Account balance pension plans: a benefit program for the 1990s.

• Author: Rothy, Gary H.

In recent years, more and more companies have adopted account balance pension plans. This nontraditional means of providing retirement and separation benefits for employees combines features of defined contribution and defined benefit pension plans. Companies that convert their traditional pension plans to this type of plan typically look for some or all of the following advantages. * Constructive use of pension plan surplus without taking reversions. * A pension plan that readily lends itself to the assimilation of acquired companies' plans. * Stronger control over pension plan costs. * Competitive benefits for younger, more mobile employees. * Simplified benefit plans.

Defined benefit and defined contribution plans are traditional vehicles for providing retirement benefits. Under a defined contribution plan, the sponsor typically contributes a specific amount--usually based on a percentage of pay--to the participant's account, which is invested in an employer-sponsored fund of the employee's choice. When the employee leaves or retires, the plan pays the participant the total amount contributed--plus or minus any investment gains or losses--in a lump sum. It is not unusual, however, for plans to allow participants to opt for periodic payments over a fixed period of time in lieu of the lump sum.

Defined benefit pension plans are funded on a plan-wide basis and do not hold separate accounts for each participant. An employee's monthly retirement benefit is based on a specified percentage of pay--either final pay or career pay. Under a final pay plan, the benefit is usually based on an employee's average annual salary over the last three to five years of employment. Under a career pay plan, the benefit is based on the annual salary earned over a participant's entire career.

Defined benefit pension plan sponsors underwrite the plan's investment performance and all risks associated with adverse mortality experience and unexpected increases in benefit liabilities.

Most defined benefit plans generally make benefits available only in the form of an annuity--and only at retirement. However, some plans do allow participants to take their retirement benefits as a lump-sum distribution.

An account balance pension plan's benefit formula is similar to that of a defined contribution plan: the sponsor contributes a fixed amount for each participant. However, an account balance pension plan is funded like a defined benefit pension plan, with each...