PHILADELPHIA -- SmithKline Beecham Corp. switched its $1.6 billion defined benefit pension plan to a cash balance plan.
"We did a survey and our employees were not understanding the benefit," said Stanley J. Serocca Jr., SmithKline Beecham's vice president and director of human resources services. "No one had any idea what their pension was worth."
The company also altered its $2.2 billion 401(k) plan, changing the vesting and company match structure, introducing a stock ownership option, and adding five investment options, Mr. Serocca said.
Eligibility for both plans was shortened to six months from one year. The changes were effective Jan. 1.
A cash balance plan offers a number of defined contribution features -- such as quarterly participant ac- count statements -- in a defined benefit setting. But it is a defined benefit plan, in that the benefit is guaranteed.
Because a cash balance plan looks something like a defined contribution plan, it is a more valuable tool for retaining and attracting employees, consultants say.
The downside of a cash balance plan is that it can cost employers more money.
Employers make up for the cost of the switch by treating employees' accounts as if all of the money were invested in a guaranteed investment contract, which these days pays about 5%, one consultant explained. Employer investments generally earn a better return, and these excess returns offset the costs.
The switch to the cash balance plan did not result in any changes to the investment management lineup, said Barbara Bird, manager of SmithKline Beecham's pension plan program. The company did, however, hire Fidelity as trustee to administer the plan. Previously, that was done internally.
According to initial materials sent employees, the new cash balance plan works this way:
* The opening account balance or accrued benefit of employees who were in the defined benefit plan is equal to the value of the benefit each employee had earned. To calculate the present value of the accrued benefit, SmithKline Beecham used a discount rate equal to the interest rate on 30-year Treasury securities for November 1998, which was 51/4%, Ms. Bird said.
* At the end of each calendar quarter, SmithKline Beecham will credit each employee with an amount equal to 5% of his or her credited pay up to the Social Security wage base, plus 10% of the employee's credited pay above that base, up to the IRS limit. In 1998, the Social Security wage base was $68,400 and the IRS limit was $160,000.
For example, an employee whose pay is $44,000 this year will receive a credit of $2,200. An employee whose credited pay is $75,000 a year would receive a $4,080 contribution to his cash balance plan in 1999 (5% of $68,400 plus 10% of $6,600).
* Each employee also earns interest credits. The rate used is the 24-month average yield of 30-year Treasury bonds as of June 30. The credits are paid quarterly.
For 1999, the plan will credit interest at an annual rate of 6.5% -- so interest credits for the first quarter of 1999 will be about $162 on an account balance of $10,000, or $650 for the year.
* Some employees also receive transition credits so that longer-term employees nearing retirement are not disadvantaged by the switch. Employees who would have earned a better pension benefit under the old plan are being paid the present value of the difference paid over as much as seven years but not beyond age 60, she explained.
* For vested employees, the company purchases an annuity with the value of the account balance. Employees who are not vested when they leave SmithKline Beecham forfeit their account balance.
The idea of converting its defined benefit plan into a cash balance plan had been kicking around the company for a couple of years, Mr. Serocca explained.
"We were spending a lot of money on the (defined benefit) pension plan but nobody had a clue what they got and what it was worth," Ms. Bird said.
With quarterly statements keeping the plan "in people's faces," Ms. Bird said, "Suddenly, it's worth something."
Substantial changes also were made to SmithKline Beecham's 401(k) plan. Among them:
* Five Fidelity Freedom Funds -- which are lifestyle funds -- were added, bringing the total number of options to 21.
* SmithKline Beecham added a stock ownership account to the 401(k) plan, in which each employee receives a company-provided contribution equal to 2% of credited pay each pay period, up to IRS limits. This contribution is invested in SmithKline Beecham stock and is paid to all employees, even those who do not participate in the 401(k) plan, Mr. Serocca said. Employees cannot move money in or out of this account until the earlier of five years of vesting service or age 65, Ms. Bird explained.
* The company match remained 4%, but how it is paid was changed. Previously, all company contributions were invested in SmithKline Beecham stock. Now, 50% is in company stock and 50% can be invested in any of the investment funds.
* Company matches now are immediately vested. Previously, the vesting period was three years.
* After-tax contributions were discontinued in the 401(k) plan and a separate after-tax plan called Investing At Work and managed by American Express Retirement Services was created, Mr. Serocca said.
Also, the company hired American Express Financial Advisors to offer financial planning seminars and one-on-one advice to all employees.
