Report to Congressional Requesters

United States Government Accountability Office

GAO

October 2005 PRIVATE PENSIONS

Information on Cash 

Balance Pension Plans

GAO-06-42 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-42.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 

Highlights of GAO-06-42, a report to 

congressional requesters 

October 2005

PRIVATE PENSIONS

Information on Cash Balance Pension 

Plans 

Current pension and economic literature provides little conclusive evidence 

about the effects of CB plan conversions on benefits. In many cases, data 

and other methodological issues (e.g., sampling methods) limit the 

generalization of results. Nonetheless, cash balance research indicates that 

the effects of a conversion depend on many factors, including the generosity 

of the CB plan, transition provisions that might limit any adverse effects on 

current employees, and firm-specific employee demographics. CB plan 

conversions are posited to have distributional effects on expected pension 

wealth: younger, more mobile workers usually benefit while older workers 

with long job tenure are likelier to experience a loss, particularly if they are 

nearly eligible for early retirement. 

GAO’s analysis of a representative sample of plan conversions determined 

that most conversions occurred between 1990 and 1999 and primarily in the 

manufacturing, health care, finance and insurance industries. Most 

conversions set participants’ opening account balances equal to the present 

value of benefits accrued under the previous plan, although the interest rate 

used to calculate the balance varied around the 30-year Treasury bond rate. 

Most plans provided some form of transition provisions to mitigate the 

potential adverse effects of a conversion on workers’ expected benefits for 

at least some employees. About 47 percent of all conversions grandfathered 

at least some of the employees into the former traditional DB plan. In most 

cases, grandfathering eligibility was limited to employees meeting a 

specified minimum age and/or years of service. 

GAO’s simulations of the effects of conversions on pension benefits show 

the following: 

• In conversions from a traditional DB plan to a typical CB plan, most 

workers, regardless of age, would have received greater benefits under 

the DB plan. Unless grandfathered into the former plan, older workers 

experience a greater loss of expected benefits than younger workers. 

• In comparing a typical CB plan to a terminated FAP plan, all vested 

workers would do better under the CB plan. 

• In conversions from a traditional DB plan to a CB plan of equal cost to 

the sponsor and more generous than the typical CB plan, while more 

workers at age 30 have benefit increases under the CB plan, this was not 

true for those at age 40 and 50. 

• In comparing a equal cost CB plan to a terminated FAP plan, again all 

vested workers would do better under the CB plan. 

• GAO’s comparisons focusing on the lifetime present value of benefits did 

not change the basic findings of GAO’s analysis of monthly benefits. 

The nation’s private defined benefit 

(DB) pension system, a key 

contributor to the financial security 

of millions of Americans, is in longterm decline. Since 1980, the 

number of active participants in 

Pension Benefit Guaranty 

Corporation (PBGC) insured single 

employer DB plans has dropped 

from 27.3 percent of all national 

private wage and salary workers in 

1980, to about 15 percent in 2002, 

and more recently the PBGC has 

assumed billions of dollars in 

unfunded benefit obligations from 

bankrupt plan sponsors. Some 

analysts have identified hybrid DB 

plans like cash balance (CB) plans 

as a possible means to revitalize 

this declining system. However, 

conversions from traditional DB 

plans to CB plans have sometimes 

been controversial because of the 

effect conversions may have on the 

benefits of workers of different 

ages. 

As House and Senate committees 

consider comprehensive pension 

reform legislation that includes 

efforts to resolve uncertainties 

about CB plans, GAO was asked to 

(1) review current research about 

the implications of CB conversions 

for employee benefits, (2) describe 

the prevalence and type of 

transition provisions used to 

protect workers’ benefits in past 

CB conversions, and (3) estimate 

the effects of CB conversions on 

the benefits of individual 

participants under a hypothetical 

conversion to a typical CB plan 

from a typical traditional DB plan. 
Page i GAO-06-42 Pension Plans 

Letter 1

Concluding Observations 8 

Agency Comments 9 

Appendix I Information on Cash Balance Pension Plans 11 

Appendix II Review of Literature on Cash Balance Plans 50 

Appendix III Analysis of Form 5500 Data on Cash Balance Plans 55 

Appendix IV Analysis of Simulated Cash Balance Plans and 

Traditional Final Average Pay Plans 59 

Appendix V GAO Contacts and Staff Acknowledgments 68 

Tables 

Table 1: Cash Balance Plan Sample Disposition 57 

Table 2: Conversions Costs of Typical Cash Balance Plan by 

Conversion Age 66 

Contents 
Page ii GAO-06-42 Pension Plans 

Abbreviations 

APS age plus service 

BLS Bureau of Labor Statistics 

CB cash balance 

CBOLT Congressional Budget Office’s long-term social security 

 model 

DB defined benefit 

DC defined contribution 

LABOR Department of Labor 

GAM Group Annuitant Mortality 

FAP final average pay 

PBGC Pension Benefit Guaranty Corporation 

PENSIM pension policy microsimulation model 

PSG Policy Simulation Group 

PSID Panel Study of Income Dynamics 

SIPP Survey of Income and Program Participation 

SPD summary plan description 

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Page 1 GAO-06-42 Pension Plans 

October 27, 2005 

The Honorable George Miller 

Ranking Minority Member 

Committee on Education and the Workforce 

United States House of Representatives 

The Honorable Bernard Sanders 

Ranking Minority Member 

Subcommittee on Financial Institutions 

 and Consumer Credit 

Committee on Financial Services 

United States House of Representatives 

The Honorable Tom Harkin 

United States Senate 

The nation’s private defined benefit (DB) pension system,1

 a key 

contributor to the financial security of millions of American workers and 

their families, is in long-term decline. The number of single employer DB 

plans has declined dramatically over the past several decades,2

 from over 

95,000 in 1980 to less than 35,000 in 2002, with the number of active 

participants in such plans dropping from 27.3 percent of all national 

private wage and salary workers in 1980, to about 15 percent in 2002.3

Structural problems in industries like airlines, steel, and auto parts have 

led to large bankrupt firms terminating their DB plans, with thousands of 

workers losing some of their benefits and saddling the Pension Benefit 

 1

 In DB plans, formulas set by the employer determine employee benefits. DB plan formulas 

vary widely, but benefits are frequently based on participant pay and years of service. 

2

 Single employer plans provide benefits to employees of one employer or, if under 

common control, employees of several related employers. Multiemployer plans are DB 

plans created by collective bargaining agreements covering more than one employer and 

generally operate under the joint trusteeship of labor and management. These plans cover 

over 9.7 million participants or about 22 percent of all workers and retirees insured by the 

Pension Benefit Guaranty Corporation (PBGC). See GAO, Private Pensions: 

Multiemployer Plans Face Short and Long-Term Challenges, GAO 04-423 (Washington, 

D.C.: Mar. 26, 2004). 

3

 Pension Benefit Guaranty Corporation, Pension Insurance Data Book, (Washington, D.C., 

2004). 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-06-42 Pension Plans 

Guaranty Corporation (PBGC) with billions of dollars in unfunded benefit 

guarantees.4

 In response, several congressional committees have proposed 

comprehensive pension reform legislation that, among other issues, would 

address the underfunding of single employer defined benefit plans.5

Some analysts have identified hybrid DB plans like cash balance (CB) 

plans as a possible means to revitalize this declining system. CB plans are 

referred to as hybrid plans because legally they are DB plans but contain 

certain features that resemble defined contribution plans. Similar to 

traditional DB plans, CB plans use a formula to determine pension 

benefits. However, unlike traditional final average pay (FAP) plans that 

pay retirement benefits on the basis of an annuity amount calculated using 

years of service and earnings, CB plans express benefits as a hypothetical 

individual account balance that is based on pay credits (percentage of 

salary or compensation) and interest credits, rather than an annuity. 

In the late 1990s, many pension plan sponsors converted their traditional 

final average pay plans to CB plans. Conversions to CB plans have been 

controversial because of the effect they may have on pension benefits of 

workers of different ages and years of service.6

 In particular, CB plan 

conversions can sometimes result in so-called “wearaway” situations 

where some workers do not earn additional pension benefits while other 

workers continue to do so.7

 The legality of CB plans has recently been 

questioned in a court ruling regarding whether a CB plan is age 

 4

 The PBGC is the federal corporation that insures certain benefits of vested participants in 

DB plans. PBGC insures both single employer and multiemployer defined benefit plans. As 

of the end of fiscal year 2004, PBGC reported an accumulated deficit in its single employer 

program of $23.3 billion. See GAO, Private Pensions: Recent Experiences of Large Defined 

Benefit Plans Illustrate Weaknesses in Funding Rules, GAO-05-294 (Washington, D.C.: 

May 31, 2005). 

5

 For example, see H.R. 2830 and S. 1783. 

6

 As we noted in past GAO work, plan participants could benefit from receiving clearer 

information regarding the conversions they face. See GAO, Private Pensions: 

Implications of Conversions to Cash Balance Plans, GAO/HEHS-00-185 (Washington, 

D.C.: Sept. 29, 2000) and Cash Balance Plans: Implications for Retirement Income, 

GAO/HEHS-00-207 (Washington, D.C.: Sept. 29, 2000). 

7

 See GAO, Private Pensions: Implications of Conversions to Cash Balance Plans, 

GAO/HEHS-00-185 (Washington, D.C.: Sept. 29, 2000). 
Page 3 GAO-06-42 Pension Plans 

discriminatory.8 Employers report this legal uncertainty has made CB plan 

conversions less popular than in the past. In 2000, we reported on the 

implications of conversions to CB plans and recommended legislative and 

executive agency actions to address the regulatory uncertainty concerning 

CB plans and to improve disclosure to affected participants.9

In response to the problems facing the DB system, committees in both the 

House and the Senate have recently proposed legislation that would 

address many issues facing defined benefit plans, including the legal 

uncertainty regarding the formation of new CB plans or the conversion of 

traditional DB plans to CB plans.10 To help in your deliberations, you asked 

us to provide information on the incidence, features, and effects of CB 

plan conversions. More specifically, you asked: (1) What does the current 

research say about the implications of CB plan conversions for workers’ 

benefits? (2) What is the prevalence and types of transition provisions 

provided to protect workers’ benefits in past conversions to CB plans? (3) 

How do individual participants fare under a hypothetical conversion to a 

typical CB plan compared to the typical FAP plan? On September 1, 2005, 

and again on October 12, 2005, we briefed your staff on the results of our 

analysis. This report formally conveys the information provided during 

those briefings. (See app. I). 

To determine the results of current research, we conducted a review of 

academic and business literature regarding CB plans and the conversion of 

traditional DB plans to CB plans. To identify the prevalence and types of 

transition provisions in CB plans, we worked with the 2001 Form 5500 to 

 8

 See Cooper v. IBM Pers. Pension Plan, 274 F.Supp.2d 1010 (S.D. Ill. 2003). 

