cash balance plan. Thus employees who have transferred assets into the pension plan will have an opportunity to rebuild their 401(k) nest eggs.
The bank's defined benefit plan had assets of $1.9 billion as of Sept. 30, 1997, and its 401(k) plan had assets of $2.9 billion, according to P&I estimates.
The cash balance plan kicked in July 1, months after the announcement of the bank's megamerger with BankAmerica Corp. (Bank-America Corp., which adopted the first cash balance plan in the early 1980s, has not yet decided on how to meld the two pension plans, according to a BankAmerica official.)
"It was designed to look as much (like) a defined contribution plan as you could" within the framework of a defined benefit pension plan, said Eric Lofgren, head of the retirement consulting practice of Watson Wyatt Worldwide, New York. Watson Wyatt wasn't involved with the plan.
Another consultant, who was involved in designing the plan, called it "very imaginative."
"It is intended to utilize assets that are in the defined benefit plan -- and not valued by employees -- in a manner that is valued by them," he said, speaking on condition of anonymity.
At retirement, employees will get whatever money they have accumulated in their cash balance plan accounts, depending on how their investments have fared.
At a minimum, they will get NationsBank's annual contribution as well as the amount of money they had moved from their 401(k) plans, and pension benefits they already had accrued under the defined benefit plan.
In fact, the cash balance accounts exist only on paper. NationsBank will continue to invest the assets through investment professionals, hoping to better the return participants earn, and pocket the difference. An example: One option, the NationsBank Stable Capital Fund, yielded 6.17% in the first quarter; had the bank invested the underlying assets elsewhere and earned, say, 9%, the bank could use the excess returns to cut contribution costs, or offer more generous retirement benefits.
EMPLOYER ARBITRAGE
A May 12 Towers Perrin internal memo that discussed an unidentified plan (which P&I believes to be the NationsBank plan) suggests the real motivation for an employer to set up such a plan is financial. "If the assets of the cash balance plan can actually be invested in a manner that outperforms the crediting rates for cash balance accounts, this will produce gains for the cash balance plan," the memo states.
Towers Perrin is a NationsBank actuary and one of the many consultants NationsBank uses. However, the lead consultant that designed the plan is Price Waterhouse, now part of PricewaterhouseCoopers.
"The extent of this arbitrage opportunity probably depends on employees' cash balance investment elections. Assuming many employees invest a substantial portion of their balances in a fixed-income fund, this financial gain for the cash balance plan should be achievable," the Towers Perrin memo continued.
The NationsBank plan description given to employees says of the arbitrage: "Excess proceeds would decrease plan costs, saving money for the company."
Moreover, the infusion of cash into the NationsBank cash balance plan -- assuming many of its employees transferred their 401(k) balances into the plan -- also could help the company cut costs by defraying its future pension contributions, according to a consultant who declined to be identified.
NationsBank brochures about the new plan given to employees state: "As the number of associates who take advantage of the one-time 401(k) plan transfer increases, so does the potential savings to the company."
NEW FEATURES
The same brochure said the anticipated savings allows NationsBank to guarantee minimum pension benefits irrespective of the performance of the employees' investment choices, as well as expand the definition of compensation on which the pension benefits are based.
The new NationsBank cash balance plan permits employees to borrow up to half of their eligible account balances (up to $50,000), much as they can from their 401(k) retirement plans.
NationsBank also pitched the downside protection of the rollover to employees, reassuring them they would still collect that amount (as well as company contributions to the plan) upon retirement, even if their investments tanked.
Under the new plan, the company now includes overtime pay as well as half of commissions and incentive pay as compensation on which it bases pension benefits.
Moreover, the 401(k) money transferred into the cash balance plan presumably will be insured by the Pension Benefit Guaranty Corp. as it will be part of the company's defined benefit plan assets.
Employees had until June 28 to roll their 401(k) account balances into the new cash balance plan. They could not, however, roll over the employer match, which is made in company stock.
The new NationsBank plan includes many features typically associated with 401(k) plans, such as portability and the ability to switch options daily.
What's more, NationsBank has defined normal retirement age -- typically 65 -- as five years of service, in part to avoid complications from an IRS rule that can cause employers to pay out more than the account balance when employees quit their jobs before retirement, according to a consultant familiar with the plan who declined to be identified.
IRS QUESTIONS
And while NationsBank obtained the IRS' blessing for the plan in January 1997, the Towers Perrin memo raised some doubts about the legality of transferring 401(k) plan money into a defined benefit plan.
"We do not know whether the IRS agent reviewing the determination letter request understood the transaction and the applicable rules adequately," the memo states, describing the arrangement as "aggressive."
In particular, the memo raised concerns about whether the hypothetical cash balance accounts would preserve the separate account feature of defined contribution plans. Although the memo points out the company's request to the IRS might have satisfied regulatory concerns, it noted that various court decisions as well as IRS rules would require an employer to actually credit the return on the underlying pension plan to the cash balance accounts.
