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MEMPHIS, Tenn., and AKRON, OhioTwo large employers last week announced major changes to their pension offerings, with FedEx Corp. expanding its cash balance pension plan to cover all eligible employees and Goodyear Tire & Rubber Co. signaling the winding up of its defined benefit plan.
Nearly four years ago, FedEx adopted a cash balance plan, offering it to employees hired on or after June 1, 2003. At the time, current employees were given a one-time choice of shifting to the cash balance plan or remaining in FedEx's traditional pension plan.
Under the change announced Tuesday, employees who decided to stay in the traditional plan in 2003 will--effective June 1, 2008--earn future pension benefits through the cash balance plan.
Under the cash balance plan, employees receive annual pay-related credits based on points that are a combination of age and service. Those credits range from 5% to 8% of pay. Additionally, employees' account balances are credited with interest based on a U.S. Treasury bill index.
Certain eligible employees age 40 and older moving to the cash balance plans will receive additional pay credits.
Aside from expanding the cash balance plan to all eligible employees, FedEx is improving its 401(k) plan. Effective Jan. 1, 2008, FedEx will match 100% of employees' salary deferrals on the first 1% of pay and 50% of deferrals on the next 5% of pay. Currently, FedEx's matching 401(k) contribution is capped at $500.
Among reasons for the pension plan changes, FedEx said, are employees' desire to make their pension benefits more portable. From the corporate perspective, there also is the need to reduce "unacceptable risk and volatility" caused by new pension funding and accounting rules, said FedEx Executive Vp and CFO Alan Graf Jr. in a statement.
"We believe these changes are the responsible thing to do and will help you prepare for a comfortable retirement, while at the same time protecting the company from significant financial risk," the company told its employees.
FedEx, which last year ranked No. 70 on the Fortune 100 list of largest corporations with more than $32.2 billion in revenue, is at least the third major company recently to add or expand a cash balance plan. Earlier, MeadWestvaco Corp., a Richmond, Va.-based packaging and office products manufacturer, and SunTrust Banks Inc., the big Atlanta-based bank, announced conversions of traditional plans to cash balance plans, which are so named because benefits are expressed as a cash lump sum.
Meanwhile, continuing its drive to reduce its retiree benefit costs and obligations, Goodyear said it is phasing out its defined benefit pension plan, as well as boosting retiree health care premiums and is no longer paying premiums for a retiree life insurance plan.
The changes, which only affect salaried employees and retirees, are expected to generate roughly $260 million to $300 million in aftertax savings from 2007 through 2009, with $80 million to $90 million in annual savings after that.
Like many other major corporations, Goodyear is winding down its defined benefit plan, which it will freeze on Dec. 31, 2008.
Starting on Jan. 1, 2009, Goodyear will make automatic contributions based on employees' age and service to a 401(k) plan. It also will match 50% of employees' salary deferrals, up to the first 4% of pay. Currently, Goodyear offers a 401(k) plan to salaried employees, but does not match their contributions.
On the health care side, Goodyear, effective Jan. 1, 2008, will increase premiums that current and future retirees pay for coverage. At the same time, it also will discontinue paying premiums for a retiree life insurance plan.
The changes, said Goodyear executives, are intended to increase its competitiveness while reducing its cost structure.
"These changes allow us to continue to provide the kind of compensation packages that are competitive and will attract and retain talented associates," said Kathleen Geier, Goodyear's senior vp of human resources. "They are also consistent with our goal of reducing costs in excess of $1 billion by 2008."
Earlier, Akron, Ohio-based Goodyear took the first step to reduce benefit obligations through an arrangement--agreed to by the United Steelworkers union--in which Goodyear will contribute $1 billion to a special tax-exempt health care trust that will provide benefits to USW-represented retirees.
In turn, Goodyear will have no future obligation to provide retiree health care benefits, removing a $1.3 billion projected obligation from its balance sheet and improving annual cash flow by $145 million a year (BI, Jan. 15).