But the act also provides at least one positive inducement to employers to fund cash-balance plans: it increases the tax-deductible limit on funding for plan liabilities—supplying “wiggle room on the upside,” as Jacobson puts it.
That provision has caught the eye of Mark White, the CFO of SAP America, a subsidiary of SAP AG, the software giant. White thinks that SAP America, which last year was able to make a tax-deductible contribution of $36 million to its cash-balance plan, might be able to sock away more than $50 million more as result of the act. While the plan is already fully funded, SAP would over-fund it up to the tax-deductible limit to save for rainy days in the software business.
Despite providing such enticements for the sponsors of traditional DB plans and existing cash-balance plans, the new act seems to provide little reason for employers to form new hybrid plans. More likely, it might stem employer flight from pensions to 401(k)s. “It gives [ plan sponsors] the opportunity to change the shape of their plan but still stay in the pension world,” says Waite.
Why would some employers want to stay in the fold rather than switch to the much less onerous—and cheaper—defined-contribution arena? An employer with a relatively young group of workers might be interested, the actuary points out, since a cash-balance plan doesn’t reward seniority as much as a traditional DB plan might. Some companies may want to differentiate themselves in the labor market by providing richer benefits.
Nevertheless, there are considerable barriers standing in the way of a wave of conversions to cash-balance plans. The act, by tightening funding rules, could push financially shaky employers to dump responsibility for their DB plans on to the Pension Benefit Guaranty Corporation, the nation’s pension insurer. In turn, the PBGC could hike the premiums it charges the sponsors of healthy plans—and drive them out of the pension system entirely.
Even though he’s relatively satisfied with SAP America’s cash-balance plan, for example, White says that the company would switch to a DC plan if PBGC premiums get high enough. High enough, he suggests, is when providing a generous 401(k) match is a more sensible use of funds than bailing out imprudent plan sponsors.
While he hopes the act will push such employers to live up to their obligations, “I don’t see it,” the finance chief says. “It’s too easy for top executives to get bonuses by slashing pensions.”
Another barrier to conversions from DB plans to cash balance plans is the toll they can take on certain employees. “If defined-benefit plans are volatile and you want to move that volatility, those risks don’t go away,” says Joel Rich, a senior vice president with The Segal company, a benefits consulting firm. “They’re just going to be shouldered by the employees.”