PISCATAWAY, N.J. - Telcordia Technologies on Jan. 1 will add a cash balance plan and give its employees a choice between the new plan and the existing $2 billion defined benefit plan.
Telcordia, a subsidiary of San Diego, Calif.-based Science Applications International Corp., may be one of the last telecommunications companies to add a cash balance plan, but its leisurely pace has helped pension executives create a state-of-the-art plan, said Bruce R. Lasko, manager of retirement plans for Telcordia.
"We tried to learn lessons of previous conversions," Mr. Lasko said. "There are advantages of waiting. It's a great deal with the (early retirement) subsidy we put in. Nobody was forced to go left or right."
Telcordia also made design changes to its $2 billion 401(k) plan, along with its defined benefit and retiree medical plans, to create a complete capital accumulation package.
Existing employees will choose between remaining in the traditional defined benefit plan and, if they're eligible, receiving retiree medical benefits subsidized by Telcordia, or moving to the cash balance plan and receiving no subsidized retiree medical benefits. Employees have until Dec. 17 to make the one-time-only choice. Participating subsidiaries are Database Service Management Inc., Mesa Solutions Inc. and Telcordia International Inc.
Long, complex history
Telcordia has a long and complex corporate history. In 1997, the unit was spun off from Bellcore Inc., a communications company created by the 1984 divestiture by AT&T Corp. of the seven regional Bell operating companies. It was sold to Science Applications in 1997.
Rather than merge the Telcordia plans into a $1.8 billion defined contribution plan, "we maintained our plans because we are in a different, very specific industry in the eastern part of the country where high-technology telecommunications workers are highly sought after," Mr. Lasko said.
The company had considered switching to a cash balance program for almost 10 years, but the time, design and cost factors were never right, he said.
Unlike some plans that are designed primarily with existing employees in mind, Telcordia executives built its new one for people just coming through the door, he said.
Telcordia looked at its overall retirement benefits package to ensure that the new cash balance plan would be a good fit.
The employer contribution to the cash balance plan is based on each individual's years of service with the company, Mr. Lasko said. The plan includes a retention factor that rewards long-term employees; this "subsidy" ranges from 4% to 10% of salary in monthly credits, and interest is credited on a monthly basis, he said.
The cash balance plan is in the same master trust as the defined benefit plan; it just has different payout, said Curt Morgan, principal in the outsourcing division of Unifi Network, Fort Lee, N.J., which assisted Telcordia with the plan conversion and education. "It's one plan with two formulas."
For those who choose the cash balance plan, the value of each employee's accrued benefit on Jan. 1 will be converted into an opening account balance comprising the present value of the pension benefit plus the subsidy, Mr. Morgan said. To calculate the opening balance for each participant, Telcordia will use age 58 as its assumption for when the employee will start receiving benefits, instead of using the usual retirement age of 65.
Telcordia's traditional defined benefit plan does allow for early retirement. Employees who have completed 20 years of net credited service can retire with full benefits at age 55. Employees with 25 years of service can retire at age 50, but with reduced benefits.
"Telcordia in its design preserved a significant early retirement subsidy in the opening balance," Mr. Morgan said.
The defined benefit is based on a percentage of an employee's final average pay multiplied by years of net credited service. The benefit grows slowly in early years and increases dramatically for full career employees as they near retirement, starting at age 50. By comparison, the cash balance plan benefit is based on the accumulated value of an employee's cash balance account, which grows steadily throughout an employee's career based on accumulated monthly pay and interest credits.
Christine Shaffer, a principal at Unifi, a division of PricewaterhouseCoopers, said the education process of preparing employees to choose between the defined benefit and cash balance plans began in June, Ms. Shaffer said. Materials include a personalized pension choice statement with four personalized projections and an interactive modeling linked to Telcordia's human resources website, she said.
Telcordia executives project that 70% of existing employees will choose the cash balance plan.
Towers Perrin, Philadelphia, assisted with the cash balance plan design, Mr. Lasko said. The Ayco Co. LP, Albany, N.Y., provides financial planning services to help employees choose between the pension plan and cash balance plan, he said. The service is available through Dec. 17, he said.
Telcordia also made a couple of changes to its defined benefit plan. For example, company executives changed from a five-year cliff vesting schedule to five-year graded vesting, now allowed under the 2001 pension reform bill, Mr. Lasko said.
Telcordia also changed its 401(k) match to 100% on the first 3% of salary and 50% on the next three percentage points to 6% of pay, for a total of 4.5%. The old match was 4.2% of pay with an annual discretionary match of up to 0.5% of pay, he said.
Vanguard is semi-bundled provider for the 401(k) plan.