Cash balance pension plans are attractive to younger, short-tenured workers because they routinely permit the transfer of earned benefits to other plans or to IRAs when workers change jobs. But, there may be serious financial consequences for older, long-tenured workers when their employers convert from a traditional defined benefit plan to a new cash balance plan. Employers are currently required to provide a written notice to plan participants when an amendment to an existing pension plan will significantly reduce the rate of future benefit accruals for any active plan participants. Employers can easily meet this disclosure requirement by sending participants a summary description or a copy of the plan amendment 15 days before its effective date. Additional information about plan amendments is necessary, but not sufficient, to safeguard the financial interests of mid-career and older plan participants who may be adversely affected by conversions to cash balance pension plans.
Some older workers are likely to be hit particularly hard.
They may lose a more generous defined benefit accrual formula at a time when their advanced age will prevent them from earning a comparable benefit under the new cash balance formula. In a cash balance plan, an employer contributes a percentage of pay into hypothetical accounts for plan participants and credits interest to those accounts at a rate or index of rates set by the employer. Employees receive periodic statements outlining their accumulated pay and interest credits. Advantages of Cash Balance Plans for Employers and Younger Workers Cash balance plans provide employers with the funding flexibility of traditional defined benefit plans, along with predictable contribution levels that better enable them to budget for future pension plan costs. Cash balance plans also allow employers to distribute those costs more evenly over covered populations.