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Cash balance pension plans catch eye of mid-market professional firms

Model offers bigger benefits to executives in demand


Once the domain of large companies, cash balance pension plans now are being embraced by mid-market professional firms, benefit experts say.

The first cash balance plan was adopted in the mid-1980s by financial services industry giant Bank of America Corp. in Charlotte, N.C.

Many other corporate titans, including Cigna Corp., IBM Corp. and Wells Fargo & Co., followed.

But the interest of big employers in the plans cooled beginning in the late 1990s amid a flurry of lawsuits from the plaintiffs bar alleging that the plans' design was age-discriminatory, along with the failure of federal pension regulators to provide guidance on the issue.

The age discrimination issue largely came to an end after five federal appeals courts ruled that the plans did not discriminate against older employees, while Congress, in a 2006 law, made clear that the plans were not age-discriminatory.

“The age discrimination issue has been pretty much resolved,” removing a potential impediment to plan formation, said Dan Schwallie, a senior Aon Hewitt legal consultant in Cleveland.

While only a handful of big employers have set up new cash balance plans since 2006, small professional firms have eagerly embraced the plan design, which combines the features of defined benefit plans and defined contribution plans.

“Small professional firms are the ones looking at these plans,” said Sam Henson, senior ERISA counsel for Lockton Financial Advisors L.L.C. in Kansas City, Mo.


“We've seen a huge uptick in the formation of cash balance plans among professional firms, like medical and law firms,” said Dan Kravitz, president of retirement plan administrator Kravitz Inc. in Los Angeles.

Among professional firms, cash balance plan formation has been outpacing 401(k) plan growth, said Art Noonan, a senior partner in the Pittsburgh office of Mercer L.L.C.

Federal statistics illustrate the growth of cash balance plans among smaller firms. In 2001, among pension plans with less than 1,000 participants, just 681, or 2.3%, were hybrid plans — mainly cash balance plans — according to statistics compiled by the federal Pension Benefit Guaranty Corp.

By 2010 — the most recent year for which the PBGC has published statistics on the issue — 2,909, or 12.6%, of plans with fewer than 1,000 participants — were hybrid plans.

There are several reasons why smaller and mid-market firms, especially professional firms with a high percentage of well-paid employees, are gravitating to cash balance plans, the chief one being a growing understanding that the plans will provide much greater benefits to executives than just offering, for example, a 401(k) plan.

“It is clear that just offering a 401(k) plan does not do enough,” said Alan Glickstein, a senior retirement consultant with Towers Watson & Co. in Dallas.

“Professionals are in huge demand, and offering a cash balance plan can be a way of attracting and keeping those professionals,” said Jack Abraham, a principal with PricewaterhouseCoopers L.L.P. in Chicago.


One firm thinking along those lines is SouthWest Diagnostic Imaging Ltd., a 650-employee radiology provider in Phoenix, which intends to set up a cash balance plan this year.

“A cash balance plan will serve as a significant recruitment tool for individual physicians and for consolidation efforts in the future as a result of health care reform,” said Mike von Kolen, director of finance at Valley Radiologists Ltd., which is a Southwest Diagnostic Imaging unit.

“This will be a positive attraction to working here. Why not go from a company that does not offer a cash balance plan to one that does?” Mr. von Kolen said.

The additional benefits that employers can provide to employees through offering a cash balance plan compared with providing just a 401(k) plan are striking.

Employees can contribute up to $17,500 — or $23,000 if they are age 50 and older — annually to a 401(k) plan. Their employers can match those contributions up to a total of $51,000. By contrast, employers can fund an annual benefit of more than $200,000 in a cash balance plan.

“It is great way of providing additional savings,” Mr. Kravitz says of cash balance plans.

Another attraction of cash balance plans for professional firms is that the pay-related credits, which are equal to a percentage of an employee's salary, can vary by employee classification.

“You can have a higher allocation rate for, say, engineers, who might be in great demand, and a lower allocation rate” for other employees, Mr. Abraham said.


The pay-related credits also can be designed so that older employees receive bigger credits than others. That design could help professional firms woo older, highly experienced individuals who would immediately earn large pay-related credits.

And proposed Internal Revenue Service regulations give an additional boost to cash balance plans, experts say. Those rules, intended to implement a provision in a 2006 law, allows cash balance plans to credit interest to employees' accounts based on a market returns earned by the plans.

Aside from credits equal to a percentage of their pay, plan participants, as a result, could earn additional credits tied to the performance of plan assets — a feature not found in other types of defined benefit plans.

“A lot of employers are starting to look at that approach,” Mr. Kravitz said.

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