Firms adopted cash balance formulas for a variety of  reasons, including reducing total pension costs, increasing portability to  enhance the recruitment of younger or more mobile workers, and adding a lump sum benefit feature that can be used to better explain pension  benefits to workers. About One of Five Fortune 1000 Firms Sponsors Cash Balance Plans

About 19 percent of Fortune 1000 firms sponsor cash balance plans that  cover an estimated 2.1 million active participants. Firms sponsoring these plans exist in many sectors of the economy,  but the greater concentrations are found in the financial services, health  care, and manufacturing industries. Most firms in our  survey that sponsor cash balance plans previously covered their workers  under another defined benefit plan. For example, converting to a cash balance plan can extend the  period of time a firm would not have to make a contribution to the pension  plan while still having the plan considered to be fully funded or  overfunded—that is, the value of plan assets meet or exceed the value of  currently accrued pension benefits. Conversions Can Be Advantageous for Some Workers but Can Result in Lower Benefits at Retirement for Others

Conversions to cash balance plans can result in higher pension benefits  accruing earlier in a worker’s career and increased portability of benefits,  which can be advantageous to younger or more mobile workers. Defined Benefit Plans With Final Average Pay Formulas Accumulate Benefits Differently Than Cash Balance Plans

Cash balance plans provide a larger share of a participant’s accrued benefit  earlier in the worker’s career than a traditional defined benefit plan based  on a final average pay formula. Our comparative design scenarios illustrate the declining rate of normal  retirement benefit accrual inherent in cash balance plans. 3.) This is especially important for workers who  change jobs frequently or move in and out of the workforce. Conversions to Cash Balance Plans Can Reduce Older Workers’ Future Benefits

Depending on the age of a participant at conversion and a plan’s design  features, conversions of defined benefit plans with final average pay  formulas to cash balance plans can result in lower annuities for some  participants than they would receive if no conversion occurs. 4). 5.) 6). We found wide variation in the type and amounts of  information workers receive about plan changes. In many instances of  conversions to cash balance plans, sponsors did not ensure that  participants received sufficient information about plan changes that can  reduce future benefit accruals. Consequently, the communications  provided to employees typically vary from general statements about plan  changes to specific examples of how conversions to cash balance plans  might affect workers of different ages and tenure. We selected the firms randomly. Our survey of 1999 Fortune 1000 firms indicates that there is a wide variety  of cash balance plan designs among the firms that sponsor these plans. 1. 2. 3. 1. 2. 7). 8).
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the implications of converting traditional private pensions to cash balance plans, focusing on: (1) the prevalence and major features of cash balance plans, and reasons why firms adopt them; (2) how the use of cash balance plans affect the pension benefits for workers of different ages and tenure, particularly after conversion; and (3) what information employers converting to cash balance plans typically provide to plan participants and how disclosure might be improved.

What GAO Found

GAO noted that: (1) GAO's survey of 1999 Fortune 1000 firms indicates that the number of firms sponsoring cash balance plans has increased within the last few years, with few firms sponsoring such plans prior to the early 1990s, but increasing to about 19 percent of all Fortune 1000 firms this year; (2) these plans cover an estimated 2.1 million workers; (3) firms in many sectors of the economy sponsor these plans but greater concentrations are found in the financial services, health care, and manufacturing industries; (4) about 90 percent of the firms GAO surveyed that sponsor such plans previously covered their workers under a traditional defined benefit plan; (5) most of the conversions occurred within the past 5 years; (6) key reasons firms gave for converting include lowering total pension costs, adding a lump sum feature to increase the portability of pension benefits, thereby improving the firm's ability to recruit more mobile workers, and facilitating communication of the value of plan benefits; (7) as with traditional pension plans, cash balance plan designs vary significantly; (8) conversions to cash balance plans can be advantageous to certain groups of workers, for example, to those who switch jobs frequently, but can lower pension benefits for others; (9) cash balance plans provide a larger share of a participant's accumulated benefit earlier in a career, compared with a traditional defined benefit plan that is based on final average pay; (10) as a result, conversions can increase the value of some workers' benefits, especially younger or short-tenured workers who leave firms before retirement; (11) unlike traditional defined benefit plans, cash balance plans can result in a declining rate of normal retirement benefit accrual over time; (12) this declining accrual rate can result in older workers receiving lower benefits at retirement from a cash balance plan than they would have from a traditional final average pay plan if it had not been converted; (13) current disclosure requirements provide minimum standards for the information plan sponsors must give participants about plan changes; (14) GAO found wide variation in the type and amounts of information workers receive; (15) the communications provided to employees vary from general statements about plan changes to specific examples of how a conversion to a cash plan might affect workers of different ages and tenure; and (16) often, sponsors did not ensure that participants received sufficient information about plan changes that can reduce future benefit accruals.