Cash Balance Plans Need Clarity in Regulations

At ASPA’s 401(k) Sales Summit Tuesday, Graff also said there is a need for Congress to “try to address clarity and regulations to help those plans,” especially the several thousand cash balance plans that are not the result of a traditonal pension plan conversion. Additionally, while Graff said ASPA likes the Treasury proposal in principle, the industry professional group is still concerned about the effectiveness of the proposals as presented. There are many cash balance plans that are new plans, and the proposed regulations does not address those, but focuses instead on the plans being converted from old defined benefit plans, he said.

The US Treasury Department’s proposal would impose a five-year hold harmless period after each conversion, during which the benefits earned by any worker under the cash balance plan would have to be at least as valuable as the benefits the worker would have earned under the traditional plan if the conversion had not occurred. The proposal would ban any “wear-away” of retirement benefits, so that all workers would earn benefits immediately after the conversion, according to a government announcement (see Bush Releases Controversial Cash Balance Proposal).

Steve Rosen, president-elect of ASPA and an independent consulting actuary specializing in the design and implementation of qualified retirement plans, said when he develops plans he wants to ensure that he creates the most appropriate plan. “Cash balance really fits for many employers,” he said, adding that the principle behind the cash balance approach makes it “very appropriate from a plan design perspective.” Rosen said cash balance plans can be used either as the sole plan, or as a supplement to an existing plan to generate guarantees for employees.

A cash balance plan is a pension plan that combines the benefit formula of a defined contribution plan with the worker investment security of a defined benefit plan. Under a cash balance plan, a hypothetical account is set up for each worker and is credited with hypothetical pay and interest credits (seeFASB Releases Cash Balance Definition ).

These plans continue to be implemented, filling a need in the marketplace, which, Graff said, means clarity needs to be found sooner rather than later. Unfortunately, he said, because of the controversy surrounding the issue and it being an election year, the issue will most likely be tabled until 2005.