To date, employers haven't shown much interest in cash balance or other types of hybrid pension plans.
Research from Towers Watson shows just 24 of Fortune 100 companies offered a hybrid in 2009 — not bad but not exactly Prius-level penetration, if you know what I mean. (Nearly a million Priuses have been sold in the United States since the car’s rollout, in case you were wondering.) However, recent IRS rules may pique employers interest in hybrid pension plans, TW predicts.
A little history: In 2006, the Pension Protection Act acknowledged the legitimacy of hybrid plans, and in October 2010, the IRS proposed rules that will provide more clarity on the plans.
In particular, the proposed rules define the "market rate" that cash balance plan sponsors must use to credit interest to plan participants’ account balances. 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,” says Alan Glickstein, TW senior consultant.
"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," he explains.
His colleague, senior consultant Kevin Wagner, adds: "The recent recession shows the very attractive risk-sharing and cost management features of hybrid plans to greater advantage, especially given the consequent high contributions and funding volatility in traditional defined benefit plans and the significant asset losses to many DC accounts. Hybrids’ mix of cost-effective DB and DC features can be very appealing to employers, while most workers welcome their reliability and security."
TW also finds that cost and cash contribution for credits to a cash balance plan are generally less than those for the same final retirement benefit in a defined contribution plan.
Regulatory clarity and cost savings? Sounds like a good deal to me. What do you think? Any spark of interest in cash balance/hybrid pension plans in light of the new IRS rules? Share your thoughts in the comments.
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