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Matt Dunning

Hybrid pension plans combine traditional and defined contribution elements

May 25, 2014 - 6:00am


Hybrid pension plans are employer-sponsored retirement plans that combine elements of traditional pension plans and defined contribution arrangements.

While hybrid pension structures generally are classified as defined benefit plans under federal law, they are distinct from the traditional defined benefit model in the way employees' retirement benefits are accrued and paid.

Traditional pensions define the benefit as a percentage of an employee's final salary at retirement as determined by their years of service with the employer, and a specified amount is paid monthly after retirement. Conversely, in most hybrid models, the promised benefits accrue value annually over the length of a worker's participation in the plan and typically are paid as a lump sum.

By a wide margin, cash balance plans are the most popular form of hybrid pensions. From an employee perspective, cash balance plans may resemble traditional defined contribu-tion plans, in that an employer agrees to contribute a certain percentage of an employee's salary annually, which can be tiered according to age, job classification or pay rate.

But unlike defined contribution plans, employees' retirement balances in a hybrid pension plan cannot decline in value. Instead, employer and employee contributions are deposited in a notional account for each employee, with interest earned at a fixed rate set by the employer, a variable rate tied to the 30-year Treasury bond rate or other index, or a market rate tied to the overall plan's investment performance.

Although pension equity plans account for a much smaller portion of total volume of hybrid pension plans, about 4% of private industry employees in the U.S. still were accruing benefits through pension equities in 2012, the most recent year data was available from the U.S. Bureau of Labor Statistics.

In a pension equity plan, employees are credited for each year of enrollment. When they reach retirement, the credits are multiplied by the employee's final average salary, and the resulting amount is paid in a lump sum.

In both models, employers still assume the bulk of the financial risk associated with the plan.

 



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