Bank to convert to cash balance plan

ATLANTA--One of the nation's biggest banks is converting its traditional pension plan to a cash balance plan, the second major company to do so since Congress passed legislation last year that protects new cash balance plans from age discrimination lawsuits.

Beginning Jan. 1, 2008, new SunTrust Banks Inc. employees and employees with less than 20 years of service will earn benefits under the cash balance plan. SunTrust employees with 20 or more years of service as of Dec. 31, 2007, will be given the option of staying in the traditional plan under a reduced benefit formula or earning future benefits in the cash balance plan.

Cash balance plan participants will receive annual pay-related credits with the amount of the credit based on an employee's age and service. For example, employees whose combined age and service is less than 30 will receive a credit equal to 2.5% of pay, while employees whose age and service is between 30 and 39 will receive a credit equal to 3% of pay. Additionally, employees whose age and service is between 40 and 49 will receive a 4% pay credit; employees whose age and service is 50 or more will receive a 5% annual pay credit.

Atlanta-based SunTrust, which has more than $180 billion in assets and reported $2.1 billion in net income in 2006, also will credit employees' account balances with interest based on a current market rate. It is waiting for upcoming Internal Revenue Service guidance before deciding on how to calculate a market rate.

Aside from adding a cash balance plan, which the Atlanta office of benefit consultant Towers Perrin helped design, SunTrust also is sweetening its 401(k) plan. Effective Jan. 1, 2008, SunTrust will fully match employees' 401(k) plan salary deferrals, up to the first 5% of pay. Currently, SunTrust fully matches deferrals on the first 3% of pay, and matches 50% of deferrals on the next 2% of pay.

On the health care side, SunTrust, effective Jan. 1, 2010, will stop subsidizing retiree health care coverage for retirees under age 65 unless retirees were at least age 55 and had 10 years of service prior to that date.

The pension and retiree health plan changes, SunTrust reported in a U.S. Securities and Exchange Commission filing, will make the "retirement program financially sustainable over the long term by stabilizing the volatility of pension expense" while maintaining a benefit program that employees will value.

These changes came at the conclusion of a year-long, in-depth review of its benefit plans, SunTrust President and CEO James M. Wells III wrote in a brochure distributed to employees.

"At the heart of the changes is a new way of thinking about our retirement program," Mr. Wells wrote. "In the past, retirement benefits revolved around planning for an employee's retirement date. Today, retirement planning revolves around building financial resources that employees take with them throughout their careers."

Plan attraction

For example, one of the attractions of cash balance plans for employees is that they can take their accumulated benefit--regardless of their age--as a cash lump sum when they leave. By contrast, traditional pension plans typically do not allow employees to collect their benefit until they reach retirement age, with the benefit then paid out as a monthly annuity.

Last year, paper packaging and office products company MeadWestvaco Corp. of Richmond, Va., became the first major employer to convert a traditional pension plan to a cash balance plan after Congress, as part of the Pension Protection Act, gave new cash balance plans the green light so long as they met a few basic conditions (BI, Nov. 13, 2006).

Other major employers also are considering converting traditional plans to cash balance plans, benefit consultants say.

Employers now sponsor somewhere between 1,200 and 1,500 cash balance plans, with nearly all of those plans established between the mid 1980s and the end of the 1990s.