Page 184 - Group Insurance and Retirement Benefit IC 83 E- Book

In the US, conversions from traditional to hybrid plan designs have been controversial.

Upon conversion, plan sponsors are required to retrospectively calculate employee
account balances, and if the employee's actual vested benefit under the old design is more

than the account balance, the employee enters a period of wear away. During this period,
the employee would be eligible to receive the already accrued benefit under the old

formula, but all future benefits are accrued under the new plan design. Eventually, the
accrued benefit under the new design exceeds the grandfathered amount under the old

design. To the participant, however, it appears as if there is a period where no new

benefits are accrued. Hybrid designs also typically eliminate the more generous early
retirement provisions of traditional pensions.

Since younger workers have more years in which to accrue interest and pay credits than
those approaching retirement age, critics of cash balance plans have called the new

designs discriminatory. On the other hand, the new designs may better meet the needs of
a modern workforce and actually encourage older workers to remain at work, since

benefit accruals continue at a constant pace as long as an employee remains on the job.

As of 2008, the courts have generally rejected the notion that cash balance plans
discriminate based on age, while the Pension Protection Act of 2006 offers relief for most

hybrid plans on a prospective basis.

While a cash balance plan is technically a defined benefit plan designed to allow workers

to evaluate the economic worth their pension benefit in the manner of a defined
contribution plan (i.e., as an account balance), the target benefit plan is a defined

contribution plan designed to express its projected impact in terms of lifetime income as a

percent of final salary at retirement (i.e., as an annuity amount). For example, a target
benefit plan may mimic a typical defined benefit plan offering 1.5% of salary per year of

service times the final 3-year average salary. Actuarial assumptions like 5% interest, 3%
salary increases and the UP84 Life Table for mortality are used to calculate a level

contribution rate that would create the needed lump sum at retirement age. The problem
with such plans is that the flat rate could be low for young entrants and high for old

entrants. While this may appear unfair, the skewing of benefits to the old worker is a

feature of most traditional defined benefit plans, and any attempt to match it would reveal
this backloading feature.