Hybrid plans Easier to offer now
Companies will now find it easier to offer cash-balance
plans, a hybrid pension that mixes characteristics of traditional pensions with
In a cash-balance plan, an employer pays a specific amount — such as 5% of a
worker's pay — into the employee's account each year. The account earns a
specified interest rate, usually tied to a Treasury bond rate or other index.
Benefits are typically paid out in a lump sum once the employee leaves or
For some employers, cash-balance plans are less expensive than traditional
And many employers believe that cash-balance pensions are more appropriate for
today's workers, who typically change jobs several times during their careers,
says James Klein, president of the American Benefits Council, a trade group for
But companies have been reluctant to convert their traditional pensions to a
cash-balance plan because of legal concerns.
In 2004, IBM paid $300 million to settle allegations that its conversion to a
cash-balance plan discriminated against older workers.
The lawsuit alleged that workers who had built up years of benefits under the
traditional plan were unfairly penalized by the conversion to a cash-balance
The act would eliminate the uncertainty by making it clear that cash-balance
plans don't violate federal laws against age discrimination, Klein says. The
measure also bars companies from freezing older workers' benefits after a
conversion — a practice known as "wear-away" that can sharply reduce their
Still, AARP said the plan doesn't do enough to prevent older workers from losing
expected benefits in a cash-balance provision.
A report released last year by the Government Accountability Office concluded
that most workers see their benefits reduced once their employers convert from a
traditional pension to a cash-balance plan. The GAO also said that the loss was
greater for older workers.
Klein argues that allowing companies to convert to cash-balance plans will
prevent more employers from dropping their pension plans altogether.
In recent years, dozens of companies have frozen pension benefits for their
existing workers and eliminated pensions for new employees.
For companies that are interested in offering their employees some kind of
pension, "This law will help them maintain a hybrid plan rather than exit the
system," Klein says.