Compounding this uncertainty, in September 1999, the Internal Revenue Service 

announced that it would begin requiring that applications for the approval of cash balance 

formula designs be forwarded to its headquarters for technical review, resulting in an 

effective moratorium on approving conversions to cash balance plans. 

9

 For more information, see GAO/HEHS-00-185 and GAO, Cash Balance Plans: 

Implications for Retirement Income, GAO/HEHS-00-207 (Washington, D.C.: Sept. 29, 

2000). 

10 See for example, H.R. 2830 and S.1783. 
Page 4 GAO-06-42 Pension Plans 

identify and examine CB plan conversions for their design features.11 We 

first identified all 843 plans with 100 or more participants that indicated a 

CB or hybrid plan component on Form 5500. We then selected a random 

sample of 205 of these plans. Our sample was comprised of the 45 largest 

plans (the smallest of which has about 17,500 participants) and a random 

sample of 160 other plans.12 Of these 205 plans, we identified 31 large plans 

and 102 smaller plans as conversions from traditional DB plans to CB 

plans. (For our methodology, see apps. II, III and IV.) 

To analyze the effects of a CB plan conversion on individual workers, we 

used a pension policy microsimulation model (PENSIM). PENSIM 

simulates lifetime retirement benefits for over 100,000 participants in the 

1955 birth cohort. We calculated and compared monthly retirement 

income for workers from the 1955 birth cohort who are projected to be 

alive at age 68, and vested in a job covered by a typical FAP plan that is 

converted to a CB plan. The model allows comparison of benefits received 

from CB plans and ongoing traditional FAP plans, as well as terminated 

FAP plans. 

We conducted four simulations: 

• typical CB plan versus typical FAP plan, 

• typical CB plan versus terminated FAP plan, 

• equal cost CB plan versus typical FAP plan, and 

• equal cost CB plan versus terminated FAP plan. 

Plan characteristics for the traditional FAP plan and typical CB plan were 

based on Bureau of Labor Statistics’ (BLS) employee compensation and 

benefit data, our analysis of CB conversions as designated in the 2001 

 11 The Form 5500 contains considerable information on plan assets, liabilities, 

contributions, design features, including whether a plan is a cash balance plan. Although 

the Form 5500 provides the most comprehensive data, its problems are well documented. 

Our analysis focused on the features of the CB plan at the time of conversion and thus 

would not include information on how these plans might have been amended since that 

date. It is possible that some sponsors have amended their plans since the initial 

conversion, in light of employee reactions and recent court decisions. Also, it is possible 

that some sponsors have changed other employee benefit plans to help mitigate the 

potential reduction in some workers’ future benefits resulting from a CB plan conversion, 

but determining the nature and extent of such changes was outside the scope of our work. 

12 Estimates based on our random sample of plans are subject to sampling error. We are 95 

percent confident that the true population values are within +/- 9 percentage points of the 

estimated percentages. 
Page 5 GAO-06-42 Pension Plans 

Form 5500 data base and discussions with industry actuaries and 

consultants knowledgeable about CB plans and DB plans generally. We 

developed the features of our equal cost CB plan by starting with the 

design features of the typical CB plan and then increasing both the base 

pay credit and the weighted pay credits (a percentage of pay that increases 

as an employee’s age and/or years of service increase) until the cost was 

equivalent with a traditional FAP plan with a workforce of identical 

actuarial, demographic, and labor market characteristics. (See slides 19 to 

25 in app. I.) We conducted our work between September 2004 and 

September 2005 in accordance with generally accepted government 

auditing standards. 

In summary, we found the following: 

• The pension and economic literature provides little conclusive 

evidence about the effects on benefits and other aspects of CB plan 

conversions, particularly with regard to why sponsors convert to CB 

plans in the first place. (See slides 9 and 10.) In many cases, data and 

other methodological issues (e.g., sampling methods) limit the 

generalization of results. The effects of a conversion depend on a 

variety of factors including the generosity of the CB plan itself, 

transition provisions that might limit any adverse effects on current 

employees,13 and firm-specific employee demographics. CB plan 

conversions are posited to have distributional effects on expected 

pension wealth: younger, more mobile workers usually benefit while 

older workers with long job tenure are more likely to experience a loss, 

particularly if they are near the age and service requirements for early 

retirement. Less research is available on the actual benefit 

distributional effects of such conversions, e.g., how participants are 

likely to fare under a CB plan compared to the traditional DB plan that 

is being replaced. 

• Our analysis of plan conversions determined that most conversions 

occurred between 1990 and 1999, and primarily in the manufacturing, 

health care, finance and insurance industries. Most conversions set 

participants’ opening account balances equal to the present value of 

their accrued benefits under the previous plan, although the interest 

 13 Some firms protected workers against a potential reduction in future benefits by 

grandfathering, at the time of conversion, all or some plan participants. Grandfathering 

allows eligible participants to continue to accrue benefits under the prior formula or entails 

operating both formulas and providing eligible participants with the greater benefit. 

Grandfathering can be implemented in various ways, affecting different groups of workers. 
Page 6 GAO-06-42 Pension Plans 

rate used to calculate the balance varied plus or minus 1 percent of the 

30-year Treasury bond rate. (See slides 11 to 18.)14 The use of interest 

rates above the 30-year Treasury rate is more likely to result in a 

wearaway situation, unless otherwise mitigated. Most plans provided 

some form of transition provisions to mitigate the potential adverse 

effects of a conversion on workers’ expected benefits for at least some 

employees. About 47 percent of all conversions used some form of 

grandfathering that was applied to at least some of the employees in 

the former traditional DB plan.15 In most cases, grandfathering 

eligibility was limited to employees meeting a specified minimum age 

or years of service or both. Most conversions also used some form of 

ongoing weighted pay credit. 

• Our comparison of a typical FAP plan that is converted to a typical CB 

plan finds that, regardless of a worker’s age, more workers would have 

received greater benefits under the FAP than under the typical CB 

plan.16 (See slides 26 to 28.) For workers who receive less under the CB 

conversion, median benefit decreases range from $59 per month at age 

30 to $238 per month at age 50. For the workers who receive more 

under the conversion, median benefit increases range from $15 per 

month at age 30 to $27 per month at age 50.17 Those who experience 

either benefit increases or decreases are more likely to be men, except 

for those at the age 50 conversion, where they are more likely to be 

women. 

 14 IRC section 417(e)(3) stipulates that DB sponsors that permit lump sum distributions 

must, among other conditions, calculate distributions to departing participants using an 

interest rate no greater than 30-year Treasury rate. Using a higher interest rate would result 

in a lower lump sum distribution. 

15 There is a range of types of grandfathering that can be used by plan sponsors. They can 

include provisions such as giving employees a choice of whether to stay in the old FAP 

plan or join the new CB plan, providing a minimum benefit where the employee is 

guaranteed to at least earn the benefit of their former plan until a future specified date, or 

making grandfathering available to only some or all employees in the former plan. 

16 These comparisons are based on amounts of annuity benefits and do not take into 

account death benefit coverage before an annuity begins. For the purpose of this report, it 

is recognized that participants do not have an entitlement to future or expected benefits. 

17 We also conducted a comparison of lifetime benefits for workers under a traditional FAP 

and those converted to a typical CB plan as well as to an equal cost CB plan. In these cases, 

while the number of workers faring better under the CB plans is greater at each age 

compared to the numbers in the monthly benefits calculation, the basic results found under 

the monthly benefit comparison are not changed in either case. (See slides 31-32, 38-39.) 
Page 7 GAO-06-42 Pension Plans 

• In comparing a conversion to a typical CB plan with a terminated FAP, 

all vested workers would do better under the CB plan. Median monthly 

benefits increase at conversion ages 30, 40, and 50, with increases 

ranging from $150 per month for conversions at age 30 to $305 per 

month for conversions at age 50. (See slides 29 to 30.) The increase in 

benefits for older workers is because grandfathered benefits are 

included in these results. Although the analysis focuses on vested 

workers at the time of conversion, under a terminated FAP plan, by law 

all previously unvested workers (those with less than 5 years service) 

are immediately vested.18 

• Under a traditional FAP plan conversion to an equal cost CB plan, 

larger numbers of workers at all ages have benefit increases than under 

the typical CB plan/FAP plan scenario.19 (See slides 33 to 35.) 

Grandfathering again protects the benefits of those older workers who 

were covered. However, while more workers who are converted at age 

30 fare better under the CB plan, this was not true at other ages. A key 

factor is the greater generosity of the equal cost CB plan compared to 

the typical CB plan we also simulated.20 Under the equal cost scenario, 

median reductions range from $75 per month for conversions at age 30 

to $128 per month for conversions at age 50, while median increases 

range from $90 per month for conversions at age 30 to $29 per month 

for conversions at age 50. For all conversion ages, those with longer job 

tenure and who are not covered by grandfathering protections are 

more likely to lose than those workers with shorter tenure. At each 

conversion age, a greater percentage of those who are more likely to 

experience benefit increases are men rather than women. 

• In comparing a conversion to an equal cost CB plan with a terminated 

FAP plan, again all vested workers do better under the CB plan. Median 

increases range from $283 per month for conversions at age 30 to $396 

per month for conversions at age 50. (See slides 36 to 37.) The increase 

in benefits for older workers comes about because grandfathered 

benefits are included in these results. 

 18 In our simulations, about 36 percent of our sampled individuals (57,049) who participated 

in at least one private sector FAP or CB plan never vested in such plans. 

19 Again, these comparisons are based on amounts of annuity benefits and do not take into 

account death benefit coverage before an annuity begins. 

20 This plan’s pay credits were more generous than virtually all of the 136 plan conversions 

we analyzed. 
Page 8 GAO-06-42 Pension Plans 

Our analysis illustrates one of the difficult choices facing the Congress in 

crafting comprehensive DB pension reform legislation, including the 

controversial issues surrounding the legal status of CB plans, and 

particularly CB conversions. The current confusion concerning CB plans is 

largely a consequence of the present mismatch between the ongoing 

developments in pension plan design and a regulatory framework that has 

failed to adapt to these designs. Although CB plans legally are DB plans, 

they do not fit neatly within the existing regulatory structure governing DB 

plans. This mismatch has resulted in considerable regulatory uncertainty 

for employers as well as litigation with potentially significant financial 

liabilities. For many workers, this mismatch has raised questions about the 

confidence they may have in the level of income they expect at retirement, 

confidence that has already been shaken by the termination of large 

pension plans by some bankrupt employers.21

CB plans may provide more understandable benefits and larger accruals to 

workers earlier in their careers, advantages that may be appealing to a 

mobile workforce. However, conversions of traditional FAP plans to CB 

plans redistribute benefits among groups of workers and can result in 

benefits for workers, particularly those who are longer tenured, that fall 

short of those anticipated under the prior FAP plan. Our simulations 

suggest that grandfathering plan participants who are being converted can 

protect those workers’ expected benefits, and, in fact, such protections, in 

some form, are fairly common in conversions. Our simulations also show 

that without such mitigation, many workers can receive less than their 

expected benefits when converted from a traditional FAP plan, even in 

cases where the CB plan is of equal cost to the FAP plan it is replacing. As 

a result, as we noted in our 2000 report,22 additional protections are 

needed to address the potential adverse outcomes stemming from the 

conversion to CB plans. For example, requirements for setting opening 

account balances could protect plan participants, especially older 

workers, from experiencing periods of no new pension accruals after 

conversion while other workers continue to earn benefits. 

