Companies that are finding it increasingly difficult to lure younger workers are beginning to adopt cash balance pension plans which can often penalize older long-term employees. 

A cash balance plan is a defined benefit pension plan that typically defines an employee's retirement benefit by reference to the amount of a hypothetical account balance. 

In a typical cash balance plan, this account is credited with hypothetical allocations and interest that are determined under a formula set forth in the plan.

The crediting of hypothetical allocations and hypothetical interest has been described as resembling the allocation of actual contributions and actual earnings to an employee's account under a defined contribution plan, such as a profit-sharing plan. In recent years, existing defined benefit plans covering a significant number of employees have been changed into cash balance plans.

A Conversion

This change, made by amending the existing plan, is commonly referred to as a conversion. In a conversion, the new cash balance benefit formula generally applies to new employees and may also apply to employees who had already earned benefits under the plan before the conversion. The law protects benefits earned before the conversion by prohibiting a plan amendment that reduces those benefits. 

In some conversions, however, employees who had already earned benefits may not earn additional retirement benefits for varying periods of time after the conversion. This effect, often referred to as a "wear-away" or "benefit plateau" continues until an employee's benefit under the ongoing cash balance formula "catches up" with the employee's protected benefit. 

Who Wins - Who Loses

Generally, younger workers who switch jobs relatively frequently do better with a cash balance plan. Employees who stay with the company for, say 30 years, do significantly better with a traditional pension plan. However, if they leave before about 20 years of service, they'll often have a very small benefit from a regular plan.  For the company, there's no question a cash balance plan is cheaper if there's a high proportion of older employees.

A cash balance plan also makes sense if you need such a plan to be competitive in the labor market for young employees. For example, you're unlikely to lure high-tech employees to your company by touting a defined benefit pension plan. 

While there are a relatively small number of cash balance plans in operation, they have been adopted by some large corporations. That means a substantial number of individuals may be affected. Congress is taking a look at these plans to determine what, if anything, they might do to restrict their use or to insure that employees covered under existing plans may elect to continue to be covered under those plans if the employer switches to a cash balance plan.