Hybrid Retirement Plans

Background

Pension experts are exploring the potential for hybrid retirement plans that combine features of defined-benefit (DB) and defined-contribution (DC) plans to better distribute investment, interest, and longevity risks between the plan sponsor and the participant. One such hybrid plan is a cash-balance plan under which employers credit a participant's account with a set percentage of his or her yearly compensation plus interest charges. Unlike a 401(k) plan, investments are managed collectively, and benefits are not tied to the performance of the plan’s investments. The conversion of a traditional defined-benefit plan to a cash balance plan can negatively affect older workers. Traditional DB plans often base the benefit calculation on the salary in the worker’s final years, which are generally those with the highest earnings. In contrast, benefits in a cash balance plan are based on all working years, including early years when the worker’s salary was lower. As a result, older, longer-serving employees may work for many years after a plan conversion without receiving any additional pension credits under the new cash balance plan (an effect often called “wear-away”).

HYBRID RETIREMENT PLANS: Policy

Protections in hybrid plans

In this policy: Federal

The law should ensure that cash balance and other hybrid plans do not discriminate against older workers and that they maintain the important benefit protections of defined-benefit plans.

Congress should require that in a plan conversion, employers provide each affected individual with a personalized benefits statement that compares the benefits under the old and new plans. Such information must be shown in a comparable form (e.g., life annuity A contract that provides fixed payments for a lifetime or a specified number of years, usually after retirement. compared with life annuity A contract that provides fixed payments for a lifetime or a specified number of years, usually after retirement. ) and provided well in advance of the effective date of any plan change.