Our simulated comparison of CB plans with the termination of a FAP plan 

leads to several important observations. First, the immediate vesting of all 

unvested workers requirement in a plan termination actually leads to a 

greater number of workers getting some retirement benefits and highlights 

 21 See GAO-05-294. 

22 See GAO/HEHS-00-185.

Concluding 

Observations 
Page 9 GAO-06-42 Pension Plans 

the portability limitation of DB plans. Workers in an ongoing DB plan only 

receive benefits if they are vested. Appealing to a mobile workforce would 

seem to place an even greater significance on pension portability. Yet even 

CB plans, which often feature lump sum provisions in their design, do not 

address this issue because they typically have similar vesting requirements 

as traditional FAPs. 

In our simulations, vested workers under either a typical or equal cost CB 

plan still fare better than if the FAP plan is terminated. We note further 

that some sponsors of CB plans have already exited the DB system, a 

system that has been declining in sponsorship and participation for several 

decades now. There is a crucial balance between protecting workers’ 

benefit expectations with unduly burdensome requirements that could 

exacerbate the exodus of plan sponsors from the DB system. Congress, as 

it grapples with the broader components of pension reform, has the 

opportunity not only to protect the benefits promised to millions of 

workers and eliminate the legal uncertainty surrounding CB plans that 

employers face, but also to craft balanced reforms that could stabilize and 

possibly permit the long-term revival of the DB system. 

We provided a draft of this report to the departments of Labor, Treasury, 

and the PBGC. No written comments were provided by these agencies. 

They did, however, provide technical comments, which we incorporated 

as appropriate. 

We plan to provide copies of this report to the Secretaries of the 

Department of Labor and the Department of Treasury and to the Pension 

Benefit Guaranty Corporation and interested congressional offices. We 

will make copies available to others upon request. In addition, the report 

will be available at no charge on the GAO Web site at http://www.gao.gov. 

Agency Comments 
Page 10 GAO-06-42 Pension Plans 

If you have any questions concerning this request please contact me at 

(202) 512-5932. Other major contributors to the report are listed in 

appendix VI. 

Barbara D. Bovbjerg 

Director, Education, Workforce 

 and Income Security Issues 
Appendix I: Information on Cash Balance 

Pension Plans 

Page 11 GAO-06-42 Pension Plans 

Appendix I: Information on Cash Balance 

Pension Plans 

1

Objectives

I. Literature Review: Evaluate current research on the 

implications of cash balance (CB) plan conversions

II. Plan Analysis: Review CB plans for the prevalence 

and types of transition provisions provided to protect 

workers’ benefits when converting to CB plans

III. Simulations: Analyze how participants may fare under 

hypothetical CB plan conversions compared to the 

typical final average pay (FAP) plan and to a 

terminated FAP plan.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 12 GAO-06-42 Pension Plans 

2

Background

• CB pension plans:

• Are a type of hybrid defined benefit (DB) plan that expresses 

benefits as a hypothetical account balance based on pay, service, 

and interest credits. 

• Are classified as DB plans because participants’ benefits are 

determined by a benefit formula.

• FAP plans are a type of DB plan where participants’ benefits are

derived from a formula that is based, in part, on the employee’s final 

average pay.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 13 GAO-06-42 Pension Plans 

3

Background, cont.

• Some conversions to CB plans have been controversial because of the effect 

they may have on pension benefits of workers with different ages and years 

of service. At the same time, CB plans have been noted for providing lump 

sum benefits that can be rolled over upon separation and providing benefit 

accruals based on pay and length of service. 

• Wearaway periods: CB plan conversions can sometimes result in situations 

where some workers do not earn additional pension benefits while other 

workers continue to do so.

• Wearaway can occur for a variety of reasons. Examples of when wearaway 

can occur are:

• At conversion when a participant’s hypothetical opening account balance is set at less than the present value of the prior accrued benefits (the 

level of benefits received if paid out as a lump sum).

• After conversion because of a fall in the federally mandated discount rate used to determine a lump sum amount.

• In relation to annuity benefits earned as of conversion. It is dependent on the the form of annuity selected by the participant and the design of 

early retirement benefits in the prior plan’s formula.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 14 GAO-06-42 Pension Plans 

4

Background, cont.

• During wearaway, pay and interest credits do not represent new 

benefit accruals until the CB account exceeds the value of benefits 

that could be paid under the old plan.

• Wear-away periods tend to be longer for older workers.

• Status of CB plans has been questioned after a court’s ruling that at 

least one CB plan is age discriminatory. In late 1999, the Treasury 

Department stopped issuing IRS determination letters approving CB 

plan conversions. 

• Proposed pension reform legislation includes provisions that could 

clarify some legal issues concerning CB plans. 

• Some analysts believe that CB plans represent a potential opportunity 

to stem the decline or even revitalize the declining DB system.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 15 GAO-06-42 Pension Plans 

5

Methodology

I. Conducted review of academic and business literature. 

II. Analyzed Form 55001 information and attachments from 2003 and 

earlier years capturing design features of CB plan conversions at the 

point of the initial conversion. Initial conversions from a traditional 

DB plan to a CB plan with most covering the period from early 1990s 

to 2003 with a few plan conversions in the mid 1980s. Subsequent 

changes to CB plans’ design were not part of the analysis nor were 

changes made to other plan benefits.

• Identified 843 plans with 100+ participants that indicated CB on

Form 5500 

• Selected the 45 largest plans (1.8 million participants) and a 

random sample of 160 other plans

• Of these 205 plans, 31 large plans and 102 smaller plans met 

criteria as conversions

1The Form 5500 Report, which is completed and filed by the Plan sponsor, is the primary source of information for both the federal government 

and the private sector regarding the operation, funding, assets, and investments of private pension plans and other employee benefit plans. The 

Form 5500 does not provide enough detail to determine the number of participants affected by a conversion.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 16 GAO-06-42 Pension Plans 

6

Methodology, cont.

• Estimates are based on a random sample of plans, so slightly different 

estimates could result from a different random sample. We are 95% 

confident that the true population values are within +/- 9 percentage 

points of the estimate percentages based on our sample.

III. Simulate effects of a conversion to a CB plan and other scenarios –

Used a pension policy micro-simulation model (PENSIM).

• Model simulates lifetime retirement benefits for over 100,000 

participants in the 1955 birth cohort. Lifetime and monthly 

retirement income is analyzed for those who are:

• projected to be alive at age 68, and 

• vested in a job covered by a typical FAP plan that is converted to a CB plan (typical or equal cost). 

• Model allows comparison of benefits received from CB plans, ongoing traditional final average pay plans, and terminated FAPs.

• See appendixes II, III, and IV for a discussion of our methodology.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 17 GAO-06-42 Pension Plans 

7

Summary of Findings

I. Literature provides few generalizable conclusions, 

particularly with regard to:

• why sponsors convert to CB plans 

• the benefit distributional effects of such conversions.

II. Analyzed plan conversions show most, but not all:

• converted accrued benefits into an opening account 

balance and offered some form of transition provisions.

• had age and service eligibility restrictions on transition 

provisions.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 18 GAO-06-42 Pension Plans 

8

Summary of Findings, cont.

III. Regardless of age, workers who were converted from an 

FAP plan to a typical CB plan generally had reductions 

from expected FAP benefits. A majority of younger 

workers received larger benefits under a conversion to an 

equal cost CB plan.

• Analysis of lifetime benefits under a conversion to an 

equal cost CB plan does not change basic findings.

• Vested workers receive larger benefits under a CB 

conversion of either type compared to benefits received 

under termination of an FAP. 
Appendix I: Information on Cash Balance 

Pension Plans 

Page 19 GAO-06-42 Pension Plans 

9

Research Provides Limited Evidence to 

Generalize About CB Conversions

• Data and other methodological issues Data and other methodological issues (e.g., sampling 

methods) limit generalization of results. limit generalization of results. 

• Conversion impact depends on a variety of factors 

including plan generosity, transition provisions, and firm 

specific employee demographics.

• Also, because of the different accrual patterns in a CB 

plan compared to a FAP plan, for a variety of workers, 

the impact of a conversion varies.

I. Literature Review
Appendix I: Information on Cash Balance 

Pension Plans 

Page 20 GAO-06-42 Pension Plans 

10

Research Provides Limited Evidence to 

Generalize About CB Conversions, cont.

• Current research provides limited evidence as to: Current research provides limited evidence as to:

• Why sponsors convert to CB plans. Why sponsors convert to CB plans.

• How participants are likely to fare under a CB plan How participants are likely to fare under a CB plan 

relative to the traditional DB plan that is being replaced. relative to the traditional DB plan that is being replaced.

• CB plan conversions have distributional effects on pension 

wealth:

• Younger, more mobile workers who vest usually benefit.

• Older workers with long job tenure likely to experience a loss, particularly if they are near age and service 

requirements for early retirement.

I. Literature Review

Note: About 36 percent of our sampled individuals (57,049) who participated in at least one private sector FAP or CB plan 

never vested in such plans.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 21 GAO-06-42 Pension Plans 

11

Figure 1: Characteristics of Conversions

Lead Industries

1. Manufacturing 

2. Finance & insurance

3. Health care

Most plans converted prior to 

2000

II. Plan Analysis
Appendix I: Information on Cash Balance 

Pension Plans 

Page 22 GAO-06-42 Pension Plans 

12

Methods for Determining Opening Account 

Balances at Conversion

• There were 2 primary methods for setting the opening account 

balance:

1. Present Value (PV) of old accrual: account balance is based 

on accrued benefit at conversion; or 

2. A+B: (A) preserves prior benefits as annuities + (B) CB 

opening balance is $0.

• Opening account balance depends on a formula that may include 

factors such as interest rates, employer-added incentives, early 

retirement benefits, & other assumptions.

