Pension design can boost cash flow: defined benefit plans, far from being dead weight on the balance sheet, can be engineered to be tools for reducing cash needs and attracting employees.

• Author: Lawrence, Stewart D.
• Position: Benefits

Let's face it: Many financial executive think of defined benefit (DB) pension plans as a financial dead weight shackled to the corporate balance sheet with little redeeming value in terms of attracting and retaining younger workers. Further, with plan assets declining recently, pension plans are often considered a cash drain on a corporation.

Ironically, today as never before, DB plans can be harnessed in imaginative ways to yield valuable cash management solutions for plan sponsors, while serving as an alluring employee benefit that appeals to prospective recruits and newly hired employees.

While having an over-funded DB plan gives the greatest flexibility during a corporate cash crunch, even under-funded plans can be put to use without jeopardizing employee retirement income security or federal regulatory compliance. For example, creative plan designs may allow employers to manage cash flow by:

* Boosting the equivalent of a 401(k) employer match without creating additional cash contributions when least affordable

* Financing severance benefits

* Mitigating adverse impact when employee compensation increases need to be reduced or eliminated, or pay cuts implemented

Consider the case of Avnet Inc., a Fortune 200 wholesaler of electronic components, computer products and embedded systems. As with most distributors, employee compensation-related expense (current and deferred, as well as benefits) represent a very large cost for Avnet. A cyclical business slowdown was putting a squeeze on cash, yet the Phoenix-based company did not want to pursue belt-tightening moves that would limit its ability to attract and retain employees or respond rapidly to customer needs.

Looking for Savings

Avnet sponsors both a traditional 401(k) plan and a cash balance DB plan. Unfortunately, the very modest employer match in the 40 1(k) program wasn't viewed as a meaningful support to Avnet's recruitment and retention efforts. However, Avnet's low-margin business sector and the current phase of the economic cycle limited the company's ability to provide a more robust employer match. The solution: a creative modification to Avnet's well-funded DB plan that, in effect, creates an even better benefit for younger workers without triggering any short-term increase in Avnet's annual funding obligation.

Specifically, the employer match on 401(k) deferrals was suspended, and the DB plan was amended to provide for a minimum annual crediting to employees' cash balance...