New Kind of Pension Divides Benefits Along Generational Lines

Many big corporations are adopting cash-balance plans, and workers in their 40s could be the losers.
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, long known as a leader in workplace perks, recently announced it would dismantle its traditional pension system in favor of a fresher approach. Normally, only the pulse of an actuary would race at this sort of news. But these aren't normal times.

IBM's decision to switch to a so-called cash-balance plan is a strong signal that the old way of funding pensions in this country is changing. An increasing number of corporations, particularly those with household names, are fueling the trend.


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Eastman Kodak




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MCI WorldCom




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Chase Manhattan


are just a few of the corporations that have either switched or are doing so now. By some estimates, up to 1,000 companies have embraced cash-balance plans, including 22 in the

Fortune 100


Whether you should applaud this trend or protest bitterly depends on your age and whether you tend to job-hop or spend your career tied to the same cubicle. What's clear is that longtime workers in their 50s and 60s will typically be hurt by these conversions unless some pension sweeteners are mixed in. Not surprisingly, lawsuits, including some alleging age discrimination, are challenging this trend.

Corporations are saving money with these new plans. IBM, for example, estimates it will spend about $200 million less in pension benefits. But while critics blast corporations for shortchanging longtime workers in the name of profits, supporters claim the switch is crucial for any company wanting to maintain a competitive edge in attracting the best talent.

"To say that all conversions are motivated by cost reduction is false," insists James Delaplane, vice president of retirement policy at the

Association of Private Pension and Welfare Plans

, an industry trade group. "In many cases, it's much more about modernizing corporate pension systems and making it a better fit for employees."

401(k)-Like Features

Cash-balance plans, which sport the look of the popular 401(k)s, do offer attractive features. They provide participants with regular account statements that are actually understandable. In contrast, traditional pension statements typically extrapolate what future benefits would be at retirement. This isn't particularly meaningful for anybody who is two, three or four decades away from that milestone.

And unlike many traditional pension plans, the newer plans are portable: You can take the cash when leaving a company. Your sensible options are rolling the money into an IRA or into your new workplace's pension plan. Employers, however, fret that too many of us will simply take the windfall and blow it. That's your third option, but you'll be subject to a 10% penalty plus taxes if you do it.

It's how the benefits are calculated for both types of plans that is fueling the passionate debate. In the cash-balance system, pension benefits accrue steadily. With one of these plans, for instance, your employer may typically deposit from 4% to 7% of your annual salary into your account each year. The interest your account earns is either specified by the company or tied to an index, such as the

consumer price index

or the interest rate on U.S. Treasury bills.

In contrast, the old-style plans are back-loaded. Benefits accumulate very slowly until the tail end of an aging worker's career. "Only when you get close to retirement do the benefits start to exceed what you'd get in a cash-balance plan," observes Tom Edwalds, a senior research actuary at the

Society of Actuaries


Winners and Losers

That late-career spike is wonderful for corporate lifers, but not so great for many others. Cash-balance plans can be a better deal for people who change jobs frequently and for women who find themselves moving in and out of the workforce due to pregnancy and/or child-care issues.

A study by the Society of Actuaries, which looked at the pension benefits of 259,458 vested employees who retired or quit their jobs, suggests that about 75% of women would have enjoyed fatter retirement checks with a cash-balance plan.

But women weren't the only ones who would have benefited; roughly two-thirds of all workers would have fared better. The research revealed dramatic disparities in hypothetical pension payouts. Take, for instance, a worker in his early 40s, who remained loyal to his employer for 16 to 20 years. Under the cash-balance plan, he'd have been entitled to $37,558 in pension benefits if he took them in a lump sum. But with the traditional plan, that value would have plummeted to $12,543. The numbers, however, flip-flop for older workers with lots of seniority. A 65-year-old with more than 25 years of service could have expected a pension worth $85,050 with the cash-balance formula. But under the traditional method, the retiree's benefit would have soared to $127,908.

Some critics of cash-balance conversions, including David Certner,

the American Association of Retired Persons'

senior coordinator for economic issues, suggest that workers in their 40s could be hurt the most by a pension change. That's because employers who want to make the switch more equitable may allow employees in their 50s and 60s to opt out of the new plan or give them other financial incentives.

Figuring Out Your Plan

Trying to decipher a corporate pension plan is not easy stuff. But consumer advocates complain that workers are often expected to make critical decisions after reading a flimsy brochure or an upbeat handout. "The employers are just glossing over exactly who will be worse off here," laments Michele Varnhagen, policy director of the nonprofit

Pension Rights Center

in Washington.

Legislation sponsored by Sen. Patrick Moynihan (D., N.Y.) and Rep. Jerry Weller (R., Ill.) would require employers to provide individualized estimates of the impact of any pension conversion at companies employing more than 1,000 people.

In the meantime, you may want to hire your own actuary to crunch the numbers. You can find actuaries in your area by visiting the

Web site of the

American Academy of Actuaries

. John M. Bragg, an Atlanta actuary, estimates the tab for most people who want to know how they would fare under old and new pension plans will typically be about $250.

Lynn O'Shaughnessy writes frequently about personal finance and mutual funds and is the author of The Unofficial Guide to Investing (Macmillan).