The current value of the benefit is defined in terms of an account balance. So when a traditional defined benefit plan is converted to a cash balance plan, long-term workers are often hurt. Cash balance plans can be designed with transition rules so that long-term workers are not hurt, but not all conversions include transition rules. Many participants complain that employers have not done an adequate job of explaining to their employees how the conversion affects them. Congress is reacting to employees' confusion and complaints by considering legislation that would require more disclosure, and perhaps even require individual statements.
Conversion makes sense for many employers and for most employees.
All employers who maintain traditional defined benefit plans should be considering the possibility of converting to cash balance plans, particularly if their plan has a substantial surplus. Many issues need to be considered. Conversion is not for everyone. The conversion process is complicated, expensive and raises litigation risks that are difficult to quantify. Many employers are better off continuing, freezing or terminating their defined benefit plans.