New Mercer offering expands pool of hybrid plan design

NEW YORK — Competitors aren't champing at the bit to launch new hybrid pension plans now that Mercer Human Resource Consulting has introduced its Retirement Shares Plan.

The reason: lack of demand.

Ari Jacobs, a consultant at Hewitt Associates, Lincolnshire, Ill., said plan sponsor interest in hybrid retirement plans continues, but is not increasing. The demand is not great enough for other consultants to follow Mercer by creating new plans, he said.

Stephen Mirante, retirement practice leader at Watson Wyatt Worldwide, Washington, said there's a need for alternative plan designs, but he's unsure if sponsors will be quick to sign on.

"There are clearly more plans that have moved to a hybrid plan model" over the past few years, but many are hesitant because of the uncertainty with regard to regulations. "These plans don't fit into the current rule," he said.

Watson Wyatt officials believe hybrid defined benefit plans could be a great way to manage costs associated with traditional defined benefit plans and could keep sponsors from switching to a defined contribution platform, Mr. Mirante said.

Still, Mercer executives are touting their hybrid, saying it's aimed at plan sponsors that want to retain a defined benefit structure, with added flexibility and reduced risk.

Donald Fuerst, a principal at Mercer, said the "Retirement Shares Plan" is similar to a career accumulation defined benefit plan. It is appropriate for an employer that wants to provide a benefits package to reward long-term employees and avoid investment risk at the same time, he said.

The new plan minimizes unfunded liabilities because the liabilities and assets are always matched. The employer funds the benefits earned each year and the plan stays fully funded at all times, he said.

Mr. Fuerst said he expects the first clients to consider the new plan will be those "contemplating freezing their DB and switching to a DC plan."

A growing number of defined benefit plan sponsors are terminating or freezing their plans. According to data gathered by Watson Wyatt, 44 of 627 Fortune 1000 companies terminated or froze their DB plans in 2004, up from 28 of 633 in 2003.

Paul Strella, a principal at Mercer, said the new plan is a defined benefit plan because it is subject to funding rules applied to traditional defined benefit plans, provides guaranteed income and is professionally managed. "The DB nature is that it guarantees a lifetime stream of income. In this plan, the employer takes on the risk that you can outlive your money. Income will always be there," Mr. Strella said. Mercer uses the value of the accumulated retirement shares to buy an annuity for the employee.

Mr. Fuerst said he believes the new plan could achieve the results sponsors wanted when some switched to cash balance plans. "It has many of the same objectives," he said, without the contested age discrimination issue. Like cash balance plans, retirement share plans "make the plan more meaningful for employees. And cash balance plans don't necessarily have stable costs and funded liabilities," he said. "But unlike a cash balance plan, it provides more benefit to long-service employees."

There are also some parallels with money purchase plans, but Mercer's plan differs because of the benefit post-retirement, he said. In a money purchase plan, "the employee is bearing the investment risk throughout their active employment period. But after they retire, the plan works like a fixed annuity," said Mr. Fuerst.

In Mercer's plan, employees earn a credit based on a percentage of their salaries each year, typically 1%. At the end of the year, that credit is converted into retirement shares at their end-of-the-year value, determined by the value of the retirement trust assets.

Employees can customize their degree of risk and potential growth by offering two classes of retirement shares, equity and stable value mutual funds, while freeing them from selecting individual investments. The plan sponsor selects and monitors the funds.

When asked whether a plan sponsor would have to use different money managers than are used for a company's traditional defined benefit plan, he said plan sponsors could keep their current investment managers.

Plan sponsors that would like to convert their existing DB plans to Mercer's new plan can do so fairly easily, he said.

The plan also can accept transfers from 401(k) plans, giving employees the opportunity to "purchase" retirement shares with their defined contribution account balances at more favorable rates than are generally available in the marketplace, and still maintain some equity exposure.

The new plan is "ready to go. We worked out most of the details, and it's up to the employer to customize it for their situation," he said. He declined to discuss costs or sales goals.

"There is tremendous demand for the characteristics of this type of plan," Mr. Fuerst said. "Plan sponsors simply want less investment risk, but still have a DB plan in place."

David Wray, president of the Profit Sharing/401(k) Council of America, Chicago, said this new option could potentially stop plan sponsors from switching to a DC from DB plan, because Mercer's product has defined contribution features.

"You have hundreds of thousands of companies and their diversity in the workplace is wide ranging. You need multiple types of solutions," said Mr. Wray. "I'm not sure if sponsors will use the plan, but the need for alternative solutions is great."

Mercer will begin marketing the plan through a series of seminars throughout the country in the coming months.