Since 1985, when BankAmerica Corp. set up the first cash balance pension plan, hundreds of companies have adopted these hybrid plans, which aim to combine the best features of both 401(k) and defined benefit plans.
As revolutionary as the BankAmerica plan seemed almost 15 years ago, today it would pale in comparison with the new-fangled versions.
For example, the cash balance plan at Nationsbank Corp., Charlotte, N.C. (now, coincidentally, part of Bank of America Corp.) is the first to allow employees a chance to roll over their 401(k) balances into the cash balance plan.
Employees earn pension benefits ranging from 1% to 10% of current pay, depending on their ages and tenure.
That plan also allows employees to invest their individual account balances into any of 11 investment options mirroring choices in the 401(k) plan.
The original BankAmerica plan set up in 1985 was, in contrast, a white bread cash balance pension plan. Employees with more than 10 years tenure received 5% of pay credits to their hypothetical individual accounts -- reduced by the amount of Social Security benefits they could expect to receive. The accounts also earned 10% interest each year initially. Employees with fewer than 10 years on the job received lower pay credits.
Any benefits employees had earned under the old pension plan became part of their opening account balances in the new cash balance plan.
The bank also gave employees leaving the company the choice of taking their entire account balances in lump sums, or as monthly pensions.
As part of the switch, the bank let workers 50 and older and with 10 or more years tenure stay in the old plan if it provided a higher benefit, said Theresa Stuchiner, the PwC Kwasha consultant who worked on designing the BankAmerica plan in the mid-1980s. This "grandfathering" was in effect for five years. Older workers with longer tenure also received higher pay credits to their accounts during the first five years of the new plan.
A few companies do let workers link the returns on their hypothetical accounts to a range of investments, frequently the same as those in their 401(k) plans. For example, Charles Stark Draper Laboratory Inc., Cambridge, Mass., lets employees put up to half of the company's contribution in pooled fixed-income or pooled stock investments.
Some years ago, Price Waterhouse LLP converted to an employee-directed cash balance pension plan that lets employees direct their assumed account balances into one or more of 17 hypothetical investments, many mirroring the choices available through the company's 401(k) plan. The company, which merged with Coopers & Lybrand last summer to become PricewaterhouseCoopers LLP, is now extending this choice to employees covered by the old Coopers & Lybrand plan and employees covered by the cash balance plan of the Kwasha Lipton Group of Coopers & Lybrand.
In the mid-1990s, Allmerica Financial Corp., Worcester, Mass., also adopted an employee-directed cash balance pension plan, giving employees the choice of investing their accounts in the same 11 options available at the time through the company's 401(k) plan, including the company's stock.