II. Plan Analysis
Appendix I: Information on Cash Balance 

Pension Plans 

Page 23 GAO-06-42 Pension Plans 

13

Figure 2: Most Conversions Set Opening Account 

Balance at Present Value of Old Accrual

II. Plan Analysis
Appendix I: Information on Cash Balance 

Pension Plans 

Page 24 GAO-06-42 Pension Plans 

14

Conversion Interest Rates and Transition 

Provisions Are Key Factors in Wearaway

• 23 of 39 plans with data available used conversion interest rates 

within 1% of the prior month’s 30-year Treasury rate

• Wearaway may occur when a participant’s hypothetical opening 

account balance is set at less than the present value of its accrued 

benefits using 30-year Treasury rate, as specified under the Internal 

Revenue Code.

• Transition provisions (e.g., grandfathering, transition pay credits) 

are important factors in mitigating wearaway.

• Grandfathering prevents wearaway for participants who 

continue to accrue benefits under the prior plan formula.

II. Plan Analysis
Appendix I: Information on Cash Balance 

Pension Plans 

Page 25 GAO-06-42 Pension Plans 

15

Figure 3: Most Sponsors Included Some 

Form of Transition Provisions
Appendix I: Information on Cash Balance 

Pension Plans 

Page 26 GAO-06-42 Pension Plans 

16

About Half of Plans Offered Some Form 

of Grandfathering

• Grandfathering was offered in 47% of all conversions 

and in 55% of the largest converted plans, although 

most of these provisions had some form of age or 

service restrictions.

• Eligibility requirements in plans offering 

grandfathering included:

• age plus service 

• all employees

• age or service

• Age plus service was the method most often used. 

II. Plan Analysis
Appendix I: Information on Cash Balance 

Pension Plans 

Page 27 GAO-06-42 Pension Plans 

17

Most Conversions Used Weighted 

Ongoing Pay Credits

• 62% of all conversions used some form of weighted 

pay credits (those that increase based on the 

participant’s age and/or service). 

• 36% of all conversions used level pay credits (those 

that are a level function of salary). 

• About 42% of large conversions used an age plus 

service method for providing ongoing pay credits.

• Weighted pay credits tend to benefit older and longertenured workers relatively more than level pay credits.

II. Plan Analysis
Appendix I: Information on Cash Balance 

Pension Plans 

Page 28 GAO-06-42 Pension Plans 

18

Figure 4: 36 Percent of All Conversions 

Used Level Pay Credits

II. Plan Analysis

Level 36% Age Plus Service 

24%

Service 24%

Age Plus Service 

42%

Service 13%

Level 19%
Appendix I: Information on Cash Balance 

Pension Plans 

Page 29 GAO-06-42 Pension Plans 

19

Simulations of Plan Conversions

• Compare monthly and lifetime retirement income for workers from 

the 1955 birth cohort who were converted at different ages to a CB 

plan and were either: 

• Not vested in a typical, traditional FAP plan at the time of conversion but stay on the job and later vest; or

• vested at the time of conversion in a typical, traditional FAP plan; 

• 4 Simulations:

• Typical CB plan vs. typical FAP plan 

• Typical CB plan vs. terminated FAP plan 

• Equal cost CB plan vs. typical FAP plan 

• Equal cost CB plan vs. terminated FAP plan 

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 30 GAO-06-42 Pension Plans 

20

Plan Characteristics: Typical Final 

Average Pay Plan

• Immediate eligibility and 5-year cliff vesting and normal retirement 

age 65, early retirement age 55 with 10 years of service with early 

retirement benefit reduction of 5 percent per year.

• Immediate disability retirement benefits for those vested, no 

survivors benefits or joint-and-survivor annuities.

• Benefits paid as a nominal annuity (i.e., no benefit COLA).

• Terminal earnings (final pay) is final five-year average.

• Benefits formula is excess integrated with base rate of 1.5 percent 

of final pay per year of service and has a rate of 0.45 percent of 

final pay per year of service for those amounts in excess of the

social security maximum.

• Typical FAP plan design based on prior GAO reports, literature 

reviews, and discussions with pension actuaries, consultants 

knowledgeable about DB plans.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 31 GAO-06-42 Pension Plans 

21

Plan Characteristics: Typical CashBalance Plan

• Immediate eligibility and five-year cliff vesting; base pay credit of 3.0 

percent of salary for employee with age-plus-service (APS) ≤ 35.

• Pay credit rises gradually until it is 6.0 percentage points above the base 

pay credit for employee with APS ≥ 70.

• Cash-balance account crediting rate is the Treasury rate.

• Employee rolls over account balance at separation and earns Treasury 

rate. Balances converted to nominal single-life annuity at retirement using 

the Treasury rate and the GAM 83 mortality table adjusted to the pertinent 

year.

• Typical CB plan design is based on plans analyzed in GAO’s Form 5500 

data, and confirmed by pension actuaries, consultants knowledgeable 

about CB plans.

• Some typical CB plan design features may have changed in light of recent 

court decisions and congressional interest

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 32 GAO-06-42 Pension Plans 

22

Plan Characteristics: Equal Cost Cash 

Balance Plan

• Same assumptions as the typical CB plan except:

• Base pay credit of 7.35 percent of salary for employee with age-plus-service (APS) ≤ 35.

• Pay credit rises gradually until it is 6.0 percentage points above the base pay credit for employee with APS ≥ 70.

• Equal cost CB plan used for our simulations is: 

• More generous pay credits than virtually all plans in our Form 5500 analysis

• More generous than those specified in pension research 

• Though not explicitly modeled, to some extent, our equal cost cash balance plan could be considered to implicitly 

include other enhancements made by employers to other 

benefits, such as those provided by a DC plan, for 

example.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 33 GAO-06-42 Pension Plans 

23

Plan Characteristics: Cash-Balance Plan 

Conversions

• Opening cash balance equal to the present value of accrued finalpay benefit at plan conversion date. Discount rate is the 30-year 

Treasury rate. Mortality table is GAM 83 projected for mortality 

improvements to the pertinent year.

• Employees who meet an age-plus-service (APS) ≥ 60 eligibility 

requirement at plan conversion date are grandfathered under the 

FAP plan and receive benefits according to that plan’s provisions.

• Treatment of early retirement benefits:

• The FAP plan considered in this report has a modest early retirement subsidy: benefits are reduced by 5 percent for each 

year benefits are claimed before age 65.

• Federal anti-cutback rules are simulated correctly in that when a FAP plan is converted or terminated, employees who remain 

with the firm until early retirement age are eligible for early 

retirement benefits under the old plan.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 34 GAO-06-42 Pension Plans 

24

Plan Characteristics: Terminated FAP 

Plan

• Same assumptions as the typical FAP plan and:

• Terminated FAP plan has immediate cessation of 

additional benefit accrual.

• Current law on plan terminations requires “immediate 

vesting” for “non-vested” workers regardless of years of 

service. This results in previously ineligible workers now 

receiving a small benefit. 

• Analysis focuses on “vested” workers only -- those with at 

least five years service. 

• FAP plan and termination scenarios provide benchmark 

range of possible comparisons, including plan freezes

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 35 GAO-06-42 Pension Plans 

25

Monthly Retirement Income Results vs. 

Lifetime Benefits Results

• Results are shown in terms of present value of lifetime benefits for 

those alive at age 68 and monthly retirement income for those alive 

at age 68. Age 68 is the age when the largest number of 

individuals are retired and alive in our sample.

• Monthly benefit and lifetime benefit comparisons for those alive at 

age 68 will have slightly different results:

• For example, vested workers under CB plans who typically separate earlier in their careers may start benefits at a different 

age compared to similar workers who separate from an FAP 

plan. 

• Thus, the present value of lifetime benefits paid to these workers under CB plans may be distributed over a different time 

period than for similar workers under FAP plans. So monthly 

benefits may be slightly different.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 36 GAO-06-42 Pension Plans 

26

Comparisons of Median Monthly Retirement 

Income: Typical CB Plan vs. Typical FAP Plan

• Regardless of age at conversion, more workers who are converted from a FAP plan to the typical CB plan experience benefit reductions. (See figure 

5).

• Key factor is lack of generosity of the typical CB plan.

• Grandfathering protects those workers who meet eligibility requirements.

• For those not grandfathered, at conversion ages 30, 40, and 50: (See figure 6)

• Reductions in median monthly income range from $59 for conversions at age 30 to $238 for conversions at age 50. 

• Increases range from $15 per month for conversions at age 30 to $27 per month for conversions at age 50.

• Those who benefit as well as those who lose from conversion at ages 30 and 40 are more likely to be men and at age 50 are more likely to be 

women. 

• At all conversion ages, those experiencing greater benefits from conversion are generally more highly educated and have higher incomes. 

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 37 GAO-06-42 Pension Plans 

27

Figure 5: All Conversion Ages in Typical CB Plan More 

Likely to Have Lower Monthly Benefits Compared to 

Typical FAP

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 38 GAO-06-42 Pension Plans 

28

Figure 6: Median Monthly Difference in Retirement 

Income For Those Not Covered By Grandfathering 

Under Selected Conversion Ages

Baseline Median Benefit: $809 $1083

III. Simulations

Median benefits before conversion at age 30 is $809, at age 40 is $1083, and at age 50 is $1323. 
Appendix I: Information on Cash Balance 

Pension Plans 

Page 39 GAO-06-42 Pension Plans 

29

Comparisons of Median Monthly Retirement Income: 

Typical CB Plan Conversion vs. Terminated Typical 

FAP Plan

• Regardless of age, all vested workers who converted to 

a typical CB plan experienced monthly benefit increases 

compared to a terminated FAP plan. 

• At conversion ages 30, 40, and 50, increases range 

from $150 per month for conversions at age 30 to $305 

per month at age 50. Grandfathered benefits for those 

eligible under the CB plan greatly impact results shown 

for older workers.(See figure 7.) 

• Terminated plan benefits are shown for only those 

participants who were vested in the typical CB plan.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 40 GAO-06-42 Pension Plans 

30

Figure 7: Median Monthly Benefits Greater for Typical 

CB Plan Conversion Than Terminated FAP Plan

III. Simulations

Median benefits before conversion at age 30 is $390, at age 40 is $454, and at age 50 is $742. These results include grandfathered benefits for 

those with APS >=60. 
Appendix I: Information on Cash Balance 

Pension Plans 

Page 41 GAO-06-42 Pension Plans 

31

Workers Converted to Typical CB Plan from Typical 

FAP at Earlier Ages Generally Receive Reduced 

Lifetime Benefits

• Comparison of lifetime benefits for typical CB plan and 

typical FAP plan does not change basic findings from 

monthly benefit comparisons.

• Regardless of age at conversion, more workers who 

are converted from a FAP plan to the typical CB plan 

have lower present value of lifetime benefits. (See 

figure 8.) 

