But before you run off to see how such a conversion could be right for your company, be aware there may be drawbacks to switching to such a plan from your current defined-benefit pension. Older employees are finding their benefits reduced by such conversions, and the federal government is investigating the legality of these converted cash-balance plans and possible violations of the tax code and age discrimination laws. Under cash-balance plans, employers periodically pay a percentage of an employee's wages into an account in the name of the employee.
Employers also pay interest at whatever rate they choose.
If the plan's assets rise above the benefits promised, the employers retain the difference. After conversion, an older employee's opening cash balance due from the new plan may be less than the current value of their accrued benefit under the original defined-benefit plan. In that situation, an employer may stop contributing to the older workers' accounts, slowing its growth until it comes into line with what is owed under the new cash-balance plan. On the other hand, younger workers may be favored under these new pension plans. Moreover, workers usually receive lump-sum payments if they leave their companies prior to retirement, which is likely in today's current job market.