Opinion ID: 200372
Heading Depth: 2
Heading Rank: 2

Heading: The Cash Balance Plan

Text: 8 BankBoston's retirement plan prior to 1989 was a traditional defined benefit plan. A defined benefit plan pays an annuity 1 based on the retiree's earnings history, usually the most recent or highest-paid years, and the number of completed years of service to the company. The BankBoston plan was determined by a formula which factored in the retiree's years of service, the five-year average compensation at time of retirement, and the retiree's Social Security primary benefit. 2 9 On January 1, 1989, BankBoston adopted the Cash Balance Retirement Plan. Cash balance plans are a type of defined benefit plan that guarantee an employee a certain employer contribution level, usually an annual percentage of salary, plus a fixed percentage of interest. Cash balance plans may superficially resemble defined contribution plans, in which an employer deposits a fixed amount into an account. However, cash balance plans are actually defined benefit plans, because the level of interest is guaranteed. 10 The plan version adopted in 1989 contained a Benefit Safeguard Minimum Benefit guaranteeing that, for long-term employees such as Campbell, the retirement benefits would be at least as much as would have been payable had the previous defined benefit plan still been in place upon their retirement. One effect of this provision was that the benefits due under the previous plan continued to accrue for those long-term employees protected by the grandfather clause. 11 In 1995, BankBoston commissioned a study of its benefits program, which concluded that this grandfather provision would cost the company a significant amount of money. Thereafter, on January 1, 1997, BankBoston again amended its retirement plan; this amendment eliminated the continued accrual of benefits under the previous defined benefit plan after December 31, 1996. There is no contention that this amendment lacked Internal Revenue Service (IRS) approval. All accrued benefits were converted to cash balance accounts by calculating the value of accrued benefits as of the end of 1996 and crediting that amount in separate conversion accounts, where they continued to earn interest. Because Campbell would receive less under a cash balance formulation than under the Benefit Safeguard, even after that provision had ceased to accrue benefits, the December 31, 1996 amendment had the effect of ending Campbell's pension accrual altogether. 12 After the sale of BankBoston's custody business to IBT, Campbell applied for retirement benefits. Under the retirement plan in place before January 1, 1997, Campbell's benefit under the older defined benefit plan would have kept accruing until his retirement on September 30, 1998. He would therefore have expected to receive $31,882.12 per year. However, under the 1997 plan amendment, Campbell was due only $28,798.10 per year, an annual difference of $3,084.02. 3