INDEPENDENT RESEARCH CONFIRMS THAT HYBRID CONVERSIONS BENEFIT EMPLOYEES
Despite what one reads in the popular press, cash balance and other hybrid pension plans actually
provide more generous benefits for employees than the traditional pension plans they are replacing. As a result, cash balance and
other hybrid plan conversions have actually benefitted employees. These conclusions emerge from a growing body of research
conducted by independent economists and academicians. Their principal conclusions with illustrative quotations appear below:
- Traditional defined benefit plans deliver the bulk of their benefits to employees who retire in their mid-50's after spending
20 to 30 years with the same employer.
"[P]ension accruals in traditional DB plans are minimal at young ages, grow rapidly in the late 40's and 50's as workers approach
retirement age, and then become negative as workers lose pension wealth when they remain at work past the plan's retirement age.
For workers in their early 60s who have participated in the DB plan since age 25, for example, pension wealth declines on average
by about 14 percent of annual salary each year." Johnson & Steuerle, Urban Institute, Promoting Work at Older Ages: The Role
of Hybrid Pension Plans in an Aging Population, at 21 & Fig. 12 (2003) (Tab N).
- Few employees retire in their mid-50's after spending 20 to 30 years with the same employer, even at large companies.
"[A]t any given point in time the fraction of workers who have held their current job for a very long period of time (20 or more years)
is relatively small. Over the period 1983-1996, the fraction of all wage and salary workers with 20 or more years of tenure with
their current employer consistently hovered around 10 percent." Yakoboski, Employee Benefit Research Institute, Debunking the
Retirement Policy Myth: Lifetime Jobs Never Existed for Most Workers, at 6 (1998) (Tab W).
- Hybrid plans are better suited to Americans' work patterns because hybrid plans allow workers to earn benefits steadily
throughout their careers.
"By distributing pension wealth more equally across the population than [traditional defined benefit] plans, cash balance plans would
increase median lifetime pension wealth in the total covered population and more people would gain pension wealth than lose."
Johnson & Uccello, Urban Institute, The Potential Effects of Cash Balance Plans on the Distribution of Pension Wealth at Midlife,
at 29 (2001) (Tab M).
- The motivation for switching to hybrid plans is not cost savings but the need to adapt pensions to employees' career patterns
and employers' business needs.
"While the idea that firms are undertaking cash balance conversions to reduce benefits lacks analytic underpinnings, it has nonetheless
served as the basis of various legislative proposals in Congress and has been the dominant theme in media coverage of this trend.
Because of its influence, the idea is worthy of empirical analysis. . . . Our results indicate that, while critics have decried the trend of
the conversion of traditional DB pension plans to cash balance plans as reducing benefit generosity, the implications for retirement security
may actually be favorable. The earlier accrual and portability of benefits will better facilitate the accumulation of wealth for a more mobile
labor force." Copeland & Coronado, Federal Reserve Board, Cash Balance Pension Plan Conversions and the New Economy, at 12,
22 (2002) (Tab F).
The ERISA Industry Committee
1400 L Street, Suite 350
Washington, D.C. 20005