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WASHINGTON -- More flexible federal rules are needed to accommodate the latest wave of innovative pension plan designs, says the executive director of the Pension Benefit Guaranty Corp.
As the workforce has changed, hundreds of employers have scrapped their traditional pension plans and replaced them with hybrid plans, so named because they are intended to combine the best features of defined benefit and defined contribution plans.
Perhaps the most radical of the new wave of hybrid plans is NationsBank Corp.'s new cash balance plan that allows employees to direct pay credits to 11 investment options. In addition, NationsBank -- now known as Bank of America following its merger with BankAmerica Corp. -- gave employees a one-time opportunity to transfer to the cash balance plan any pretax contributions previously made to the company's 401(k) plan.
Federal rules, though, have not kept pace with new designs, said PBGC Executive Director David Strauss.
Because plan design has leaped ahead of rules, employers and their advisers aren't always sure if the new plans pass muster.
After going through the effort and cost of designing hybrid plans, "they are unsure of the legality of the approach they have taken," Mr. Strauss said. "All you have to do is to look at today's Business Insurance and see one of the headlines on the front page, 'NationsBank's Innovative Pension Plan in Question,' " he said, referring to legal questions raised about the 401(k) transfer portion of NationsBank's plan (BI, Oct. 12).
Speaking last week before a Washington meeting of the ERISA Industry Committee, Mr. Strauss strongly advocated greater flexibility in federal pension rules.
"If we are really serious about bringing new people into the system, we have to give employers the flexibility to allow them to take the best features of defined contribution and defined benefit plans and use them to address the needs of their workforce," he said.
The core elements of those rules should be clarity and flexibility to allow continuing creativity in plan designs that result in more workers with predictable, secure lifetime benefits, he said.
Affirming remarks he made earlier, Mr. Strauss gave several examples of new types of pension plans that would link defined benefit and defined contribution plans into a new flexible plan. Those designs, now being examined by pension officials, would:
* Allow the employer match in a 401(k) plan to be used to provide an additional benefit in a defined benefit plan.
* Allow employees to elect to use a 401(k) contribution to buy an additional benefit in a defined benefit plan.
Such designs, now barred by federal rules, could be appealing to employers who want more flexibility in plan design.
"The people with whom we spoke told us that, as retirement professionals, they believed in defined benefit plans, but they are a hard sell. They said employers need more incentives to set up plans and more flexibility in plan design," he said.
And given the growing interest in Washington of assuring adequate retirement income, ideas for types of pension plans will get the attention they deserve.
"Because retirement income security is such a pressing imperative for the country, I believe that if we can develop credible proposals to reform the system, they will get serious consideration both within the administration and the Congress," he said.
Turning to another area, Mr. Strauss noted that the ERISA Industry Committee has called for a reduction in the premiums that employers pay to the PBGC to support its pension insurance program. Those calls were made by ERIC in response to the pension agency's $3.48 billion surplus.
While Mr. Strauss said the PBGC is "recovering quite nicely" from only a few years ago when it was on "life support," the risks to the agency's financial health have not disappeared.
"It would be imprudent for me to assume that the unprecedented economic prosperity of the last seven years will last forever. No one can predict for sure but, to use a biblical reference, the seven fat years could give way to seven lean years," he said.
Still, once the agency has built what Mr. Strauss described as an adequate cushion, "We will need to look at ways to provide premium relief."