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Wells Fargo latest firm to freeze cash balance pension plan

Bank joins exodus from defined benefits by large employers

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SAN FRANCISO--Banking giant Wells Fargo & Co. is freezing its cash balance pension plan, as big employers accelerate their move away from cash balance and other defined benefit plans.

Effective July 1, Wells Fargo employees no longer will earn benefits in the plan. Wells Fargo also is freezing the cash balance plan sponsored by Wachovia Corp., a Charlotte, N.C.-based bank it acquired last year.

Wells Fargo will continue to match 100% of employees' 401(k) plan deferrals, up to the first 6% of pay.

Wells Fargo said in a statement last week that the decisions to freeze the plans were "difficult" but that it is "confident that we're taking the right steps to ensure the long-term strength of our company."

San Francisco-based Wells Fargo, which ranks No. 41 in the Fortune 100, joins a growing number of the nation's largest companies--including Boeing Co., IBM Corp. and Verizon Communications Inc.--that have decided to phase out cash balance plans in recent years.

Those freezes contrast sharply with the rapid adoption of the plans in the 1990s. In 1985, just one Fortune 100 company--Bank of America Corp.--had a cash balance plan, according to Watson Wyatt Worldwide. By 1998, 23 Fortune 100 companies had hybrid plans, mostly cash balance; and as recently as 2004, 34 Fortune 100 companies sponsored hybrids.

Since then, though, large-employer sponsorship of cash balance and other types of defined benefit plans has been declining.

Last year, for the first time, a minority of Fortune 100 companies--49%--still offered a defined benefit plan to new salaried employees. That percentage continues to slip. As of last week, according to a soon-to-be-released Watson Wyatt analysis, 45% of Fortune 100 companies offered a defined benefit plan to new salaried employees. Of those 45 employers, 22 offered a traditional defined benefit plan, down from 24 in 2008, and 23 offered a hybrid plan--mostly cash balance--down from 25 in 2008.

While the decline of defined benefit plans has been going on for a long time, the latest decline is different, benefit experts say.

In prior years, some employers remained in the defined benefit plan system and simply converted their traditional final average pay plans to cash balance plans. Many believed cash balance plans--due to their account feature in which benefits are expressed as a cash lump sum--increased employee appreciation, said Sheldon Gamzon, a principal with PricewaterhouseCoopers L.L.P. in New York.

In addition, with their faster buildup of benefits than traditional final average pay plans, cash balance plans were a better fit for a mobile workforce, employers said.

Other employers, concerned about the cost and volatility of required contributions, froze their pension plans and instead beefed up their 401(k) or other defined contribution plans.

But increasingly, employers such as Wells Fargo now are freezing their pension plans and not sweetening their 401(k) plans because they can't afford it, experts say.

Companies are "freezing their plans for financial reasons," said Bob Walter, a principal with Buck Consultants L.L.C. in Secaucus, N.J. Such savings "may be critical for some companies to continue," he added.

"Companies are looking to save cash any way they can," said Mike Archer, chief actuary with Towers Perrin in Parsippany, N.J.

In today's economic climate, corporate decisions on freezing plans shouldn't be viewed as votes on plan design but as part of the drive to reduce costs wherever possible, said Alan Glickstein, a senior retirement consultant for Watson Wyatt in Dallas.

Easing employers' ability to freeze defined benefit plans has been the lack of employee backlash. With employees more concerned about keeping their jobs rather than the amount of their benefits, employers don't face the pressure to provide the same level of benefits as they previously did, said Ethan Kra, chief actuary for Mercer L.L.C. in New York.

Still, down the road, some companies, amid future predicted shortages of employees, may decide to unfreeze their pension plans to help them attract and retain employees.

"There will be industries where companies will be focused on gaining a competitive advantage. I'm optimistic there still will be" defined benefit plans, said Towers Perrin's Mr. Archer.

In addition, employers eventually may unfreeze plans because of concerns that some employees will stay on the job longer than they should because they lack sufficient retirement savings, Mr. Gamzon said.

"Times are tough now for any employee benefit program as companies have to cut to survive. But nothing is forever and perhaps we will see a reversal of some of those freezes," Mr. Glickstein said.