Over the past few months, two developments have occurred which may have an adverse impact on the continued growth of the private pension system. The first is the government review of Cash Balance plan conversions which was precipitated by a worker revolt at IBM. The second is the more recent announcement that IRS is reviewing "New Comparability" plans to see if they are "appropriate" in all situations. A brief summary of each of these situations follows.

New Comparability is the generic name for the technique which allows defined contribution plans to designate different levels of contributions for different groups of employees, provided that the ultimate allocation passes the complex non-discrimination test in the law. Because of its power and flexibility, this technique has helped increase both the number of qualified retirement plans in existence, and the amount of dollars flowing into these plans. Most CAI clients utilize this technique, either under the name of "MAD" or "Customized" in their retirement programs. Now, the IRS says that it is concerned that New Comparability is hurting rank and file employees because it frequently permits the key employees to receive a higher percentage of the overall contribution than they would under a standard defined contribution plan.

CAI, along with the American Society of Pension Actuaries, and several other groups, believe that the IRS needs to be very careful in how it addresses this concern. The last time that the government became concerned with benefits for rank and file employees, they created the top-heavy rules, reduced the compensation limit, and created a myriad of restrictions on defined benefit plan designs. The result of that round was an avalanche of plan terminations and the near elimination of (non-401k) small business retirement plans. New Comparability plans (as well as Cash Balance plans described below) have played a large role in promoting the formation of new retirement plans, thus enhancing the retirement benefits for millions of employees in small businesses throughout the country.

As a result of negotiations between ASPA and the treasury department, it has been agreed that any changes to the law relating to current New Comparability plans will not be effective until plan years beginning after December 31, 2001. This means that all current clients will have at least 2 more years before any changes need to be made. Depending upon the nature of the changes ultimately proposed by the treasury department, it may be necessary to organize a "grass roots" movement of small business owners to make sure that congress fully understands the adverse consequences of any significant change in these laws. We will keep you informed of any new developments in this area.

The past 15 years have seen a shift away from traditional defined benefit plans toward account oriented plans. This shift had proceeded with very little worker protest until IBM announced last summer that it would be converting its defined benefit plan into a Cash Balance plan. Under the Cash Balance plan, employees receive an annual allocation equal to a set percentage of salary. This allocation then earns interest credits at a rate proscribed by the plan document. At retirement, the participant can either take a lump sum equal to his account value, or convert it into a monthly pension. This plan has proven to be popular because it is easier for employees to understand than traditional defined benefit plans while allowing employers more flexibility in plan design and greater ability to control costs.

It also tends to provide higher benefits than traditional defined benefit plans for younger workers and lower benefits for older workers. The last item became the sticking point with the IBM employees who saw the Cash Balance plan as management reneging on its commitment to provide a certain level of retirement benefit. Under the IBM plan design the reduction in benefits for many older workers was so severe that, in effect, they stopped earning additional pension benefits as of the date the plan became a Cash Balance plan.

Congress has been considering several proposals to prevent this situation and while the ultimate outcome is still in doubt, we already know that some changes will be made. First, it is nearly certain that the participant notification requirements will be enhanced. It is also likely that plans will require that participants continue to accrue benefits after the plan is amended. However, because so many large companies have now adopted Cash Balance plans it is highly unlikely that this type of plan will be outlawed. It is our belief that the impact of any legislation in this area will be limited solely to traditional defined benefit plans being converted to Cash Balance plans.

Clients who are looking to enhance their benefit programs, increase their tax deductions, and provide additional benefits to key employees should consider implementing a Cash Balance plan. The attention being given to these plans is a sign of their popularity among employers. Please contact your Senior Consultant if you are interested in seeing whether or not a Cash Balance plan is right for you.

PLAN AMENDMENTS AND RESTATEMENTS

The deadline for amending and restating all qualified retirement plans for the various laws passed after 1994 is December 31, 2000. Because, as usual, the IRS has not been able to get all regulations together in a timely way, this deadline will be extended. Nevertheless, we have begun the task of coordinating the restatement of our client’s plans, and we will be contacting you shortly concerning the steps which need to be taken. Since the IRS has already issued approval letters on volume submitter defined contribution plans, we will be concentrating on those plans before turning our attention to clients who maintain defined benefit plans. Please be assured that no matter what type of plan you have, we will make sure that the amendments are completed properly and on time.