IRS Rules Renew Interest in Cash Balance Pension Plans

New rules from the Internal Revenue Service (IRS) should clear the path for more employers to renew their interest in cash balance and other types of hybrid pension plans, according to Towers Watson, a global professional services company.

According to the company, in 2006, the Pension Protection Act acknowledged the legitimacy of hybrid plans, and in October 2010, the IRS proposed rules that would provide more clarity on the plans. In particular, the proposed rules define the “market rate” that cash balance plan sponsors must use to credit interest to plan participants’ account balances. The IRS also issued final rules that clarify requirements for an age discrimination safe harbor.

“Once finalized, these rules eliminate virtually all of the uncertainty that has surrounded cash balance plans the past few years,” said Alan Glickstein, senior consultant at Towers Watson, in a statement. “Many employers have been waiting for these rules before adopting a new retirement plan design. With this clarification of legal requirements and the resolution of lingering ambiguities, more plan sponsors may be encouraged to convert their traditional defined pension plans to hybrid plans.”

About one-fourth (24%) of the Fortune 100 companies offered a hybrid pension plan in 2009, up from just eight companies in 1998, according to a new report on hybrid retirement plans released by Towers Watson. The report also noted that the cost and cash contribution for credits to a cash balance plan are generally less than those for the same final retirement benefit in a defined contribution plan.

“The recent recession shows the very attractive risk-sharing and cost management features of hybrid plans to greater advantage, especially given the consequent high contributions and funding volatility in traditional defined benefit (DB) plans and the significant asset losses to many DC accounts. Hybrids’ mix of cost-effective DB and DC features can be very appealing to employers, while most workers welcome their reliability and security,” said Kevin Wagner, senior consultant at Towers Watson.

Towers Watson research shows that four in 10 U.S. workers are planning to delay their retirement, and a vast majority of workers are willing to pay more now for greater certainty in their future retirement benefits. Additionally, the number of younger workers who cite their pension plans as an important reason to work for their current employer jumped by more than half−from 28% in 2009, to 43% in 2010.