HARTFORD, Conn. -- Aetna Inc. was in a tough spot. It wanted to overhaul its traditional pension plan to eliminate an expensive early retirement program, but wanted to make sure middle-aged employees would not be left in the cold if they were contemplating quitting work in a few years.
The company's generous early retirement program, in existence since 1978, allowed employees to start collecting pensions if they were 50 and had worked for the company for at least 15 years.
At the same time, Aetna, which acts as a consultant to other employers for their retirement programs, wanted to offer a pension program that would appeal to its younger employees, to whom the notion of lifetime employment at one company was foreign.
After agonizing over the details for three years, the financial services company converted its plain-vanilla defined benefit pension plan to a cash-balance plan on Jan. 1.
The company, with a fully funded $3 billion pension plan, did not tinker with how it invests those assets.
For most of last year, Jim Gould, Aetna's vice president of compensation benefits and human resource services, had a white board in his room and ran complex calculations for each of Aetna's approximately 30,000 employees, crunching numbers to see how the new plan would affect their retirement benefits.
"I would not let something get put to bed with a simple answer. Because we are in this business, we want to be a model for how this should be done," Mr. Gould said.
The goal was to ensure people would get at least 70% of their current income in retirement from a combination of their pension plan and Social Security.
Kicking the tires
The company also brought in several leading pension consultants, using Hewitt Associates to help design much of the new plan. PwC Kwasha did "the tire kicking," and Towers Perrin helped create the communications package to tell the employees about the change, he said.
Eventually, Aetna decided to keep the early retirement feature intact for another seven years.
And because cash balance plans can sometimes shortchange older employees, the company also is letting employees choose between its old pension plan and the new cash balance plan until Dec. 31, 2006.
Either way, employees who retire by Dec. 31, 2006, will get whichever plan provides them with the highest pensions.
"It's a very generous feature," said Marty Collins, a principal at PwC Kwasha in Fort Lee, N.J., who has worked on scores of cash balance plans. Although it is obviously more expensive for companies to run two plans concurrently, it takes the heat off employers by letting employees decide which plan they want to be in, he said.
Also, those who opt for the new cash balance plan can collect half of their retirement benefits in cash -- which they may roll over into individual retirement accounts or the company's 401(k) plan -- and the other half as monthly pensions. Employees also may take all their retirement benefits as annuities or monthly pensions for life.
New employees are eligible to participate in only the cash balance plan, and cannot participate in the early retirement program.
To help employees, Aetna gave each a personalized statement showing the opening balance under the cash balance plan and comparing it with the retirement benefit under the existing pension plan.
The company also handed out interactive financial planning software that lets employees estimate their retirement benefits under different scenarios.
And finally, Aetna ran a series of free financial education seminars and is offering free initial financial planning through Aetna's financial planners, who usually work with other employers. "We put a few million bucks behind the financial counseling (programs), and they are sold out," Mr. Gold said.
Eventually, Aetna Retirement Services, the retirement and financial services arm of Aetna, plans to offer those programs to its clients.
Although the company continues to invest the underlying assets of the pension plan, employees get hypothetical account balances, which grow annually in line with interest on the 30-year Treasury bond in October of the preceding year. Employee account balances also get "pension credits" equal to a percentage of eligible pay, based on their ages and tenure at the company.
The company also expanded its 401(k) plan, offering 10 new investment options on top of the existing seven. It added three international growth portfolios, Aetna International, Janus Worldwide and Templeton Foreign I; the Aetna small company portfolio; and the MFS Capital Opportunities A fund. Also new are the Aetna Index Plus Large Cap Fund, a growth and income stocks portfolio, and the T. Rowe Price Equity Index fund. Three asset allocation funds also were added.
Aetna eliminated the Neuberger Berman Guardian Trust Fund.