Pension Frozen, Switch to Cash Balance

[googily]

My Megacorp has followed the herd and announced recently that it is freezing the defined benefits pension at the end of this year. They are moving employees who were still in the DB plan to a Cash Balance plan (but new employees won't even get that).

They are supposed to be sending us documentation, have meetings, etc., but there's one sentence in the announcement that's driving me crazy while I wait, and I'm hoping someone out there can read the tea leaves better than I can:

"The Cash Balance Schedule has a three-year vesting schedule. Your current years of service will transfer to the Cash Balance Schedule and will count towards the vesting requirement and the amount of pay credit."

I have 18 years of service, and am hoping to RE in a couple of years. Does this mean that I will have access to a lump sum from the Cash Balance that covers my 18 years? (while still then having the option of my larger DB remaining as an annuity)

Thanks for any insights. I am miffed about the pension, but between pension and 401k and SS, I'm less worried about financing my years past 59 1/2 -- it's the getting to 59 1/2 that could use a little padding, so this Cash Balance switch could have somewhat of a silver lining.

 

[Chuckanut]

Can you roll the cash balance into an IRA and take it out at 59 1/2?

 

[Texas Proud]

OK... this could mean many things....

One, they will give you pay credits based on how many years you have been there... say 2% up to 5 years, 3% to 10, etc. with a cap of maybe 5 or 6%... this means you would get the cap if they max at 15... it means you will not if they max at 20 or 25....


You do not have to worry about vesting... you have the years...


You get to choose what you want... but cannot take both.... you either take the cash balance OR the annuity.... and I would bet big money that the annuity is much better than cash balance...

 

[scrabbler1]

Back in 2002, my former company froze its pension (for employes not grandfathered to remain in the pension system) and started up a cash-balance system for everyone else.

This meant that for those not grandfathered in the pension system, whatever pension benefit had been accrued would never increase. The Cash Balance system had a pay credit and an interest credit which accrued for the next 6 years until I ERed. The interest credit continues even though I am gone, as I receive a benefit esimate every year. My previous 17 years of service did not affect my cash balance, as it was only for going forward starting in 2002.

I assume you plan to work at least 3 more years under the cash balance plan so you will be vested, right?

I can take a lump sum as early as age 55 or spread it out over a few years. Or, I can take a monthly benefit starting at 65 because I separated from service before 55. I have little in the cash balance plan, only 7 part-time years working from 2002-2008, so it won't matter a lot what I do. If I can cash it out in my late 50s that will be good because I won't yet be able to start tapping into my other, larger "reinforcements" such as SS, the actual frozen pension, and SS. (We seem to have the same financial goals in this area.)

 

[googily]

Thanks for the responses, all!

But I should have been a bit more clear. We are definitely still getting the Defined Benefits payout, which I assume I would take as an annuity at age 65.

So my main question is/was whether the phrasing of the Cash Balance statement means that this new vehicle will have a value determined by all of the years I've worked there, not just from here on out. It sounds like it will, and that my 18 years of service mean I'm already vested in it.

The numbers they gave us for how the pay credits are figured are pretty paltry, maxing out at 3.25% for me with less than 20 years of service.

Given I may only work another 2-3 years, I do see this new Cash Balance as a way to get a smallish lump sum when I quit while still having the DB pension as an annuity years from now.

I will find out in the next week or so for sure....

 

[rodi]

If I'm understanding this correctly -
- Your DB pension is being frozen,
- going forward for existing employees (vs new hires) they will pay into a cash balance type pension.
- so you'll have two types of pension.

That's kind of the situation I was in. My original company was acquired a long time ago. They froze our defined benefit pension. I will get a small annuity payment from that anytime from age 55 to 65. (The longer I wait, the more it pays.)
The acquiring company had previously frozen their pension and converted to a defined contribution pension. So I had that, separate from the original DB pension of the first company. It was no where near as generous as the DB pension they used to have, nor as generous as my old company's DB pension. But it was there... They froze that 9 years later. So I have two pensions. Neither big. One isn't accessible till age 55, the other I can start anytime (but am waiting till after 55 when I start the first one.)

I chose not to roll the lump sum of the defined contribution pension because the annuity option pays SO much more than an equivalent annuity. But the risk isn't that great - the sum of my pensions, if taken at 55, will be about $500/month. Big whoop.

 

[googily]

If I'm understanding this correctly -
- Your DB pension is being frozen,
- going forward for existing employees (vs new hires) they will pay into a cash balance type pension.
- so you'll have two types of pension.

Yes, plus a small Secure Retirement Account payout (given when they slashed our 401k company match a few years ago), plus the 401k.

I've only planned on being there another two years or so (not that anyone knows that, since I'm 48), so really this isn't a huge hit on the DB pension front--I'm guessing maybe $100 a month.

I hope I am right and that they are throwing the longtimers a bone by giving us all of our years of service credited in the Cash Balance, rather than just starting here at 0. It won't match what the pension would have offered, I'm sure, but it's better than nothing, plus it gives me the chance to actually get a small portion of my "pension" (the 18 years credited in the CB) in a couple of years, rather than at 65.

There's also the issue that DH works there, too, for one year longer than me, and is also planning an escape in two years (but at age 55, and likely going for the 72(t)). Maybe we keep one CB as an annuity and cash out the other. We'll have to see when they give us the numbers.

