Hybrids for the Future
Life Time Worker
 Defined-benefit pension plans have fallen out of favor with both employers
and employees in recent years. They were designed to reward long-- service
employees by providing a monthly benefit at age 65, typically equal to a
percentage of pay for each year of service with the company-the larger the
salary and the longer the service, the larger the benefit. "Career" employees
who worked many years with the same employer were amply rewarded,
whereas short-service employees who terminated employment prior to
retirement often had little or nothing to show for their efforts.
 defined-benefit plans worked well for long-service employees,
providing guaranteed benefits for the employee's lifetime. However,
they were expensive to administer, often contained unfunded liabilities
that had to be carried on the company books, were hard to
communicate to employees, and were perceived to be useless in the
eyes of younger employees with a job-hopping mentality
Raise of the 401K
 During the 1980s, a whole new approach to retirement savings occurred
with the birth of the 401 (k) plan. These vehicles are more like tax-benefited
savings accounts. They usually are funded by a combination of employer
and employee money, so generally they are cheaper for the sponsoring
company to administer. Unlike the defined-benefit plan, they work well for
job-hopping, short-service employees. On termination of employment, an
employee can easily roll over his accumulated account balance to his new
employer's plan or to his IRA if a new plan is not offered.
Cash Balance Plans
 In the past few years, AT&T, Xerox, and American express, among others,
have instituted a new type of "hybrid" pension plan for their employees.
IBM is reportedly considering a similar move.
 Cash-balance plans look much like 401 (k) plans but have some of the
guarantees offered by defined-benefit plans. Under a typical cash-balance
plan, the company deposits a stated percentage of pay for each employee,
and an account is established in the employee's name. This account is
guaranteed a certain rate of return, and the sponsoring employer makes extra
deposits if needed to meet the guarantee. Conversely, future employer
deposits may be reduced if investment earnings exceed the guaranteed
amount. At retirement, benefits often are paid in the form of a guaranteed
monthly income rather than a lump sum.
Problems With the Plan
 Because defined-benefit plans discount in advance for anticipated
employee turnover, mortality, and future interest earnings, they tend
to accrue benefits at a very low rate during an employee's early years
of employment. The accrual rate accelerates as employees approach
retirement. By contrast, the accrual rate tends to be fairly level over
an employee's working lifetime when a cash-balance plan is used. It
is an accurate rule of thumb that young, short-service employees will
accrue more benefits under the cash-balance approach, whereas those
close to retirement prefer the defined-benefit approach. Because of
this phenomenon, there has been some negative press surrounding
cash-- balance plans, accusing employers of reducing accruals and,
therefore, plan costs for older employees to pass this savings on to
younger employees
Conversion Strategies
and Problems at IBM
 the motive behind the conversion to a cash-balance approach has been
questioned. It has been implied that the real reason for this trend is not to design
a plan better suited to today's workforce but to reduce pension costs by
designing a plan that reduces benefit accruals as employees near retirement IBM
much publicized problem in selling the conversion of their plan to its employees
has contributed to the negative image of cash-balance plans.
 There are lessons to be learned from IBM experience. Hundreds of other
companies made the conversion from a defined-benefit type plan to a cashbalance plan with little or no complaint from their employees. When
considering a fundamental change in the method of funding retirement benefits,
a company must carefully develop a conversion strategy
 there were other groups of employees who concluded, rightly or wrongly, that
their benefits would be reduced. These employees established a web sight in
protest, which reportedly was getting 15,000 hits a day during the height of the
controversy Unable to win back its credibility, IBM agreed to allow these
employees to elect to remain in the old plan.
Three Steps in a Conversion
Strategy
 The development of such a strategy begins by understanding that there is no
one plan that is perfect for every employee. There are many varieties in
benefit formulas and funding methods that result in the accrual of benefits at
different rates based on such factors as age, service, and salary
 A second essential part of a conversion strategy requires that the employer
run test models to determine how the new plan will affect benefit accruals
for each employee. There are ways to protect benefit accruals for certain
groups of employees, but a specific plan must be developed to do so.
 This brings us to the third part of the conversion strategy: Clear
communication of the changes being made to employee benefits is essential.
This should include a projected comparison of the benefits generated by the
existing and revised plans and full explanation of the assumptions used
when making this projection.
The Take Away
 Conversion campaign of this type may unfold over many
months, but we believe that there is no substitute for doing
it right, no matter how long it takes. A plan that is well
designed, fair to all concerned, and clearly communicated
should be the ultimate goal of all concerned
 Thank you