• Nearly half of workers experiencing a conversion at 

age 50 are grandfathered in their FAP benefit.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 42 GAO-06-42 Pension Plans 

32

Figure 8: Present Value of Lifetime Benefits 

Comparison of Typical FAP vs. Typical CB

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 43 GAO-06-42 Pension Plans 

33

Grandfathering Protects Eligible Older Workers’ 

Monthly Benefits When Converted to an Equal Cost 

CB Plan from a Typical FAP Plan

• Grandfathering protects eligible older workers’ benefits converted to an equal cost CB Plan from a FAP Plan (See figure 9.)

• More workers who converted from a FAP plan to an equal cost CB at age 30 generally experience monthly benefit increases 

• Increases range from $90 per month for conversions at age 30 to $29 per month for conversions at age 50. (See figure 10.) 

• Reductions range from $75 per month for conversions at age 30 to $128 per month for conversions at age 50. 

• For all conversion ages, those with a longer job tenure and who are not covered by grandfathering protections are more likely to 

experience lower benefits than those with shorter tenure 

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 44 GAO-06-42 Pension Plans 

34

Figure 9: Workers Who Convert at Age 30 More Likely 

to Have Higher Monthly Benefits under Conversion 

to Equal Cost CB Plan from Typical FAP

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 45 GAO-06-42 Pension Plans 

35

Figure 10: Median Monthly Difference in Retirement 

Income for Those with No Grandfathering Protection 

under Various Conversion Ages (2004 $)

III. Simulations

Median benefits before conversion at age 30 is $809, at age 40 is $1083, and at age 50 is $1323. 
Appendix I: Information on Cash Balance 

Pension Plans 

Page 46 GAO-06-42 Pension Plans 

36

Comparisons of Median Monthly Retirement Income: 

Equal Cost CB Plan vs. Terminated Typical FAP Plan

• Regardless of age, all vested workers who converted to 

an equal cost CB plan experience benefit gains 

compared to a terminated FAP. 

• Median increases range from $283 per month for 

conversions at age 30 to $396 per month for 

conversions at age 50. Grandfathered benefits for older 

workers under the CB greatly impact results.(See figure 

11.)

• Terminated plan benefits are shown for only those 

participants who were vested in the equal cost CB 

plan.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 47 GAO-06-42 Pension Plans 

37

Figure 11: Median Monthly Retirement Income 

Greater under Equal Cost CB Plan Conversion Than 

Terminated FAP Plan

III. Simulations

Median benefits before conversion at age 30 is $390, at age 40 is $454, and at age 50 is $742. 

These results include grandfathered benefits for those with APS >= 60.
Appendix I: Information on Cash Balance 

Pension Plans 

Page 48 GAO-06-42 Pension Plans 

38

Workers Converted to Equal Cost CB Plan from 

Typical FAP at Age 30 Receive Greater Lifetime 

Benefits

• Comparison of lifetime benefits for equal cost CB plan and typical 

FAP plan consistent with basic findings from monthly benefit 

comparisons (See figure 12).

• More workers converted to an equal cost CB plan from a typical 

FAP at age 30 receive greater present value of lifetime benefits

through conversion than would at later conversion ages. 

• Nearly half of workers experiencing a conversion at age 50 are 

grandfathered in their FAP benefit, while a significant number 

(41%) of unprotected workers converted at age 50 experience a 

lower present value of lifetime benefits.

• Outside of grandfather protections, results show a redistribution 

of benefits from older workers to younger workers.

III. Simulations
Appendix I: Information on Cash Balance 

Pension Plans 

Page 49 GAO-06-42 Pension Plans 

39

Figure 12: Present Value of Lifetime Benefits 

Comparison of Equal Cost CB vs. Typical FAP

III. Simulations
Appendix II: Review of Literature on Cash 

Balance Plans 

Page 50 GAO-06-42 Pension Plans 

GAO compiled a comprehensive list of the academic literature on CB 

pension plans since our last reports on the subject issued in 2000,1

focusing on those studies that contained original and material empirical 

work on the issue. After constructing a list of the relevant literature, we 

eliminated partial or incomplete studies, those that did not contain 

material empirical work and those that exhibited serious methodological 

concerns. We then conducted a more detailed review of the remaining 

studies, including several surveys of CB plans. The review concentrated on 

the studies’ findings and on the methodological issues that may limit 

conclusions that can be reached. There is a list of the studies and surveys 

reviewed for this report at the end of this appendix.2

Although there are academic studies that attempt to go beyond anecdotal 

information, the literature remains in its infancy. Data and other 

methodological issues often limit the conclusions that the empirical 

studies examining the impact of plan conversions can reach and, the 

ability to generalize their results. In general, the results of all studies are 

sensitive to assumptions regarding earnings growth, interest rates, 

investment returns, and turnover rates. Because some specifics of the 

simulations presented in some studies do not include sufficient detail, it is 

difficult to evaluate the quality of the estimates in some cases.3

 1 See GAO, Cash Balance Plans: Implications for Retirement Income, GAO/HEHS-00-207

(Washington, D.C.: Sept. 29, 2000) and GAO, Private Pensions: Implications of

Conversions to Cash Balance Plans, GAO-HEHS-00-185 (Washington, D.C.: Sept. 29, 2000). 

2

 Since we focused on empirical literature produced since 2000, we did not include one 

older study that is cited in the literature in our detailed review (Kopp and Sher, “A Benefit 

Value Comparison of a Cash Balance Plan with a Traditional Average Pay Defined Benefit 

Plan,” The Pension Forum [Society of Actuaries, October 1998]). The study contains data

and other methodological limitations, as well as making similar conclusions. For example, 

because the study examines hypothetical rather than actual plan conversions, it is not clear 

that the results extend to the broader workforce. Additional limitations include that fact 

that the authors had limited wage information and therefore relied on simple wage 

assumptions rather than actual wage histories and did not test the sensitivity of the results 

to the assumptions made regarding key variables. 

3 See for example, Watson Wyatt Worldwide, The Unfolding of a Predictable Surprise: A 

Comprehensive Analysis of the Shift from Traditional to Hybrid Plans (2000) and Robert 

Clark, and Sylvester Schieber, “The Transition to Hybrid Pension Plans in the United 

States: An Empirical Analysis,” Private Pensions and Public Policies, eds. W. Gale et al. 

(Washington, D.C.: Brookings Institution, 2004). 

Appendix II: Review of Literature on Cash 

Balance Plans 
Appendix II: Review of Literature on Cash 

Balance Plans 

Page 51 GAO-06-42 Pension Plans 

Because of the limited availability of data on actual conversions and on 

the workforce associated with a particular conversion, few empirical 

studies have the ability to examine actual conversions.4

 Because a range of 

factors that are unique to each conversion influence the final impact on 

workers—including demographic characteristics, the transition benefits 

offered during the conversion and the generosity of the new CB plan 

relative to the old plan it is replacing—it is difficult to extend the results of 

the literature to the actual experience of workers. For example, in the 

conversion to a new plan, a sponsor may eliminate early retirement 

subsidies—a significant reason why older workers may receive lower 

benefits. Similarly, some employers may offer transition benefits that can 

help to ameliorate the adverse effects of plan changes on the more senior 

segment of the workforce, while others do not. Other studies focus on 

“hypothetical” or “prototypical” workers instead of actual employees and 

therefore cannot make definitive statements about many segments of the 

population or actual workers in the plans analyzed.5

In addition, the majority of the research simulates the effects of plan 

conversions on the workforce assuming that the conversion is cost neutral 

(the cost of the new CB plan is equal to the cost of the old DB plan so that 

overall pension benefits remain constant). However, some research 

suggests that the retirement benefit implications due to a shift to a less 

generous CB plan differ materially from the effects of a cost-neutral 

conversion.6

 Moreover, several studies were limited to plans that include 

transition benefits that often ensure that existing workers do not suffer 

significant losses in pension wealth during plan conversions and exclude 

 4

 Virtually all researchers studying this issue, including GAO, have suffered these data 

limitations. 

5

 The use of hypothetical workers is also a limitation of prior GAO reports on cash balance 

plans. See GAO-02-207 and GAO-00-185. 

6

 See, for example, Watson Wyatt Worldwide (2000). In simulating the effects of one 

conversion to a cost-reducing cash balance plan, the authors find that the majority of 

workers receive lower benefits. However, another simulation of a shift to a cost neutral 

plan finds that the majority of the workers receive higher benefits and, although the losses 

are disproportionately borne by the older workers, they are lower than the losses 

experienced in the cost-reducing case. 

Lack of Available Data 

Limits Empirical Studies 
Appendix II: Review of Literature on Cash 

Balance Plans 

Page 52 GAO-06-42 Pension Plans 

pension wealth on previous jobs.7 Thus, their inclusion/omission may lead 

to a bias in the empirical findings either in favor or against CB plan 

designs. 

Some studies examine only a few plan conversions or rely on assumptions 

based upon information extracted from the limited surveys discussed 

below. Since the plans analyzed may not be representative, the outcomes 

may not generalize to the typical CB conversion or related to the broader 

workforce.8

A few widely cited studies which use survey data in an attempt to 

determine the reasons why employers initiate CB plan conversions contain 

methodological limitations and base their conclusions on employers’ self 

perceptions along with additional biases, and cannot be extended beyond 

the small samples of firms studied.9

 For example, one study is limited by a 

low response rate (20 percent) and insufficient information about the 

population and sampling method, survey instrument and its development, 

while the others raise concerns over the potential for sample bias and/or 

the additional bias due to the fact that over half of the plans evaluated 

were those for which the researchers were the primary design 

 

7

 This pertains to the majority of the literature we reviewed. Although Johnson and Uccello 

(R.W. Johnson, and C. Uccello, “Cash Balance Plans and the Distribution of Pension 

Wealth,” Industrial Relations, 42(4) [2003], 745-773) include pension wealth on previous 

jobs, analyze actual workers and capture a greater diversity of outcomes, the results do not 

generalize to cost-reducing plan conversions or conversions where the defined benefit plan 

incorporated early retirement incentives (see below for more on the cost neutral 

assumption). Moreover, the pension wealth in cash balance plans may be exaggerated 

because of issues with the data and the assumptions regarding turnover rates. 

8

For example, see several studies conducted by Schieber (including Clark and Schieber 

[2004]) which are derived from data on 77 plans collected and analyzed initially by Watson 

Wyatt Worldwide in their 2000 study. Given estimates of the number of actual cash balance 

conversions and their growth since 2000, it is not clear that this work can be used as a 

reliable guide to gauging the impact of a typical cash balance conversion on workers. 

Moreover, GAO found other research studies that were based on significantly fewer cash 

balance conversions, e.g., Clark and F.W. Munzenmaier (R. Clark, and F.W. Munzenmaier. 

“Impact of Replacing a Defined Benefit Pension with a Defined Contribution Plan or a Cash 

Balance Plan.” North American Actuarial Journal, 5 (1). (2003-4): 32-56. (2001). 