My head hurts!

 

[EastWest Gal]

The U.S. Department of Labor has a webpage about cash balance plans. I didn't read much of it, but it appears to be comprehensive, not to hard to read, and may answer most of your questions and hopefully allay your fears.

http://www.dol.gov/ebsa/faqs/faq_consumer_cashbalanceplans.html

 

[EastWest Gal]

No, they won't start you at year zero. The language about 3 years vesting is for the newbie employees.

 

[googily]

No, they won't start you at year zero. The language about 3 years vesting is for the newbie employees.

Thanks for both replies! (especially this one)

The link was very helpful, too.

 

[Texas Proud]

Check the language... when my old mega did what you are saying, they created a cash balance account with a predetermined amount based on your DB balance... IOW, they gave a cash balance amount to that plan and that is what your beginning balance was...

If you continued to work, you got pay credits and interest credits... when you were ready to retire you could convert your cash balance to an annuity or roll it over to an IRA....

The big gottcha was that the annuity that you could buy with that cash balance was not as much as the annuity was when it was frozen... so someone who worked there for many years effectively got ZERO increase in their pensions for the last few years they worked... for some people where I worked the difference was in the $250K range.... they sued and lost...


So, are you sure that you will have BOTH plans when it comes time to retire Most big companies will not do it this way.... they know they are screwing long term employees, but really don't care...

 

[googily]

The wording in the initial notification message--with the official packet with exact numbers for each person apparently about to be mailed out--says that the change to a Cash Balance plan "does not affect the vested benefits that employees have already earned and will earn in the traditional pension schedule through the end of this year."

Then the wording for the explanation of the Cash Balance says "Your current years of service will transfer to the Cash Balance Schedule and will count towards the vesting requirement and the amount of pay credit."

I read those two sections as being that we will get both. There will still be a big loss, but I think the putting your existing years in the Cash Balance for credit is a bit of a bone tossed to long-timers to lessen the blow slightly on what's lost from the traditional plan going forward.

This isn't a mega-megacorp--and the pension fund is known to be overfunded.

 

[Texas Proud]

The wording in the initial notification message--with the official packet with exact numbers for each person apparently about to be mailed out--says that the change to a Cash Balance plan "does not affect the vested benefits that employees have already earned and will earn in the traditional pension schedule through the end of this year."

Then the wording for the explanation of the Cash Balance says "Your current years of service will transfer to the Cash Balance Schedule and will count towards the vesting requirement and the amount of pay credit."

I read those two sections as being that we will get both. There will still be a big loss, but I think the putting your existing years in the Cash Balance for credit is a bit of a bone tossed to long-timers to lessen the blow slightly on what's lost from the traditional plan going forward.

This isn't a mega-megacorp--and the pension fund is known to be overfunded.

The language you give can mean what you say or can mean what I say...

It is illegal for them to change the vested benefits that you already have... so that first sentence means nothing IMO...


As I mentioned, my company did the same thing... and also said that it would not affect your vested benefits... but they gave you a 'beginning balance' to your cash account based on that vested benefit... you continue to work and get pay credits and interest credits.... when it comes time to retire, you got a choice... take the vested benefits that were frozen OR take the cash balance... you could not take both... it is not a bone thrown to long time employees.... it is a way for them to stop making pension payments...

I hope your reading is correct.... you will find out pretty quickly if you get some kind of notice that you have a beginning balance... if so, you fall into what I am saying.... if it starts at zero and grows from there.... it is what you are saying....

One way you can find out is to talk to HR.... they should know.... but they can be wrong... I was told something by a 'pension specialist' that was flat out wrong... I questioned it at a higher level and was told that they told me incorrectly and would get 'training' so they would not make the same mistake....

 

[thefinancebuff]

The wording in the initial notification message--with the official packet with exact numbers for each person apparently about to be mailed out--says that the change to a Cash Balance plan "does not affect the vested benefits that employees have already earned and will earn in the traditional pension schedule through the end of this year."

Then the wording for the explanation of the Cash Balance says "Your current years of service will transfer to the Cash Balance Schedule and will count towards the vesting requirement and the amount of pay credit."

I read those two sections as being that we will get both. There will still be a big loss, but I think the putting your existing years in the Cash Balance for credit is a bit of a bone tossed to long-timers to lessen the blow slightly on what's lost from the traditional plan going forward.

This isn't a mega-megacorp--and the pension fund is known to be overfunded.

It only means you will be vested on day 1. You don't have to work another 3 years to be vested. You will get a % of pay into the Cash Balance plan for each year forward. That % may or may not vary based on your existing years of service. Yes you will get both but you are not going to get a % of pay into the Cash Balance plan for each of your 18 years already worked.

 

[googily]

It only means you will be vested on day 1. You don't have to work another 3 years to be vested. You will get a % of pay into the Cash Balance plan for each year forward. That % may or may not vary based on your existing years of service. Yes you will get both but you are not going to get a % of pay into the Cash Balance plan for each of your 18 years already worked.

Ah, I'm finally seeing that other meaning. (It's like one of those color blindness tests!) Meaning that the first year of cash balance pay is credited using the percentage they set for someone having worked 18 years.

Easy come, easy go I guess.

Still waiting on the packet for specific numbers--my guess is it'll come tomorrow. Well timed for employees to not see it until they go home for the weekend!