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.

can undermine traditional plans that favor older workers who get paid for seniority. Employees in their 40s and up could end up getting the short end of the stick, realizing pension reductions by as much as 25%-30%. “Under the traditional pension plan, the most valuable years to the employee were the later years of work,” says David Certner, senior coordinator for economic issues at the Washington, D.C., advocacy group, AARP (800-424-3410; www.aarp.org). “The longer you were with a company, the greater the contributions to your pension benefits. So, if you were with a company for 30 years, your account accrued more in the last 10 years than in the first 20 years of employment.”

So what happens to a worker who has been with a company for 20 years and his or her company converts to a cash balance plan? Certner says that the worker loses the most valuable years of retirement benefits. Rather than getting a large portion of their salary credited to a pension each year, he maintains, employees now receive from 4%-8%.

As a result, these plans are being scrutinized by the Labor Department and consumer groups, including AARP, that are trying to figure out how such plans operate and the effect on employees. Companies have leeway as far as how they convert to a cash balance plan because the IRS has not instituted any formal regulations to govern the hybrids. “A lot of people foresee trouble down the road because so many big companies have now adopted it,” says Mike Johnston, a retirement consultant with Hewitt Associates, a management consulting firm in Lin
colnshire, Illinois. “It’s a pension plan dressed up like a 401(k), and it doesn’t fit the technical rules that apply to traditional pensions.”

For instance, there are requirements about distributions. Generally, defined-benefits plans allow employees to receive their vested account balances as a lump sum payment or an annuity. Standards have been developed for eligibility, funding and vesting as well as death and spousal benefits. Johnston says employers may have to make substantial changes to cash balance plans once the IRS decides to establish new ground rules.

According to Johnston, the calculations for determining the opening account balance and annual contribution schedules “are all over the place. There’s no standard formula for determining each employee’s future benefit [the specified amount of money due at retirement] under these plans.”
Essentially, the employer designates the value of benefits built up by an employee under the traditional plan, and then places some or all of the value into individual employee accounts. Then, the company establishes a contribution percentage for each employee, anywhere between 3% for younger employees and 10% for older workers. (Balances are determined in two ways: cash balance credit or interest credit based on a fixed rate.) Depending on the way the conversion is handled, experts maintain, some employees aren’t going to earn new pension benefits right away.

Many companies, however, see cash balance plans working in tandem with 401(k) plans. In fact, they have increased their matching contributions to

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