As pensions fade, some firms try hybrid plans
The traditional pensioner is becoming a rare breed. In the past five years, no firm has launched an old-style pension plan. Many companies are closing them. Some steelworkers, engineers, and now airline pilots have seen their nest eggs cut when employers went bankrupt - or switched to other retirement plans.Skip to next paragraph
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But hybrid plans, which combine several pension features with new flexibility, could offer workers a stable retirement. They're called "cash balance plans." Many high-profile companies incorporated them in the 1990s. Now, though, they await action by the US Congress to pull them out of legal limbo and make them more attractive to workers.
Financing retirement has become a crucial issue in the United States. Some 77 million people born between 1946 and 1964 - the baby boomers - start retiring in masses in four years. They will get checks from Social Security. It has enough funding to provide full benefit payments until 2042 - and probably long after that, given the program's political support. But today, corporate pensions are in a shakier situation, as many retired airline employees discovered in recent weeks after their companies declared bankruptcy and shed some pension requirements.
Cash-balance plans offer one way for firms to continue offering a pension but often with less cost, at least in the short run. Here's how they work:
The company regularly puts money aside for workers. But unlike with popular 401(k) retirement plans, the company, not the worker, decides how that money is invested. At retirement, employees have accumulated a nest egg without the hassle of managing a portfolio of stocks and bonds.
Not everybody wins with such plans. Older workers whose companies used to have traditional pensions often see their future benefits reduced. Phil Nigh, an IBM engineer in Burlington, Vt., calculated that his pension wealth was halved when the company converted its system in 1999. He was just under 40 at that time, so he wasn't allowed to stick with IBM's old pension plan. He assumes he will lose pension benefits under his cash-balance plan - unless he works until he's 70.
"Nothing has come out since then to dispute that figure," Mr. Nigh says.
But for younger workers, cash- balance plans offer some advantages. Employees' pension wealth accrues evenly each year as long as they work for one firm. In traditional pensions, wealth accumulates slowly until employees reach their 50s, when it starts piling up rapidly. Firms built in this delay to encourage workers to stay on the job until retirement.
Under a cash- balance plan, the extra money at a young age means workers can be more mobile without suffering financially. If employees leave a firm, they take the accrued pension wealth (the cash balance) and roll it over into an Individual Retirement Account or into the new employer's pension plan, if allowed. Under traditional plans, departing vested younger employees may be entitled to a pension - probably small, and only on retirement.
More than 80 percent of participants do better under hybrid plans than under traditional pensions, says a study by consulting firm Watson Wyatt. "People that gain are not very vocal," says Julia Coronado, an expert at the Federal Reserve.