9 See, for example, Watson Wyatt Worldwide (2000); PriceWaterhouseCoopers, Survey of 

Conversions from Traditional Pension Plans to Cash Balance Plans (2000); and Mellon 

Financial Corporation, 2004 Survey of Cash Balance Plans (Secaucus, N.J.: 2004). 

Small Sample Size Limits 

Survey Reports 
Appendix II: Review of Literature on Cash 

Balance Plans 

Page 53 GAO-06-42 Pension Plans 

consultants.10 In general, we determined that the results from these 

surveys may not be representative of the population of CB plan 

conversions and methodological limitations suggest that the results should 

be interpreted with caution. 

Clark, Robert. “Pension Plan Options: Preferences, Choices and the 

Distribution of Benefits.” Pension Research Council Working Paper, PRC 

WP. 2003-24. 

Clark, Robert, and Fred W. Munzenmaier. “Impact of Replacing a Defined 

Benefit Pension with a Defined Contribution Plan or a Cash Balance Plan.” 

North American Actuarial Journal, 5 (1). (2003-4): 32-56. 

Clark, Robert, and Sylvester Schieber. “The Transition to Hybrid Pension 

Plans in the United States: An Empirical Analysis.” Private Pensions and 

Public Policies, eds. W. Gale et al. Washington, D.C.: Brookings 

Institution. 2004. 

Coronado, Julia, and Philip Copeland. “Cash Balance Pension Plan 

Conversions and the New Economy.” Federal Reserve Board Working 

Paper. November 2003. 

D’Souza, Julia, John Jacob, and Barbara Lougee. Why Do Firms Convert to 

Cash Balance Pension Plans? An Empirical Investigation. Cornell 

University, December 2004. 

Johnson, R.W., and C. Uccello. “Cash Balance Plans and the Distribution of 

Pension Wealth.” Industrial Relations, 42(4) (2003): 745-773. 

Mellon Financial Corporation. 2004 Survey of Cash Balance Plans. 

Secaucus, N.J.: 2004. 

Niehaus, Greg, and Tong Yu. “Cash-Balance Plan Conversions: Evidence 

on Excise Taxes and Implicit Contracts.” The Journal of Risk and 

Insurance, 72(2). 2005. 

PriceWaterhouseCoopers. Survey of Conversions from Traditional 

Pension Plans to Cash Balance Plans. July 2000. 

 10 PriceWaterhouseCoopers (2000). 

Studies and Surveys 

Reviewed 
Appendix II: Review of Literature on Cash 

Balance Plans 

Page 54 GAO-06-42 Pension Plans 

Purcell, Patrick. Pension Issues: Cash Balance Plans. Washington, D.C.: 

Congressional Research Service, August 2003. 

Rao, A., L. Higgins, and S. Taylor. “Cash Balance Pension Plans: Good 

News or Bad News.” Journal of Applied Business Research, 18 (3). 2002. 

Samwick, Andrew, and Jonathan Skinner. “How will 401(k) Plans Affect 

Retirement Income?.” American Economic Review, Vol. 94, No.1. March 

2004. 11

Schieber, Sylvester. “The Shift to Hybrid Pensions by U.S. Employers: An 

Empirical Analysis of Actual Plan Conversions.” Pension Research 

Council Working Paper, PRC WP. 2003-23. 

Watson Wyatt Worldwide. The Unfolding of a Predictable Surprise: A 

Comprehensive Analysis of the Shift from Traditional to Hybrid Plans. 

2000.12 

 11 Findings of this paper are not directly discussed in this appendix as it involves an 

assessment of plan conversions from traditional defined benefit plans to defined 

contribution plans. 

12 Looking at 78 plan conversions, Watson Wyatt Worldwide (2000) found that 56.4 percent 

of the plans were cost-reducing, 20.5 percent were cost-neutral and 23.1 were costincreasing. However, when the authors assumed workers took full advantage of the 

enhancements to the defined contribution plan that occurred contemporaneously with the 

transition, 44.9 percent of the plans were cost reducing, 17.9 percent were cost neutral and 

37.2 percent were cost increasing. This work has led some researchers to deduce that the 

average cash balance conversion is cost neutral, since the majority of the plans (55.1 

percent) were cost-neutral or increasing. However, as we indicated earlier, it is not clear 

that this small sample of conversions is representative. Also, some recent statistics do not 

support the assumption of full participation used by Watson Wyatt to incorporate these 

enhancements. For example, some estimates suggest that a significant percentage of 

employees do not participate in their 401(k) program at all, and the majority of those that 

do participate do not maximize the value of the plan. See Congressional Research Service, 

Automatic Enrollment in Section 401(k) Plans (Washington, D.C., Oct. 14, 2004). The 

CRS found that because enrollment in most §401(k) plans is voluntary, not all workers 

whose employers offer a plan choose to participate. ‘The Bureau of Labor Statistics reports 

that in 2003, 51 percent of workers in the private sector were employed at establishments 

that offered a defined contribution plan, but just 40 percent of employees at private 

establishments participated in a plan. Consequently, the participation rate among 

employees whose employer offered a DC plan was 78 percent.” Also see Alicia H. Munnell 

and Annika Sundén, Coming Up Short: The Challenge of 401(k) Plans (Washington, D.C.: 

Brookings Institution Press, 2004).

The authors conclude that one in four employees do not participate in a 401(k) plan, and 

less than 10 percent contribute the maximum. 
Appendix III: Analysis of Form 5500 Data on 

Cash Balance Plans 

Page 55 GAO-06-42 Pension Plans 

To obtain information about CB plan conversions, we reviewed 2001 Form 

5500 data for a random sample of CB plans. We drew this sample from the 

population of plan sponsors that indicated on their Form 5500 that they 

sponsored a CB plan.1

 The study population consisted of all CB plans as of 

2001 having at least 100 active participants, supplemented with an 

additional 96 CB plans that were identified by PBGC based on 2002 and 

2003 data not yet available to the GAO. For the purpose of this report, we 

excluded plans having fewer than 100 participants in order to focus on the 

plans with the greatest number of participants.2 This resulted in a total of 

843 plans in our study population. 

We used the Form 5500 as our primary source of information for analyzing 

the prevalence of transition provisions used by plan sponsors when they 

converted to a CB plan because it was a cost effective way of obtaining 

conversion information for a large number of plans. It would have been 

optimal to obtain summary plan descriptions (SPD) from plan sponsors. 

However, since plan sponsors are no longer required to file SPDs, direct 

contact with such a large number of plan sponsors would have been cost 

prohibitive.3

Although it is the most comprehensive pension data available, using Form 

5500 data also presented limitations and weaknesses. We had limited 

ability to determine the full scope of conversions beyond tax year 2001 

since this was the most current and complete 5500 data publicly available 

from the Department of Labor (Labor) when we began our analysis. In 

addition, we also had difficulty obtaining Form 5500 filings for some years, 

particularly from the early 1990s and before. As previously reported by 

GAO,4

 statutory reporting requirements, processing issues, and current 

 1

 The Form 5500 is a disclosure form that private sector employers with qualified pension 

plans are required to file with the Internal Revenue Service (IRS), Labor’s Employee 

Benefit Security Administration (EBSA), and Pension Benefit Guaranty Corporation 

(PBGC). This dataset contains all private sector single employer DB plans that are insured 

by the PBGC. 

2

 There were 1590 plans of any participant size that indicated they were cash balance plans 

in the Form 5500. 

3

 Effective August 5, 1997, with the passage of the Taxpayer Relief Act of 1997, plan 

sponsors were no longer required to file summary plan descriptions or related documents 

with the Department of Labor. Instead, plans are required to furnish this information only 

upon request. 

4

 See GAO, Private Pensions: Government Actions Could Improve the Timeliness and 

Content of Form 5500 Pension Information, GAO-05-491 (Washington, D.C.: June 2005). 

Appendix III: Analysis of Form 5500 Data on 

Cash Balance Plans 

Sample of Cash 

Balance Plans 
Appendix III: Analysis of Form 5500 Data on 

Cash Balance Plans 

Page 56 GAO-06-42 Pension Plans 

Labor practices affect the timeliness of the release of available Form 5500 

information, in some cases, resulting in a 3-year lag between data 

reporting and its release. In addition, information provided on the form 

and attachments proved, in some instances, to be inconsistent from one 

plan sponsor to another. This inconsistency hampered our data collection 

efforts, and subsequently, we were unable to provide meaningful results 

on all of the information our data collection instrument was designed to 

capture. For example, we found that not all plans reported having a lump 

sum feature for those who separate before retirement although we 

believed some of those plans did so. In addition, some plans provided 

extensive details on discount rates and formulas used in their opening 

account balance calculations while others provided no information. In 

situations where we could not find information on the form or its 

attachments, we recorded this as “information not found.” Finally, 

although the Form 5500 provides information on the number of active 

participants in the entire plan, it was often impossible to determine how 

many of those participants were converted to the CB plan in instances 

where only certain employee groups were converted. Nevertheless, our 

estimates are based on plan-level data. 

The sample design for this study was a stratified random sample of CB 

plans, with the 45 largest plans comprising the first stratum, and an 

additional 160 plans selected from the remaining plans, producing a total 

sample of 205 plans. Of these sampled plans, we obtained sufficient plan 

information for 165, we found 21 plans to be out-of-scope for our study 

(not CB plans), and for 19 plans we could not obtain sufficient information 

on the plans. Also, of these 205 sampled plans, 7 plans started a new CB 

plan only for the new employees, while keeping their existing employees 

in the traditional DB plan. We did not include these plans in our analysis 

since they were start-up CB plans and not converted CB plans. 

This sample disposition information is summarized in table 1. 

Sample Design 
Appendix III: Analysis of Form 5500 Data on 

Cash Balance Plans 

Page 57 GAO-06-42 Pension Plans 

Table 1: Cash Balance Plan Sample Disposition 

Stratum Population Sample 

Not CB 

plana

Sufficient 

information Converted plan

Insufficient 

information

Completion 

rate

1. Largest 45 

plans 

45 45 2 40 31 3 93%

2. Rest of 

plans 

798 160 19 125 102 16 90%

Total 843 205 21 165 133 19

Source: GAO analysis of sampled Form 5500 data.

a

Sampled plans that were determined to be hybrid plans other than CB plans were outside the scope 

of this study. 

After obtaining Form 5500s, attachments, and summary plan descriptions 

where available5

 for sampled plans, we recorded plan features on a 

standardized instrument containing 51 questions designed to capture 

information about 

• characteristics of the traditional DB plan, such as the conversion date 

and the type of DB plan in place before the conversion; 

• the conversion such as when it took place, which employees were 

affected, and the type of transition provisions used; and 

• the ongoing features of the CB plan, such as pay credits and interest 

credits provided at the time of conversion. 

Estimates of converted CB plans were based on our sample of CB plans. 

