For Immediate Release
Contact: AARP Media Relations, 202-434-2560, email@example.com
More than ninety percent of major employers have provided transition protections for older workers when converting from the traditional "defined benefit" pension to cash balance pensions, a new study for AARP indicates.
The new report, Transition Provisions in Large Converted Cash Balance Pension Plans, conducted for AARP by researcher Daniel J. Beller on 2003 Department of Labor filings of the 25 largest cash balance plans (in number of participants), which includes more than one third of all cash balance participants nationally, found that 23 plans—92 percent—offered transition protections.
In addition, the study found a discernible trend among more recent cash balance conversions toward transition provisions that grandfather in participants under the old final pay formula.
Other types of transition protections include granting older workers a benefit based on the greater of the two plan formulas or, less often, supplemental pay-based credits to some or all participants in the prior plan.
Based on this trend and a parallel move toward including all participants in the prior plan, rather than only older, long-term workers, the AARP report concluded:
"These combined trends appear designed to reduce the controversy over conversions by maintaining the benefit structure that was in place for employees in the existing plan when they were hired."
In discussing the report, AARP Director of Federal Affairs David Certner said:
"Many have raised concerns about cash balance conversions discriminating against older workers—especially those with long service—because workers can be left without late career benefits they have earned.
"This study shows that the large majority of employers that have converted their plans not only recognize the importance of older workers to the current and future economy, but have been able and willing to ensure protections for employees facing cash balance pension conversions," Certner added. These types of private sector 'best practices' should be extended to all older workers who are negatively affected by a cash balance conversion.
Traditional defined benefit (DB) pensions that dominated the workplace for decades normally provide benefits based on a percentage of final pay times years of service.
The newer cash balance plans provide each participant with a hypothetical account—somewhat similar to a 40l (k) plan—that is generally credited by the employer with a dollar amount based on a percentage of earnings and a fixed rate of return on the accumulated contribution.
The AARP study notes that the transfer of participants from a final pay to a cash balance formula may result in lower than anticipated retirement benefits for those participants who remain with their company in retirement.
The so-called transition provisions are an attempt to offset—completely or in part—the gap that that exists between the benefits older employees would receive under the old final pay pension formula and the new cash balance formula.