Workers who take their traditional pension plans for granted may find they need to keep an eye on those benefits.
Companies have been converting pensions to cash balance plans, a hybrid of traditional pensions and 401(k)s. Depending on workers' ages and lengths of service, the change can either be a boon or bane to their retirements.
Generally, the plans favor younger workers who may switch jobs several times during their careers, but reduce retirement benefits for midcareer or older workers who have racked up many years with the same employer.
Just ask Janet Krueger of Rochester, Minn., who left IBM a year ago after 23 years when the company switched to a cash balance plan. Krueger, 46, figures the new plan cut her benefits by 40 percent. She and her co-workers then launched a highly publicized campaign against the change.
"Clearly, a lot of people aren't aware of what's happening," said Krueger, who has a new job but remains head of the grass-roots group, IBM Employee Benefits Action Coalition. "A lot of people who work for large corporations are under the assumption that the company will take care of them."
The plans have led to lawsuits and more than 650 age bias complaints to the Equal Employment Opportunity Commission since September.
About 400 to 600 mid- to large-size companies have adopted cash balance plans. Others have postponed converting to them, waiting to see how the courts, Congress and government agencies decide issues such as plan disclosure requirements and age discrimination claims.
Experts predict that once these questions are answered, though, more companies will switch to such plans. That's because the plans save money and provide benefits that reflect today's mobile work force, experts said.
Also, the plans are easier for younger employees to grasp and appreciate, which can help companies competing for workers in a tight labor market, said Sylvester J. Schieber, vice president of research at Watson Wyatt Worldwide in Bethesda.
To understand how the new plan may affect you, it helps to understand the old one. Traditional pensions reward workers who stay with a company for decades. These workers accrue most of their benefits in the last five or so years with the company. At retirement, they will get a monthly payout for life.
Under a cash balance plan, employers make all the contributions on behalf of workers, just as with a traditional pension. An employer credits an employee's account each year with a percentage of the worker's pay, usually 4 percent to 7 percent, and guarantees a certain interest rate on the money, said James Turpin, vice president of pensions for the American Academy of Actuaries. Workers accrue benefits evenly throughout their careers, an advantage for younger workers with more time for accounts to compound.
When workers retire, they can choose monthly payments or a lump sum. If they leave the job early and are vested in the plan, they can roll their account balance into an Individual Retirement Account or, if permitted, into a new employers' plan, experts said.
"There are a lot of features in these plans the people benefit from," Schieber said. The plans "keep the investment responsibility on the back of the employer, keep employees out of having to take the financial market risks. You don't have to put money in the plan. Everyone's covered."
But older workers can be hurt, particularly during the conversion, experts said.
For example, let's say you're an older worker who has accrued $60,000 in benefits. While you can't receive fewer benefits than you've earned, your opening balance in your new cash balance account may be less - say, $50,000, depending on the formula your employer uses. It could take years before your account catches up to the level of your old plan, an effect called "wear-away."
Cash balance plans also often do away with early retirement benefits, a costly perk adopted when unemployment was higher and companies wanted to nudge older workers out the door, Turpin said.
It's difficult to get a clear idea of how you will fare under a cash balance plan vs. the old plan because disclosure requirements are very limited, experts said. "An actuary told me, 'It's like you need an actuary Sherpa to get you up the cash balance mountain.' It's so tough to figure out," said Karen Friedman, director of the pension fairness project with the Pension Rights Center in Washington.
If your employer makes the switch, experts advise taking these steps:
First, you need to know what your specific benefits are under the old plan and what they would be under the new plan. Ask your employer to make a personalized comparison for you, although the company isn't required to do so.
If you can get that, ask for your benefit statement or benefit quote, something employers are required to give each year, that will tell you the benefits you've earned so far and what they would be at age 65, said Christopher Cumming, vice president of marketing for Diversified Investment Advisors in Purchase, N.Y.
Get a copy of the summary plan description of your old plan and as much information as you can about the new one, experts said. You may need to hire an actuary or pension expert to decipher the plans for you.
Find out if the new plan has a wear-away period, which is likely the case if your benefits are substantially lower, experts said.
Also, check how long you accrue benefits under the new plan, since some workers might stop earning benefits after 20 years or so, advised Steven Kaye, a financial planner with the American Economic Planning Group Inc. in Watchung, N.J.
If you're spending years in a wear-away period or are no longer accruing benefits, you may want to weigh that against your entire compensation package, he said.
Look, too, to see if the plan gives workers a choice of how the interest rate on the account is determined, Kaye said. Younger workers comfortable with more risk may want to choose a rate based on a stock index rather than a fixed rate, he said.
"If someone is being hurt badly, they ought to be looking for some sort of sweetener to be added," said C. Williams Jones, president of the Association of BellTel Retirees Inc. in Easton.
Employees hurt by the conversion should lobby for the option of staying under the old plan or having the company add more money to their accounts, experts said. Some employers have done this. For instance, after worker protests, IBM allowed workers 40 and older with at least 10 years of service to choose between the old and new plan.
If your employer won't listen, lobby your representatives in Congress for worker protections under cash balance plans, Krueger said.
You can contact Eileen Ambrose at 410-332-6984 or by e-mail at firstname.lastname@example.org.