Summary: There has been recent controversy concerning how conversions of traditional defined benefit pension plans to cash balance plans can affect workers, especially those nearing retirement. Employer-provided pensions are an important source of income for many retired persons. To encourage employers to establish and maintain pension plans for their employees; the federal government provides special tax treatment under the Internal Revenue Code (IRC) for plans that meet certain requirements. GAO addressed several aspects which includes: (1) the prevalence and major features of cash balance plans, and reasons why firms adopt them; (2) how the use of cash balance plans affect the pension benefits for workers of different ages and tenure, particularly after conversion; and (3) what information employers converting to cash balance plans typically provide to plan participants and how disclosure might be improved. Firms in many sectors of the economy sponsor these plans but there is greater awareness found in the financial services, health care, and manufacturing industries. Cash balance plans provide a larger share of a participant's accumulated benefit earlier in a career, compared with a traditional defined benefit plan that is based on final average pay. As a result, conversions can increase the value of some workers' benefits, especially younger or short-tenured workers who leave firms before retirement. Unlike traditional defined benefit plans, cash balance plans can result in a declining rate of normal retirement benefit accrual over time.
