Cash balance plans linked to one-year Treasury bills could be in a pickle because of the Treasury Department’s recent decision to stop issuing those securities as of Feb. 27. For starters, cash balance plan sponsors that credit participants’ hypothetical accounts with interest linked to the one-year T-bill will have to find an alternative security on which to base the interest rate. Also, employers will have to be careful not to trip up on federal pension law when they do switch to another security.
Because the Treasury’s decision does not affect the one-year Treasury constant maturity rate — the rate at which, for example, 30-year Treasuries in their 29th year trade — some pension plan sponsors are considering adopting that rate instead, said Kyle N. Brown, retirement counsel at Watson Wyatt Worldwide.
But because the latter usually offers a somewhat higher interest rate than one-year T-bills, plan sponsors that credited participants’ cash balance hypothetical accounts with an interest rate of, say, 100 basis points over the one-year T-bill rate will need to consider whether to keep that margin or reduce it.
