Aetna was able to diffuse much of the potential opposition to the pension plan change through careful attention to the conversion formulas and an eight-year transition period that offered participants the greater of benefits under either the old or new plans , explained James Gould , vice president , human resources at Aetna
IBM's conversion to cash balance was much more painful , resulting in adverse publicity in the media and calls for Congressional hearings from Rep.
Putting the cash balance change into the proper context is the key to getting the details right , Gould
told seminar attendees.The main motivation behind Aetna's conversion of its pension plan was to eliminate an early retirement incentive implemented in 1978.This incentive allowed employees to retire with full benefits at age 50 if they completed 15 or more years of service.
Since 1981 we have been proposing to eliminate [ the early retirement incentive ] because the downsizing was over.But we couldn't find a way to take it away from employees , Gould
hired a full-time actuary and invested in powerful new computer equipment to make the calculations that converted accrued benefits under the pension plan into opening account balances in the new cash balance plan.
The team experimented with various formulas to find the right mix that rewarded age and service and provided full benefits to longer-service employees.Opening balances were determined by the level of benefit earned under the old plan based on the last three years' pay , plus a premium of about 15%.The formulas combined with the eight-year transition period eliminated wear-away , a condition where participants in a cash balance plan accrue no new benefits for a period of time , for almost all participants.
We wanted to keep the same benefits but eliminate early retirement , Gould
Plan administrators decided that cash balance participants could take up to 50% of their account value as a lump sum and the rest as an annuity.A lump sum option was also incorporated into the old plan.
With the 401 ( k ) plan , offering a lump sum of 50% of the plan value means employees are walking away with substantial amounts of money , Gould
announced its conversion to cash balance in 1998 , the company also enhanced its 401 ( k ) plan and increased subsidies for health insurance.A broad-based stock option program was also instituted that granted shares priced around $83.While the stock subsequently slid as low as $39 , it was recently trading as high as $69 a share.
We did not say to employees that by the time you factor in stock options and the 401 ( k ) enhancements along with the new cash balance plan , you have better benefits than the old plan.We introduced those enhancements independently , Gould
Altogether , these benefit program changes were designed to motivate employees and create value in the company , according to Gould
.Is there some way we can link benefit programs like a cash balance plan to shareholder value.Certainly I think we can..Aetna
communicated the cash balance changes throughout 1998 in preparation for the conversion at the beginning of 1999.Personalized statements explaining the conversion and opening lump sum balances were distributed six months before the transition took place.Employees were shown opening balances under the old and new plans , benefits under both plans eight years out and benefits at age 65 under the new cash balance plan.
On request , we will run projections under the old plan to age 65 or to any age , Gould
To transition the new benefit , Aetna
decided to operate tandem plans for eight years that pay retirees the largest benefit under either the old pension or the new cash balance plan.Participants who retire during this phase have no choice between the plans.By the end of the eight-year transition , participants are generally as well off under the cash balance plan as they were under the old pension plan , Gould
Some companies let employees choose which plan they want at the time of transition.While choice sounds good , that's pretty onerous because retirement may be a long way away and employees may not know which plan provides the greater benefit..
Big Blue stumbles.
While Aetna's cash balance conversion was accomplished with almost no publicity and few complaints from employees , IBM's cash balance experience was much rockier.