Scholarly Articles and Other Contributions
 

Document Type

Article

Publication Date

2001

Abstract

Cash balance plans are hybrid plans designed to offer the best characteristics of both defined benefit and defined contribution plans. However, conversions of existing defined benefit plans into cash balance plans are highly controversial because they can significantly reduce the expected retirement benefits of older workers. Because future plan costs are reduced and plan surpluses are often created, the use of surplus plan assets by employers has raised serious concerns. This article describes and analyzes the advantages and disadvantages of using cash balance plans as primary retirement savings vehicles. It argues that the controversy over conversions is really about the extent to which the rights and expectations of plan participants should be protected. It proposes striking a balance between the rights of employers and employees in a plan conversion by 1) requiring employers to provide sufficient notice to affected participants about changes in their projected retirement benefits; and 2) limiting the amounts by which retirement benefits can be reduced.

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