Cash Balance Plans

Recently, firms expressed concern about information on cash balance plans for retirement income. Recognizing that pensions are an important source of income for many retirees, Congress provides special tax treatment under the Internal Revenue Code for pension plans that meet certain qualification requirements. GAO describes the: (1) prevalence and features of cash balance plans; (2) factors employers considered in making a decision about whether or not to use a cash balance formula; (3) effects of using cash balance formulas on the adequacy of individual workers' retirement income; and (4) effects of current disclosure practices on plan participants' ability to address issues regarding the adequacy of their retirement fund. Most firms GAO surveyed had at least considered adopting such a plan because cash balance plans have had high visibility in recent years. These firms reported that their decisions to adopt or not to adopt a cash balance plan were based on many factors, including corporate philosophy, the need to remain competitive, and the potential impact on workers. Cash balance plans offer both opportunities and challenges to workers seeking to ensure adequate retirement income and generally are structured such that workers accrue benefits earlier in their careers than they would under most traditional defined benefit plans. GAO concluded that there was a wide variation in the quantity and quality of information that firms provided to participants in cash balance plans.

GAO noted that: (1) its survey of 1999 Fortune 1000 firms indicated that about 19 percent of these firms sponsor cash balance plans covering an estimated 2.1 million active participants; more than half of these plans have been established within the last 5 years; (2) firms in many sectors of the economy sponsor these plans, but greater concentrations are found in the financial services, health care, and manufacturing industries; (3) of the firms GAO surveyed that sponsor such plans, about 90 percent previously covered their workers under a traditional defined benefit plan; (4) as with traditional defined benefit plans, there is significant variation in the design and operation of cash balance plans; (5) cash balance plans have had such visibility in recent years that most firms GAO surveyed had at least considered adopting such a plan; (6) these firms reported that their decisions to adopt or not to adopt a cash balance plan were based on many factors, including corporate philosophy, the need to remain competitive, and the potential impact on workers; (7) cash balance plans offer both opportunities and challenges to workers seeking to ensure adequate retirement income; (8) cash balance plans generally are structured such that workers accrue benefits earlier in their careers than they would under most traditional defined benefit plans; (9) this feature, combined with the lump sum payouts also common to such plans, provides opportunity for more mobile workers to secure and retain higher benefits, even when they change jobs, than they would under most traditional defined benefit plans; (10) older workers may be disadvantaged if their employer converts from a traditional defined benefit plan to a cash balance plan or if they leave a firm with a traditional plan for one with a cash balance plan; (11) to mitigate the impact of conversion, many Fortune 1000 employers provide transition provisions for workers previously covered under their traditional defined benefit plans; (12) because the decisions of individual participants play a more significant role in maximizing retirement income under such balance plans than under traditional defined benefit plans, cash balance plan participants have a particular need for clear and timely information about their plans; (13) most plans provided insufficient information to allow a participant to make informed career- and retirement--related decisions; and (14) GAO found a wide variation in the quantity and quality of information that firms provided to participants in cash balance plans.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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