`Cash balance' pension posts workers on fund status

ONE of the nice things about ``defined contribution'' retirement plans is that employees always know how much money they have in them. This is also true of employee-sponsored savings plans, like the 401(k). Now, a new type of retirement vehicle combines the best features of defined contribution plans with the best features of traditional corporate pensions, or ``defined benefit'' plans. A defined benefit plan promises an employee a certain level of benefits when he or she leaves the company. A defined contribution plan is funded directly by the company, and payments at retirement are based on the amount of money in the plan, plus interest or income from investments.

In these new pensions, workers can see how much is in their combined account. These are quickly becoming known as ``cash balance'' plans, or hybrid or pension equivalent reserve credit plans.

Whatever the name, a worker can, for example, be shown a specific dollar amount that has built up in it, including interest. If the worker leaves the company after only a few years, he or she will know exactly how much to expect from that firm at retirement.

If the worker leaves early, there is also the option of taking an immediate lump-sum payment, or rolling it over into an individual retirement account. If money is put into an IRA from another retirement plan, the $2,000 annual limit does not apply.

When the employee actually retires, the benefits of the plan can either be paid out in a lump sum, or an annuity. Some annuities offer a fixed-dollar payout, while other have payments tied to the consumer price index or some other indicator.

``There's a lot more visibility with a plan like this,'' says Owen McCaffrey, a vice-president and actuary with the Wyatt Company, a benefits consulting firm. ``Normally, you have to go through a lot of assumptions and make calculations to estimate what you might get. Here, you get a statement every year showing you the exact number of dollars you've got coming.''

Some plans send out such a statement every month. One of these, at Bank of America in San Francisco, started this summer and won quick acceptance among many employees, particularly younger ones. A primary advantage of the plan, in fact, is a relatively more generous treatment of younger employees.

The converse of that, however, may be one of its disadvantages. Converting a company's traditional pension plan to this new variety may mean shifting assets that might have gone to older workers and making them more available to younger ones.

The plans may also not be so good for workers who earn quick promotions and stay with the company, since the pensions are based on the average pay for the entire career. ``These plans take away the benefit that related to your pay in the last year before retirement,'' McCaffrey said.

In a cash balance plan, a ``notational'' account is established for every participant. Every month or year, additions are made to the account, based on a percentage of the employee's salary. These may range from 4 to 7 percent.

Another difference in these plans is the way interest is added. Instead of tying it to the investment performance of the assets, a minimum interest rate is established at the beginning of each year. This rate will be tied to current indicators, like one-year Treasury bills.

While a guaranteed rate may give a company and its employees a more secure feeling for the coming year, there could be years when a well-managed pension portfolio would easily outperform money market instruments.

Even though a company has installed a cash balance or hybrid plan, it may still have other retirement-savings programs, like a 401(k). Here, money is deposited before taxes are taken out, and it earns tax-free interest until withdrawal.

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