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The Difference Between Traditional Pension and Cash-Balance Plans |
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Friday, 25 January 2008 |
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Under a traditional defined-benefit pension plan, a worker receives a guaranteed monthly benefit at retirement. The amount of the benefit is based on formulas that include such variables as a worker’s age at retirement, rate of pay and number of years worked. Cash-balance plans, technically a type of defined-benefit pension plan, differ from traditional plans because workers can see their individual account balances.
For example, a traditional defined-benefit plan promises workers monthly benefit checks at retirement—say, $800 per month for life at age 65. But a cash-balance plan promises workers an account balance that grows over time—a $25,000 balance as of today, for instance. (While people in cash-balance plans have the legal right upon retirement to convert to an annuity that pays monthly benefits for life, they tend to take the lump sum, which they risk running through after retirement.) The most important practical difference between traditional defined-benefit plans and cash-balance plans is the accrual rates at which benefits build up over the course of a worker’s career. Under traditional benefit formulas, workers earn most of their benefit toward the end of their careers. In a cash-balance plan, however, a more level share of benefits is set aside throughout a worker’s career. Cash-balance plans often include special early retirement provisions, a valuable benefit for some that allows workers to collect full benefits at an earlier age if they meet certain requirements such as working a certain number of years and reaching a specific age. Many companies use cash-balance conversions to eliminate early retirement benefits for the future. However, older workers can be shortchanged when employers convert to cash-balance plans. Because of the difference in accrual rates, plus the possibility that cash-balance opening account balances will not include the early retirement subsidies credited to workers under traditional plans, conversions ultimately can cost older workers tens of thousands of dollars in benefits, according to the U.S. General Accounting Office. The U.S. Equal Employment Opportunity Commission has received more than 800 employee complaints related to cash-balance conversions. The IRS has not approved any new conversions since 1999 because of concerns regarding age discrimination. For Union Workers, Cash-Balance Conversions Must Be Negotiated Through bargaining, unions can prevent conversions or negotiate improvements that make conversions more equitable. Such improvements might include clauses that protect expected benefits for long-term employees, preserve early retirement benefits and other important options and improve contribution formulas. For more information concerning your Cash Balance Account for AT&T, Alcatel-Lucent, or Avaya, contact their Pension Service Center: which will be listed in the company’s intranet Benefit Information or contact your immediate supervisor for assistance. In unity, Roy Hegenbart President/Local 3250 |
