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Posted On: Mar. 23, 1997 12:00 AM CST

COLUMBUS, Ind.-Employees at Cummins Engine Co. Inc. now receive their pension benefits through a cash balance plan.

The new plan, which covers about 7,000 employees, replaces a traditional, final average pay plan that Cummins officials, after an extensive review, decided no longer met the needs of employees.

"The workforce was changing. We wanted a plan that better meets employees' needs throughout their entire careers. And we wanted a plan that would be easier to understand," explained Jan Nolander, executive director of performance management and rewards for Cummins, a Columbus, Ind.-based manufacturer of diesel engines and components.

The previous plan met none of those objectives. As a final average pay plan, the design was skewed in favor of long-service employees so that workers who left after a few years received very small benefits.

"We wanted to say to employees that we value your service at Cummins throughout your employment at the company," Ms. Nolander said.

In addition, because the previous plan had a complex benefit formula, it was difficult for employees to readily know the value of the benefits they had accrued.

Cummins' cash balance plan, which was put in place Jan. 1, addressed each of those problems.

As career average plans, cash balance plans provide a smoother accrual of benefits compared with traditional final average pay plans, where the bulk of benefits are earned during employees' later years of employment. That means employees leaving after a few years of service receive significantly higher benefits under a cash balance plan than they would have in the final average pay plan. It also means benefits don't suddenly jump-as they do in many traditional plans-when an employee completes a certain number of years, typically 30.

At the same time, because accrued benefits in cash balance plans are expressed as an account balance, employees instantly know, much as they do in a profit-sharing or 401(k) plan, the value of their benefits.

"We wanted to help employees better plan for retirement. Since benefits are expressed as an account balance, employees always know what they have earned under the plan," said Scott Japko, a principal with The Kwasha Lipton Group in Fort Lee, N.J. It administers the Cummins cash balance plan.

On Jan. 1, Cummins converted benefits earned under the old plan to lump-sum amounts. These lump-sum amounts were recorded as opening balances in the newly created individual employee accounts.

These account balances are credited with an annual "contribution" by Cummins. As a defined benefit plan, while amounts are credited to individuals' "accounts," Cummins' actual contributions are made to the plan itself. Benefits are funded on an aggregate basis with the employer contribution to the plan determined by a variety of factors.

"Contributions" or credits to individual account balances are based on employees' years of service. Employees with less than five years of service receive credits equal to 4% of pay, while employees with five or more years of service receive credits equal to 6% of pay.

Cummins also guarantees an annual return on the accounts based on the 30-year U.S. Treasury bond rate, plus one percentage point, as of September of the prior year.

In addition, certain transition benefits are provided to ensure that employees with longer service records will receive comparable benefits to what they would have accrued under the previous plan.

Employees can call a toll-free number-maintained by a Kwasha Lipton outsourcing center-to find out the exact amount of their account balance. This service will be expanded in April so that employees will be able to project the value of their future benefits using certain assumptions.

In addition, quarterly statements that provide the cash balance plan account balances as well as the value of employees' 401(k) plan accounts are mailed to employees' homes.

Ms. Nolander said cost was not a factor in changing to the new plan. While the cash balance plan costs somewhat less than the previous plan, Cummins enriched its 401(k) plan so that its overall retirement benefit plan costs remain about the same.