Estimates for this target population were formed by weighting the survey 

data to account for both the sample design and the completion rate. 

Because we surveyed a sample of CB plans, our estimates are subject to 

sampling errors that are associated with samples of this size and type. A 

 5

 We had some summary plan descriptions available to us as a result of past GAO work on 

cash balance issues. See GAO, Private Pensions: Implications of Conversions to Cash 

Balance Plans, GAO/HEHS-00-185 (Washington D.C.: September 2000) and GAO, Cash 

Balance Plans: Implications for Retirement Income, GAO/HEHS-00-207 (Washington D.C.: 

September 2000). We determined that some plans that had supplied summary plan 

descriptions reviewed in those studies were also included in the sample of this study. In 

addition, for this study a few plan sponsors provided plan documents upon our request for 

additional information and information on a few other plans was available via the Internet. 

Description of the 

Review 

Estimates 

Sampling Error 
Appendix III: Analysis of Form 5500 Data on 

Cash Balance Plans 

Page 58 GAO-06-42 Pension Plans 

different random sample could produce slightly different estimates. Our 

confidence in the precision of the results from this sample is expressed in 

95 percent confidence intervals. The 95 percent confidence intervals are 

expected to include the actual results for 95 percent of the samples of this 

type. We calculated confidence intervals for our study results using 

methods that are appropriate for a stratified, probability sample. For the 

percentages presented in this report, we are 95 percent confident that the 

results we would have obtained if we had studied the entire study 

population are within ± 9 or fewer percentage points of our results. For 

example, we estimate that 47 percent of the CB plan conversions offered 

some form of grandfathering. The 95 percent confidence interval for this 

estimate would be no wider than ± 9 percent, or from 38 percent to 56 

percent. 

In addition to sampling error, the practical difficulties in conducting 

sample file reviews of this type may introduce other types of errors, 

commonly referred to as nonsampling errors. For example, questions may 

be misinterpreted, or errors could be made in keying questionnaire data. 

We took several steps to reduce these errors. 

To minimize some of these errors, each completed data collection 

instrument was verified for accuracy, and a process of content analysis 

was undertaken to resolve interpretation differences. We performed 100 

percent verification of all keypunched questionnaire data. We also traced 

and verified the data collection instrument to descriptive statistics and 

output generated by GAO data analyst staff. In the event of changes, the 

entire verification process was again performed which included 100 

percent verification of the new keypunched data, additional content 

analysis to verify the change being made, and reverifying the output 

generated by the data analyst staff. 

In addition, we were only to record a plan as having a characteristic if 

evidence of that characteristic was found in the file review. For example, it 

is possible that some CB plans had transition provisions at conversion that 

were not clearly indicated in the 5500 files and attachments. We can only 

conclude that evidence of transition provisions being offered was not 

found in the 5500 data for this plan. 

Nonsampling Error 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 59 GAO-06-42 Pension Plans 

To analyze the effects of a CB plan conversion on individual workers, we 

used a pension policy simulation model PENSIM.1

 PENSIM is a dynamic 

microsimulation model for analysis of the retirement income implication 

of government policies affecting employer-sponsored pensions. The model 

has been developed by the Policy Simulation Group (PSG) since 1997 with 

funding by the Office of Policy and Research at the EBSA of the U.S. 

Department of Labor. To meet GAO’s needs for this project the model 

includes several enhancements that permit the analysis of CB plan 

conversions. 

PENSIM uses discrete event simulation methods to generate a sample of 

life histories that reflect the effects of individual risks (mortality, 

disability, earnings, etc.). The likelihood and timing of simulated life 

events are represented by a variety of probability models, including hazard 

functions and multinomial logit models that have been estimated using 

various survey data sets. The timing of job history events and employer 

pension sponsorship are estimated using longitudinal SIPP data and 

longer-term longitudinal PSID data. Simulated life histories contain 

information on educational attainment, disability, mortality, and a 

complete job history that includes details on earnings and pension 

accumulation for each job. Details of pension plan(s) covering a worker 

on a job are assigned using a pension characteristics imputation model, 

which has been estimated with late-1990s BLS Employee Benefit Survey 

data.2

 Life histories simulated by PENSIM generate social security benefit 

and payroll tax results similar to those generated by the Congressional 

Budget Office’s long-term social security model (CBOLT). 

PENSIM simulates the pension accruals of employees as they move from 

job to job over their lifetime and estimates their retirement income from a 

lifetime of pension coverage. With its CB plan analysis capability, PENSIM 

can also simulate changes in retirement income caused by conversions 

from traditional defined benefit pension plans to CB pension plans. 

PENSIM produces a large random sample of simulated life histories for 

people born in a given year and for their spouses who may have been born 

in a different year. For our report, we do not include spousal benefits in 

the analysis. The members of the birth cohort sample experience 

demographic and economic events, the incidence and timing of which vary 

 1

 For more information on PENSIM, go to http://www.polsim.com/PENSIM.html. 

2

 For more information on the pension characteristics imputation model, go to 

http://www.polsim.com/penchar.pdf. 

Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 60 GAO-06-42 Pension Plans 

by age, gender, education, disability, and employment status. The types of 

life events that are simulated in PENSIM include 

• demographic events (birth, death); 

• schooling events (leaving school at a certain age, receiving a certain 

educational credential); 

• family events (marriage, divorce, childbirth); 

• disability events; 

• initial job placement; 

• job mobility events (earnings increases while on a job, duration of a 

job, movement to a new job, or out of the labor force); 

• pension events (becoming eligible for plan participation, choosing to 

participate, becoming vested, etc.); and 

• retirement events. 

This broad scope of simulated life events is necessary in order to simulate 

lifetime pension accruals with any realism. 

Three pension plans are used in this study to simulate several kinds of 

private-sector plan conversions and terminations. The baseline from which 

the conversion/termination analysis starts is a typical final-pay defined 

benefit pension plan (“typical FAP”). This typical FAP plan has common 

private-sector characteristics and a benefit formula that produce an 

employer cost of providing the pension equal to the average cost of the full 

variety of final-pay plans observed in BLS Employee Benefit Survey data.3

The second plan considered in the analysis is a typical CB pension plan 

(“typical CB”) that has been specified to have characteristics found to be 

typical of the plans we analyzed in the GAO Form 5500 data collection 

 3

 We chose to evaluate the effects of converting or terminating a typical FAP to determine 

the changes in benefits that would be experienced by those currently participating in a FAP 

plan. An alternate approach would be to base the typical plan on characteristics of FAP 

plans that elected to convert or terminate. However, this would have required additional 

information and analysis related to the individual circumstances of such FAP plans that 

were outside of the scope of our study. While such an alternative could be used to evaluate 

the effect of past conversions and terminations on affected participants, the results would 

be limited in predicting the effect of future conversions or terminations on those currently 

covered by a FAP pension plan. 

Simulated Pension 

Plans 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

06-42templated.doc 

Page 61 GAO-06-42 Pension Plans 

conducted as part of this study.4 The third plan is a more generous version 

of the typical CB pension plan (“equal-cost CB”) that has been constructed 

to have the same employer cost as the typical FP plan. 

The typical FAP plan has the following characteristics 

• immediate eligibility; 

• 5-year cliff vesting; 

• normal retirement age of 65; 

• early retirement age of 55 with 10 years of service with benefits 

reduced by five percent for each year of early retirement (i.e., fifty 

percent reduction at age 55); 

• immediate unreduced disability retirement benefit for those who are 

vested; 

• no survivors’ benefit for those who die on the job; 

• selection of single-life annuity at retirement (no selection of joint and 

survivor annuity because study ignores survivors’ benefits); 

• benefit paid as a nominal annuity (i.e., no benefit COLA); 

• FAP is the highest consecutive five-year average; and 

• benefit formula is excess integrated with a base rate of 1.5 percent of 

final pay per year of service and has a rate of 0.45 percent of final pay 

per year of service for those amounts over the social security 

maximum. 

The typical CB plan has the following characteristics 

• immediate eligibility; 

• 5-year cliff vesting; 

• base pay credit of 3.0 percent of salary for employee with age plus 

service of less than or equal to 35; 

• pay credit rises gradually until it is 6.0 percentage points above the 

base pay credit for employee with age plus service greater than or 

equal to 70 (this results in a maximum pay credit of 9.0 percent of 

salary); 

• interest credit is calculated using current 30-year Treasury rate; 

 4

 The typical CB plan features derived from GAO’s Form 5500 data were, in part, 

established by employee and sample selection weighting. As stated previously in this 

report, it is not known how many participants of the plan were actually affected by the 

conversion to a CB plan. However, for the purposes of construction, we applied the 

employee weights assuming 100 percent of participants were affected. Results for how 

participants will fare under our typical CB plan, when taken in conjunction with our equal 

cost CB plan, provide two polar views of how a distribution of individuals may be affected 

when converted. 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 62 GAO-06-42 Pension Plans 

• employee always rolls over full account balance into an IRA at job 

termination;5

• rollover account earns current 30 year Treasury rate each year; 

• account balances are converted to a nominal single-life annuity at 

retirement using the treasury rate, current projected mortality rates, 

and projections of future reductions in mortality. An annuity loading 

fee was used such that it ensures the provider is solvent (i.e., 1.5 

percent for women and 3.0 percent for men); 

• at conversion, opening account balance is equal to the statutory 

present value of accrued benefit under old plan; 

• at conversion, employee with age plus service greater than or equal to 

60 is grandfathered in old plan so that benefit at job end can never be 

lower than it would have been if the old plan had continued operating 

The equal-cost CB plan has the following characteristics 

• same characteristics as the typical CB plan except the base pay credit 

is 7.35 percent of salary for employee with age-plus-service (APS) ≤ 35, 

rather than the 3.0 percent of salary in the typical CB plan, and 

• pay credit rises gradually until it reaches a maximum of 6 percentage 

points above the base pay credit for employee with age plus service 

greater than or equal to 70. 

These three plans are used to simulate the following conversion and 

termination situations 

• typical CB plan versus typical FAP plan; 

• typical CB plan versus FAP plan that is terminated with no replacement 

of any kind; 

• equal cost CB plan versus typical FAP plan; and 

• equal cost CB plan versus FAP plan that is terminated with no 

replacement of any kind. 

All PENSIM runs conducted for this study simulate a 3 percent sample of 

the 1955 birth cohort using historical information through the present and 

2004 OASDI Trustees Report intermediate-cost assumptions for the future 

 5

 One claimed benefit for CB plans is the ability to rollover account balances upon 

separation. Our simulation model fully captures this feature. This contrasts with a 

traditional FAP plan where a participant who leaves before early retirement loses both 

future final pay increases and the early retirement subsidy. 

Simulation 

Assumptions 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 63 GAO-06-42 Pension Plans 

projection. The resulting cohort sample consists of 151,263 individuals 

born in 1955 either in the U.S. or elsewhere (and immigrated to the U.S. in 

a subsequent year). 

