TEANECK, N.J.-- A new survey might provide lawmakers with further ammunition for legislation requiring employers to give workers more information about changes in their pension plans, especially when they convert traditional plans into cash balance plans.
The survey of 100 employers by UNIFI Network, the former Kwasha HR Solutions unit of PricewaterhouseCoopers LLP, shows that less than one-third of those that overhauled their traditional defined benefit pension plans since 1985 gave workers details when the changes could result in a 20% or more cut in future benefits. "In most of the other cases, either general information or only a hint of potential reduction was communicated to employees," the survey noted.
Benefit cuts expected
Benefit cuts of 20% or more were expected for workers of certain ages in 59% of the cases in which employers responded to this question. The large cuts usually resulted because employers dropped subsidized early retirement programs.
The 100 employers have combined plan assets of $133 billion.
Moreover, only one-fourth of the employers gave employees information about the pension benefits they had earned to date, enabling them to compare pensions they already had earned with what they could expect to earn under the new plan.
Cash balance plans give workers hypothetical accounts that grow in line with a predetermined interest rate each year. When workers quit their jobs, they can take their account balances with them instead of waiting for monthly pension checks when they retire. As in traditional defined benefit plans, however, employers manage the underlying assets of the plan.
Typically, the survey found, employers gave their workers information about the opening account balances within three to six months after converting their plans to cash balance plans.
"There may be some justification for Congress to expand the type of information that must be provided to employees whenever a defined benefit plan is being amended to significantly reduce future benefit accruals for some or all employees -- not just when a cash balance plan is introduced," the survey noted.
But any new legislation should not be such a burden to employers that they opt to take the easy route and shut down their pension plans, said Larry Sher, a principal or UNIFI Network, and author of the survey. "If the rules are overly burdensome, you could defeat the very purpose" for which they are created, he said.
The survey also found the majority of companies did not save pension costs by switching to cash balance plans in the short term, but 56% expected to save money in the long run. However, when other simultaneous changes such as enhancements to 401(k) plans were taken into account, about two-thirds of the employers expected their retirement costs to go up over time.
Most people "are still inclined to think that in the vast majority of instances companies are slashing costs" when they convert to cash balance plans, Mr. Sher said.
Opening balances
The survey also found that the starting point, or the opening account balances, most employers use in cash balance plans are equal to or based on the present value of the pensions the employees earned to date under the old plan. Few employers gave employees opening balances that were less than the present value or lump-sum benefit, resulting in a "wearaway period" when the employee would not earn any additional benefits under the cash balance plan.
A wearaway period usually results when employers use high interest rates to calculate the opening account balance or present value of pension benefits -- the higher the rate, the lower the opening balance. If the rate used to calculate the opening balance is higher than the rate on the 30-year Treasury bond at the time of the conversion, it is more likely there will be a period when the employee will not earn any new benefits.
The survey found that 72% of the employers calculated the starting point under the new plan using an interest rate no higher than the prevailing 30-year Treasury bond rate. In 15% of the cases, however, employers used interest rates one percentage point more than that on the Treasury bond.
Moreover, 81% of the employers surveyed gave all affected workers workers additional credits to their new accounts to soften the blow of the changes, or allowed them to stay in the older plan. "These findings clearly indicate that employers address the potential for benefit reductions for mid- and late-career employees when converting to a cash balance plan," the survey noted.
However, most companies that converted to cash balance plans offered their workers the option of taking all of their retirement money at once when they quit their jobs, up from slightly more than one-fourth that offered lump sums when they had traditional plans.
