When companies began converting existing defined benefit pension plans to cash
balance plans, critics cried "foul." Among other charges, they claimed
companies were making the conversions only to save money. An analysis by Watson
Wyatt Worldwide, which looked at conversions in 1999 and earlier, did indeed
find that companies saved money--1.4 percent on average.
A recent Watson Wyatt update of the earlier study, which looked at 55 large
companies (out of a known universe of about 80) that have converted to cash
balance plans, had a different result. The recently released study showed that
costs actually increased for companies making the conversion, roughly 2.2 percent.
The earlier study showed that companies contributed average pay credits of
5.1 percent of salary toward employees' retirement benefits. The new study
revealed almost no change--5.0 percent--yet costs to the company have
Most of the companies participating in the study took measures to protect workers
from possible adverse effects, the cost of which are included in the 2.2 percent
cost increase. Thirty-three percent of employers gave workers the choice of
staying with the old plan or opting for the new. Thirty-one percent grandfathered
workers under the old formula. And 13 percent guaranteed workers the better
of the old or the new formula.
Those measures dispute the idea that cash balance plans adversely affect long-term,
older participants. The U.S. Treasury Department and others have worried that
the conversions would leave such workers with less financial security than they
would have had under a standard pension plan. They argue that additional mandates
would solve the problem. However, Janemarie Mulvey, assistant director of research
at Watson Wyatt and an author of the study, points out the steady decline in
the number of cash balance conversions in the last 5 years. "While opponents
might cheer this trend," she says, "what goes underreported are the
thousands of companies that have simply frozen their defined benefit plans in
recent years. Unduly restricting the hybrid plan option will only cause more
companies to offer a stand-alone defined contribution plan, leaving workers
with none of the security of defined benefit pensions."
Steve Mirante, managing consultant of Watson Wyatt's New Jersey office,
believes employers are taking care of potential problems themselves. "Added
mandates would certainly drive more employers out of the defined benefit system,"