Checks and balances.

• Author: Murray, Gerard J.
• Position: Cash-balance pension plans - Includes related article on cash-balance plans

Employees at BOC, an international manufacturing firm, took their pension plan for granted. That was before the company installed a cash-balance plan to help drive home the save-for-retirement message.

Looking for some alternatives to pension-plan design? Consider a cash-balance program. This plan design, which combines features of a 401(k) and a defined-benefit plan, has been around since 1984, so it isn't a new kid on the block, but in today's pension environment, it can offer valuable solutions to many plan design, communications and funding dilemmas.

The BOC Group, an international company with operations in the industrial gases and medical products businesses, was one of the first companies to adopt this type of plan in 1986. The company employs about 35,000 employees worldwide, with 10,000 based in the United States. About 7,000 U.S. employees are eligible to participate in the company's cash-balance plan.

Cash-balance plans are defined-benefit pension plans that express participants' retirement benefits in the form of nominal "accounts" instead of as annuities, like more traditional pension plans. These account balances grow through dollar "deposits" (usually represented as a percentage of pay) that are credited to participants' accounts, and interest that is credited at a rate guaranteed by the plan.

Before 1986, BOC offered a traditional pension plan, with benefits based on employees' years of service and final average compensation. Unfortunately, as with many companies' pension plans, BOC's final-average-pay plan cost a great deal, and employees didn't appreciate the benefit. To most employees, the final-average-pay plan was invisible until later in their careers, when their thoughts turned to retirement. By contrast, employees showed more enthusiasm for the more "visible" 401(k) plan. Yet the company was spending approximately 2.5 percent of payroll on the 401(k) plan and 5 percent of payroll on the final-average-pay pension plan. It didn't take BOC long to conclude it wasn't getting much bang for the buck on the pension plan.

The company also wanted employees to assume more responsibility for their own postretirement financial security. Although the 401(k) plan had just been improved to provide a 50-percent match on the first 6 percent of pay, employees' participation and deferral rates were not what they should have been. BOC believed it would be easier to boost contribution rates by first clearly communicating the company's...