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Pension conversions could hit some workers harder

On Jan. 1, longtime employees at a number of large companies temporarily ceased to earn new pension benefits. For the lucky, this no-benefits period will last as little as one year. For others, it could be a decade or more.

These employees work for employers converting traditional pension plans to new "cash balance" retirement plans, under which an employer creates hypothetical employee accounts to which the employer contributes a percentage of the employee's pay each year, as well as interest.

But the pain of conversion to these little-understood hybrid plans won't be shared across the board: Younger employees and recently hired workers will earn pension benefits right away.

All this will come as a surprise to many people, even at the hundreds of companies that already have made this pension shift. Cash-balance plans are growing popular with employers who see drawbacks to traditional pension plans, which pay retiring employees designated monthly amounts. Upon eliminating a so-called defined-benefit plan and adopting a cash-balance one, an employer determines the value of benefits built up by his employees under the traditional plan, and places some, or all, of that value into individual employee accounts. Those individual accounts then grow, courtesy of pay and interest credits made by the employer, over the years.

While these individual accounts can be taken with an employee when changing jobs, what is riling some who have looked closely at this new plan is that employers have a lot of leeway in how they credit workers for the value of their built-up pension benefits. Older workers, in particular, often aren't credited for the full value of what they already have earned, and the result is that they can work years before earning pension benefits above and beyond what they had under the traditional plan.

Relatively few conversions are occurring in Florida because most companies do not have a traditional defined-benefit plan to begin with. Some companies that had them discontinued them in the 1980s. They have been replaced by defined contribution plans, such as 401(k) plans, in which an employee's retirement security depends on savings and investment performance.

"Today only the very largest corporations in this area have them (defined-benefit plans)," said Alton Ward, a Tampa lawyer specializing in pension plans. "I'd much rather be working for a company with a cash balance plan and a 401(k) plan than one with only a 401(k). But the majority in Florida are defined contribution only."

When Ispat Inland Inc., a steel company in East Chicago, Ind., announced last month it would shift to a cash-balance plan Jan. 1, Paul Schroeder, a 44-year-old engineer with 19 years at the company, calculated it would take nine to 13 years before he acquired additional pension benefits. After some Ispat employees confronted management last week, employees received a communication from the human-resources department confirming "the vast majority would experience a plateau in the growth of their pension benefit."

Here are answers to commonly asked questions about opening-account balances:

What happens when an employer converts to a cash-balance plan?

Employers generally determine a value of each employee's existing pension and put this into an individual "account." Then, each year, the employer credits the account with a percentage of pay (often 4 percent) and interest (often 5 percent).

Is the starting account balance the equivalent of the old pension benefit?

In many cases, no. The actual value of your old pension benefit might be $50,000, but your opening balance might be, say, $35,000. As a result, you wouldn't actually earn a new pension benefit until the pay and interest credits bring the account to $50,000.

Some employers call this a "plateauing" of your pension; actuaries call it "wear away," because you wear away the old benefit before earning a fresh one.

Is this legal?

By law, an earned pension can't be taken away or reduced. But a low opening balance doesn't violate this law, because, if you quit your job before your pension benefit started growing again, you would receive the full $50,000 in the above example.

It is legal for employers to establish opening balances using whatever criteria they deem appropriate.

How can I find out if I'm affected?

Federal law entitles you to request a statement of your "vested accrued benefit," expressed as a single-life age 65 annuity, as well as in optional forms such as lump sum. You may do this once every 12 months, in writing, and employers have 30 days to respond. Compare this with your account balance to see where you stand.

_ Times staff writer Helen Huntley contributed to this report.

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