The PENSIM runs differ only in their assumptions concerning privatesector sponsorship of the typical FAP plan (which is assumed to be 

offered by all private-sector employers who are simulated to offer a FAP 

DB plan) and the typical or equal-cost CB plan (which is assumed to be 

offered by all private-sector employers who are simulated to offer a CB DB 

plan). The employment history of each individual and 

coverage/participation in employer-sponsored DB and DC plans are a key 

component to determining the lifetime benefits for each individual. 

Pension benefits accumulated as a result of movement to different 

employers during a person’s entire work history is included in reported 

results. Pension coverage across a lifetime may include participation in a 

variety of DB and DC plans or no coverage at all. Workers who are not 

covered under either a private sector FAP or a CB pension plan are 

excluded from the study analysis. Most of the study analysis focuses on 

those who have vested in at least one private-sector FAP or CB plan. 

Public-sector FAP plans are assumed to be unchanged across all runs, and 

all other types of DB plans (i.e., other than FAP or CB) and all types of DC 

pension plans in all sectors are assumed to be unchanged across all the 

runs. Additionally, all the PENSIM runs used in this study contain the 

exact same life histories and job careers for the cohort sample. That is, the 

only change that takes place in all PENSIM runs is whether the private 

sector DB plan is a FAP or a CB plan.6

 The simulation analysis provides 

the following general results about the cohort sample 

• sample individuals who had at least one private-sector FAP or CB 

pension plan: 57,049 (100.0 percent); 

• sample individuals who never vest in such a plan: 20,274 (35.5 percent); 

• sample individuals who vest in such a plan but die before age 68: 6882 

(12.1 percent); 

• sample individuals who vest in such a plan and live to age 68: 29,893 

(52.4 percent); 

• of the 29,893, 87.0 percent vest in just one FAP or CB pension plan over 

their lifetime, while 12.3 percent vest in two plans, and all but three of 

the rest vest in three such plans; and 

 6

 We did not attempt to model any changes in employee behavior that may affect job tenure 

as a result of a conversion to a CB plan. 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 64 GAO-06-42 Pension Plans 

• of the 26,018 who vest in just one FAP or CB pension plan, only 10.2 

percent accumulate thirty years or more of service on that job. 

The study makes four pair-wise comparisons between PENSIM runs: (1) 

typical CB plan versus ongoing typical FAP plan, (2) equal-cost CB plan 

versus ongoing typical FAP plan, (3) typical CB plan versus terminated 

typical FAP plan, and (4) equal-cost CB plan versus terminated typical 

FAP plan. In each comparison, the difference in lifetime pension income 

between the two runs is calculated for each sample individual. Lifetime 

pension income includes all pension benefits earned during a person’s 

career even if they are unaffected by the assumed change in employer 

pension sponsorship between the two runs. Lifetime pension income is 

expressed in one of two ways: the present value of all pension income 

received over the individual’s lifetime or the monthly pension income 

received at age 68. In both cases, the monetary amounts are expressed in 

2004 dollars. 

The conversion/termination of the typical FAP plan is assumed to occur at 

one of eight ages: 25, 30, 35, 40, 45, 50, 55, and 60. The entire cohort sample 

was put through eight separate simulation runs -- one simulation run for 

each age. Results are shown for those who were vested in a job that was 

caught in a conversion. The conversion provisions (opening balance and 

grandfathering) described above for the typical and equal-cost CB plans 

were found to be typical in our analysis of the Form 5500 sample drawn 

for this study. Based on our Form 5500 sample plan analysis and meetings 

with consultants who are experts on CB plans, there was concurrence that 

the opening CB would be equal to the present value of accrued benefit 

under the old plan at the conversion date. The expected present value of 

the accrued benefit is calculated using a GAM83 mortality table adjusted 

to the proper year and the current Treasury rate as the discount rate.7

 If 

eligible for grandfathering, an individual receives the higher of two 

amounts at job termination: the accumulated CB under the new plan and 

the expected present value of the benefit the individual would have 

received if the typical FAP plan had not been converted. The expected 

present value is calculated using the same mortality and discount 

assumptions as used in the opening balance calculation. All individuals 

affected by a conversion or termination are covered under the federal 

 7

 We have no wearaway—neither initial nor inadvertent wearaway, or any other form—in 

our modeling. 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 65 GAO-06-42 Pension Plans 

anticutback rules. The PENSIM runs use these same mortality and 

discount assumptions for the anticutback calculations. 

The employer cost of sponsoring a pension plan is defined as the 

percentage ratio of the present value of benefits paid to all individuals who 

worked on a job where that pension plan was sponsored and the present 

value of earnings paid to all individuals who worked on a job where that 

pension plan was sponsored. The present value calculations use Treasury 

rates to discount both the benefit and earnings cash flows. For a FAP plan, 

the benefit cash flow is the annuity payment stream. For a CB plan, the 

benefit cash flow is the CB amount paid at job termination. 

All employer cost estimates are for the 1955 birth cohort. Using a younger 

birth cohort would produce a higher employer cost rate for the typical 

FAP plan because of rising life expectancy and about the same employer 

cost rate for the typical CB plan because of its earnings-based benefit 

formula. The estimated employer cost rates are as follows 

• full variety of private-sector final-pay plans in BLS data: 7.547 percent; 

• typical FAP plan: 7.545 percent (by construction equal to cost of full 

variety) 

Note: the employer cost of providing disability retirement benefits in 

the typical FAP plan to the 1955 birth cohort is 0.487 percent out of 

7.545 percent. 

Note: in order to simplify the study presentation, the typical FAP plan 

is assumed to have no survivor benefits, which are actually a typical 

benefit under FAP plans, and thus the 7.545 percent is an 

underestimate of a typical FAP plan’s cost; 

• typical CB plan with no conversion costs: 5.006 percent (i.e., 

conversion age 15);8

• typical CB plan with conversion costs by conversion age (see table 2); 

and 

• equal-cost CB plan with averaged conversion costs: 7.547 percent.9

 8

 This is an estimate of the ongoing cost of the typical CB plan after all conversion costs 

have been paid. 

9

 The base pay credit rate of the equal-cost CB plan has been adjusted so that the plan’s 

employer cost equals that of the typical FAP plan. 

Employer Cost 

Estimates 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 66 GAO-06-42 Pension Plans 

Table 2: Conversions Costs of Typical Cash Balance Plan by Conversion Age 

Conversion age Percent

25 4.843

30 4.645

35 4.464

40 4.680

45 5.602

50 6.937

55 7.925

60 7.866

Cost averaged over 8 conversions agesa,b 5.870

Source: GAO analysis using the PENSIM Model. 

a

Note that calculating a simple average of the eight cost rates assumes a uniform conversion-age 

distribution, which is analogous to assuming a uniform employee age distribution at the plan 

conversion date. While this assumption may not be exactly true for individual plans, there is no 

publicly available data that provide information that would support an assumption of a nonuniform 

employee age distribution for all plan conversions. 

b

This 5.870 percent is an estimate of employer cost immediately after the conversion from the typical 

FAP plan to the typical CB plan when conversion costs are being paid. Given the widespread belief 

that typical cash balance conversions have not produced substantial immediate pension cost savings 

for employers, the reasons for the difference between the 7.545 percent and 5.870 percent are 

discussed below. 

There are several reasons why the estimated employer cost of the typical 

CB plan immediately after the conversion of 5.870 percent is below the 

estimated employer cost of the typical FAP plan of 7.545 percent by about 

22 percent. First, the typical FAP plan has been constructed to reflect the 

full variety of private-sector FAP plans contained in the BLS Employee 

Benefits Survey data used to impute plan characteristics in PENSIM. The 

characteristics of the typical CB plan are drawn from the Form 5500 

sample used for this study and from discussions with pension experts and 

actuaries who confirmed that the characteristics were in the range of what 

they believe was typical for CB plans. This sample of CB plans is the 

largest available sample, and the only sample to be drawn using statistical 

sampling methods. 

The difference in the estimated employer cost rates for these two plans is 

consistent with prior research. Specifically, the cost difference reported 

here is somewhat smaller than the cost difference for typical plan 

Comparison of 

Estimated Employer 

Cost of the Typical CB 

Plan Immediately 

After the Conversion 

with the Estimated 

Employer Cost of the 

Typical FAP Plan 
Appendix IV: Analysis of Simulated Cash 

Balance Plans and Traditional Final Average 

Pay Plans 

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Page 67 GAO-06-42 Pension Plans 

conversions reported in a widely cited study by Watson Wyatt 

Worldwide.10 In the Watson Wyatt study, the employers who convert 

typical (i.e., middle of the cost distribution) FAP plans to CB plans—the 20 

percent in deciles 5 and 6 in table 9—experience an immediate definedbenefit pension employer cost reduction of about 19 percent (18.72 

percent in fifth decile and 19.76 percent in sixth decile). However, the 22 

percent cost reduction estimated in this study and the 19 percent cost 

reduction estimated in the Watson Wyatt study are not comparable 

because of differences in the Watson Wyatt life history simulations, which 

ignore disability events, and therefore, underestimate the cost of the FAP 

plans. To make our estimates comparable to the Watson Wyatt estimates, 

we subtracted the 0.487 percent disability costs from 7.545 percent 

yielding a without-disability employer cost estimate for the typical FAP 

plan of 7.058 percent. Our estimate of the immediate cost of the typical CB 

plan is 5.870 percent, which is about 17 percent below the 7.058 percent 

without-disability estimate. This 17 percent immediate employer definedbenefit cost reduction is about the same as the 19 percent reduction found 

in the Watson Wyatt study. 

 10 See Watson Wyatt Worldwide, The Unfolding of a Predictable Surprise: A 

Comprehensive Analysis of the Shift from Traditional Pensions to Hybrid Plans (2000), 

18-19. 
Appendix V: GAO Contacts and Staff 

Acknowledgments 

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Page 68 GAO-06-42 Pension Plans 

Barbara D. Bovbjerg, Director (202) 512-7215 

 

The following staff members made major contributions to this report: 

Charles A. Jeszeck, Assistant Director, Kimberley M. Granger, Analyst-inCharge, Joseph Applebaum, Kevin Averyt, Richard Burkard, Virginia 

Chanley, Tamara Cross, David Eisenstadt, Lawrence Evans Jr., Benjamin 

Federlein, Nila Garces-Osorio, Sharon Hermes, Jason Holsclaw, Gene 

Kuehneman Jr., Michael Maslowski, Amanda Miller, Michael Morris, Luann 

Moy, Macdonald Phillips, Mark Ramage, Tovah Rom, Nyree Ryder, George 

Scott, and Roger Thomas. 

Appendix V: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

(130410) 
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U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

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