IRC defines pension plans as either defined benefit or defined contribution plans and includes separate requirements for each type of plan. According to Bureau of Labor Statistics (BLS) survey data, most participants in large and medium-sized firms’ defined benefit plans are covered by plans that use a final average pay formula that is based on years of service, average earnings over a specific number of years, and a multiplier. For example, a final average pay formula might determine benefits on the basis of 1.25 percent multiplied by years of service completed multiplied by the employee’s average salary over the past 5 years of service. Defined benefit plans typically express an accrued pension benefit as an annuity beginning at the plan-specified normal retirement age. The firm, as the plan sponsor, is responsible for funding the promised benefit, investing and managing the plan assets, and bearing the investment risk. Under defined contribution plans such as 401(k) plans, workers have individual accounts to which employers, employees, or both make periodic contributions. Defined contribution plan benefits are based on the contributions to and investment returns on these accounts. Employees bear the risk of poor investment performance and often control, at least in part, how the funds are invested. Cash balance plans are referred to as hybrid plans because legally they are defined benefit plans but contain features that resemble defined contribution plans. Similar to traditional defined benefit plans, cash balance plans use a formula to determine pension benefits. However, cash balance plans express benefits as an “account balance.” An employee account balance is based on hypothetical pay credits (percentage of salary or compensation) and hypothetical interest credits to employee accounts rather than an annuity. As with other defined benefit plans, under cash balance plans, employee pension benefits are paid from commingled funds invested in a pension trust on behalf of all participants, and plan trustees have a fiduciary responsibility for all assets in the pension trust. Hypothetical account balances need not be related to investment returns on assets in the plan’s pension trust, and hypothetical accounts are not credited with the plan’s actual investment gains or losses. Employees neither own these “accounts” nor generally make investment decisions. Cash balance plans are defined benefit plans because federal pension law defines any pension plan that does not provide individual accounts with benefits based solely on those accounts as a defined benefit plan. Federal law provides specific rules on how pension benefits must be accrued in order for plans to receive favorable tax treatment as well as safeguards to preserve benefits that participants have already earned. The law prohibits firms from amending a plan’s benefit formula to reduce benefits that have already accrued. Firms can, however, change a pension plan’s benefit formula to prospectively reduce or eliminate future benefit accruals. For example, defined benefit plan formulas can be amended to reduce the percentage of final pay used in the future to determine the annual benefit or limit the number of years over which benefits accrue. Firms can also terminate their pension plans. Defined benefit plan sponsors that terminate their plans are subject to an excise tax of up to 50 percent on any surplus assets in their pension trusts if they do not share excess pension assets with participants. The Employee Retirement Income Security Act of 1974 (ERISA) mandates the types of information that must be disclosed to plan participants. The law requires firms to provide all plan participants with a summary plan description that describes the terms of the plan. Furthermore, whenever there is a significant change to the plan (called a plan amendment), firms must provide participants with a summary of the changes no later than 210 days after the end of the plan year in which the changes are adopted, known as a summary of material modification. Firms must notify participants of amendments that will result in a significant reduction in the rate of future benefit accrual at least 15 days before the effective date. This notification can entail providing either a copy of the amendment to the plan or a written summary of the change. IRS, the Pension Benefit Guaranty Corporation (PBGC), and the Department of Labor’s Pension and Welfare Benefits Administration (PWBA) are primarily responsible for enforcing laws related to private pensions. IRS enforces participation, vesting, and funding standards that concern how participants become eligible to participate in benefit plans and earn rights to benefits and that ensure that plans have sufficient assets to pay promised benefits. PWBA enforces ERISA’s reporting and disclosure provisions and fiduciary standards, which concern how plans should operate in the best interest of participants. PBGC insures the benefits of participants in most private defined benefit pension plans. Employers can voluntarily submit an application to IRS, seeking approval of their plan when it is started, when the plan is amended to comply with law changes or plan design changes, or when the plan is terminated. Under the Age Discrimination in Employment Act, it is unlawful for employers to sponsor a defined benefit plan that stops a benefit accrual or reduces the rate of an employee’s benefit accrual because of age. The Equal Employment Opportunity Commission (EEOC) enforces