Taking Stock of Your Retirement Plan

As more companies make a pension switch, you may find that you have lost ground. Here's what you can do to preserve your nest : egg.

plan like a 401(k) or a 403(b).

For decades, pensions fell under the category of a defined-benefit plan, in which employers made regular payments for all employees and guaranteed them a set amount of benefits upon retirement. The calculations were based on years of service by the highest average salary, and administrators determined how pension assets were invested. Companies bore the responsibility for making sure money was available by the time an employee was ready for his or her retirement bash. Think of it as the check an employee receives along with the golden watch.

The defined-contribution plan, on the other hand, differs in that the employer establishes individual accounts, but the employee contributes a percentage of his or her pay-which your company may or may not match. Retirement dollars are based on how much money has been accumulated in each employee’s account. Under this system, the employee controls how the money is invested and shoulders the risk.

The main reason major companies have made the shift to cash-balance plans is simple: to save money and provide a kind of “portable” pension for their employees. For one, it takes fewer people to administer these programs. Secondly, distributions to employees who leave the company are easier since they are paid what they would be worth today-not an algorithm of future value. Another factor: experts say most employees didn’t understand or appreciate the conventional process-even though management spent millions on administrative costs.

Now corporations are steadily phasing out the paternal pension and passing on the task to workers. In a survey by the Employee Benefits Research Institute (EBRI), a nonprofit research organization in Washington, D.C. (202-775-6329; www.ebri.org), one company noted that prior to implementing a cash balance plan, the defined-benefit portion of their retirement program was expected to deliver 70% of all their retirement benefits, while the 401(k) component accommodated 30%. As a result of the switch, the 401(k) portion now provides 70% of such dollars, while the cash balance plan covers the other 30%.

Some assert that cash balance plans level the playing field. Rather than preserving a back-loaded pension system that rewards a handful of employees, the new paradigm gives more money to a larger pool of employees up front. The main advantage, however, is that a person who makes a job switch doesn’t have to forfeit his or her benefits. In such a scenario, the worker can roll-over the account into another company’s 401(k) or your own IRA. However, if you keep the money, then be prepared to take a staggering tax hit, as well as a 10% penalty for early withdrawal (before the age of 591_2). “From an employee’s standpoint, cash balance plans are more tangible and understandable than traditional pensions where employees are totally clueless about how much money they would have upon retirement,” says Paul Yakoboski, senior research associate at EBRI. “Employees can access their personal files and see how much money they accrued thus far.”

PLACING CHECKS ON CASH BALANCE
While cash balance plans tend to appeal to younger employees, they

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