CHARLOTTE, N.C. -- The nation's first cash balance plan is being scuttled in favor of a more innovative one.
Beginning July 1, participants in the 15-year-old, plain vanilla Bank of America Corp. cash balance plan will be moved into the 2-year-old NationsBank Corp. plan. Assets of the combined plans total $8 billion.
BofA, San Francisco, and NationsBank, Charlotte, merged in September 1998; the merged entity was named Bank of America, and is based in Charlotte. NationsBank launched its cash balance plan in July 1998.
Also beginning July 1, employees of the original BofA may roll over assets in their $4.7 billion 401(k) plan into the NationsBank-created cash balance plan. They then can rebuild their 401(k) account balances.
Most money moved
When that option was offered to the company's East Coast employees in 1998, they moved 74% of their 401(k) money to the cash balance plan.
What makes NationsBank's cash balance plan unusual is participants' ability to invest, on paper, in 12 investment options: company stock; large-cap, midcap and small-cap index funds; aggressive growth fund; value fund; international equity fund; investment-grade bond fund; stable capital fund; and three portfolios called balanced growth, growth and income and growth.
Participants' cash balance accounts grow in accordance with the return on the options they pick. They can check the value of their accounts and move money daily among the options.
In a plain vanilla cash balance plan, the company predetermines the return on employees' accounts, for example, the return on 30-year Treasury bills plus one percentage point.
The company also will credit all employees' hypothetical accounts with credits linked to age and service, ranging from 2% of pay for the youngest, shortest-tenured employees to 8% of pay for the oldest, longest-tenured employees.
NationsBank originally credited between 1% for the youngest, shortest-tenured employees to up to 10% of pay for accounts of the oldest, longest-tenured employees.
When they move into the cash balance plan created by NationsBank, the original Bank of America employees will get the same safety net the East Coast employees have had. Regardless of how their investment options perform, at a minimum they will get the company's annual contribution, plus the amount of money they moved from the 401(k) plan and the pension benefits they had accrued.
Concurrently, the company is letting new employees participate in the 401(k) plan after just a month on the job, instead of the old one-year waiting period.
Moreover, the company is boosting its matching contribution in the 401(k) plan to 100% up to 5% of pay, from 75% up to 6% of pay.
But the company might have a tough time getting the necessary IRS blessing on its amended plan.
Last September, the Internal Revenue Service began requiring regional offices to send all requests for "determination letters" or clearance of cash balance plan conversions to the Washington office for analysis.
The head office of the IRS has, in effect, imposed a moratorium on any new determination letters for cash balance plans.
Although NationsBank sought and received the IRS' blessing for the plan in January 1997, well before it set up the remarkable cash balance plan, questions later were raised about whether the IRS agent who approved the plan really understood its ramifications.
In private conversations, regulators since have hinted they are troubled by that plan design.
For one thing, regulators strongly disapprove of the way the company has defined normal retirement age -- to which various calculations are pegged in a defined benefit plan -- as age 65 or five years of service, whichever comes first. That's because such an abbreviated normal retirement age overrides the provisions in federal pension and tax law aimed at ensuring that pension plans do not stack benefits heavily in favor of longer-tenured employees.
Moreover, a short normal retirement age allows employers to give departing employees only their account balances, without conducting onerous calculations to determine the present value of their pension benefit at retirement age (Pensions & Investments, May 31, 1999).
"The five-year normal retirement age looks like a contrivance to get around rules," said an expert who did not wish to be identified.
Moreover, the cash balance plan could flunk the anti-backloading provisions in the Employee Retirement Income Security Act because the benefit formula rises steeply from credits of 2% of pay for young workers to 8% of pay for older, longer-tenured employees, the expert said.
That formula, while resembling that of a traditional defined benefit plan, contradicts the purported aim of cash balance plans -- to give younger, mobile workers a bigger pension than they otherwise would have gotten.
"That plan would have difficulty passing the accrual rules because it is so backloaded. Normally cash balance plans are front-loaded," the expert pointed out.
Even if the IRS does not sign off on the plan, the company has little risk of losing its tax-favored status. Instead, the regulator might ask the company to change aspects of the plan it does not like.