federal law prohibiting employment discrimination, including discrimination based on age (aged 40 and older). IRC and ERISA have similar provisions prohibiting a defined benefit plan from ceasing accruals or reducing the rate of accrual because of the attainment of any age. Prompted by concern from members of the Congress and charges by participants in plans that were converted, federal agencies are now reviewing age discrimination and other issues raised by cash balance plans. In September 1999, EEOC began a review of potential age discrimination issues in cash balance conversions and is coordinating with agencies that are responsible for administering federal pension laws. Within the past year, more than 800 workers and retirees have filed age discrimination charges with EEOC concerning cash balance plans. EEOC has opened 34 cases to investigate these charges. The Department of the Treasury and IRS are currently reviewing tax qualification issues raised by cash balance plans. For example, in September 1999, IRS 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. In addition, in October 1999 IRS announced that it was soliciting public comments on issues related to the conversion of traditional defined benefit formulas to cash balance formulas. Further, in July 2000, the Office of Management and Budget issued a Statement of Administration Policy proposing legislative action to address certain issues raised by conversions to cash balance plans. Few firms that we surveyed on the 1999 Fortune 1000 list that sponsor cash balance plans adopted such plans before the early 1990s. Our analysis indicates that as of July 2000, about 19 percent of these firms sponsor cash balance plans. Firms adopted cash balance formulas for a variety of reasons, including reducing total pension costs, increasing portability to enhance the recruitment of younger or more mobile workers, and adding a lump sum benefit feature that can be used to better explain pension benefits to workers. As with traditional defined benefit plans, cash balance plans exhibit a considerable variety of designs, particularly in the amount of pay credited to participants’ hypothetical accounts. About 19 percent of Fortune 1000 firms sponsor cash balance plans that cover an estimated 2.1 million active participants. Similar to traditional pension plans, many cash balance plans that we identified generally do not cover all workers at a firm. Instead, these plans cover particular segments of a firm’s workforce such as managers or salaried employees or certain workers in a firm’s subsidiary. Most cash balance plans we identified in our survey (an estimated 69 percent) have fewer than 10,000 active participants (see fig. 1), including 8 percent with no active participants because benefit accruals are frozen. The most common reason sponsors froze a cash balance plan was that the plan was acquired as part of a merger or acquisition and the firm did not want to continue the cash balance plan. The earliest known cash balance plan has been in use since 1925, but such plans have become prominent since the 1980s. The earliest a firm in our survey had adopted a cash balance plan was 1985; more than 60 percent of the cash balance plans we identified have been adopted in the past 5 years. Firms sponsoring these plans exist in many sectors of the economy, but the greater concentrations are found in the financial services, health care, and manufacturing industries. Some of these firms have undergone mergers or acquisitions and have adopted cash balance plans to “harmonize” benefits—that is, to provide the same pension plan for employees who had been covered by different plans. Most firms in our survey that sponsor cash balance plans previously covered their workers under another defined benefit plan. Other firms started cash balance plans as their first pension plan or to supplement existing defined contribution plans. While we were told by pension practitioners, employer associations, and agency officials of firms’ continuing interest in cash balance or similar hybrid plan designs, few of the firms we surveyed expected to adopt a cash balance plan in the future. About 3 percent of the firms we surveyed told us that they were considering whether to adopt a cash balance plan within the next 5 years, and about a third of these, or 1 percent of Fortune 1000 firms, told us that they plan to adopt a cash balance plan next year. All the firms considering adopting a cash balance plan told us that the continuing uncertainty as to whether such plans violate pension and age discrimination laws might discourage them from converting their plans. Firms sponsoring cash balance plans told us that their decision to adopt these plans was based on a combination of factors such as the desire to become more competitive within their specific industry and to address changing workforce demographics. For example, some firms decided to adopt cash balance plans in order to improve their ability to recruit new workers by providing them with higher pension benefits earlier in their careers and allowing lump sum distributions so that pension benefits are more portable. Other firms told us, however, that they decided not to use cash balance plans because they had older or long-tenured workforces that could be adversely affected by a change to a cash balance plan. Some firms we surveyed that chose to convert their plans cited the financial implications of changing to a cash balance plan as a key reason in their decision.