Bright Future Seen for Cash Balance Programs

In October 2010, the IRS proposed rules that will provide more clarity on cash balance and hybrid plans. In particular, the rules would define the “market rate” that cash balance plan sponsors must use to credit interest to plan participants’ account balances, reported Towers Watson. The IRS also issued final rules that clarify requirements for an age discrimination safe harbor.

“Once finalized, these rules eliminate virtually all of the uncertainty that has surrounded cash balance plans the past few years,” said Alan Glickstein, senior consultant at Towers Watson. “Many employers have been waiting for these rules before adopting a new retirement plan design. With this clarification of legal requirements and the resolution of lingering ambiguities, more plan sponsors may be encouraged to convert their traditional defined pension plans to hybrid plans.”

Twenty-four percent of Fortune 100 companies offered a hybrid pension plan in 2009, up from just eight companies in 1998, according to a new report on hybrid retirement plans released by Towers Watson.  “Hybrids’ mix of cost-effective DB and DC features can be very appealing to employers, while most workers welcome their reliability and security,” said Kevin Wagner, senior consultant at Towers Watson.

Other findings include:

• Approximately one-third of all active participants and assets in DB plans are associated with hybrid plans.
• Between 1999 and 2007, the number of participants in hybrid plans increased from 3.2 million to 10.2 million, and assets increased from $158.8 billion to $631 billion.
• After 30 years of service, the average worker in a cash balance plan will have, on average, an account balance of between two and two and a half times their final salary, depending on the benefit formula.

A copy of the study report is at http://www.towerswatson.com/assets/pdf/3143/Hybrid_Plans_Study.pdf.