EBRI Issue Brief
Hybrid Retirement Plans: The Retirement Income System Continues to Evolve
- This Issue Brief examines the continuing evolution of retirement plans by discussing six hybrid retirement plans (cash balance, pension equity, floor-offset, age-weighted profit-sharing, new comparability profit-sharing, and target benefit plans). Hybrid plans combine features of both defined benefit and defined contribution plans. Often employers implement a hybrid plan and continue to offer a defined benefit and/or a defined contribution plan. Topics discussed include characteristics of hybrid plans, advantages and disadvantages, and the types of organizations that are attracted to these plans.
- Selected results from EBRI's 1995 survey on hybrid retirement plans are also included in this report. The summaries include discussions of hybrid retirement plan characteristics, hybrid sponsor characteristics, and factors that influenced the decision to offer a hybrid plan.
- According to the survey findings, factors that organizations consider in their decision to implement a hybrid retirement plan include employee understanding and appreciation; changing work force demographics; changing economic environment; regulatory and legislative changes; new philosophy regarding the relationship between retirement benefits and compensation, employee performance, age, service, or profits; new philosophy regarding employer and employee responsibilities for retirement; and cost control.
- Cash balance and pension equity plans are classified as defined benefit plans but have many defined contribution plan characteristics, whereas age-weighted profit-sharing, new comparability, and target benefit plans are classified as defined contribution plans but have some defined benefit plan characteristics. Floor-offset plans consist of two separate but associated plans rather than a single plan design with both defined benefit and defined contribution plan characteristics.
- A cash balance plan expresses benefits in terms of hypothetical accounts which are credited with interest and with a contribution credit. The plans generally provide participants the option of receiving their vested account balances in the form of a lump-sum distribution or as an annuity. Complying with the lump-sum rules of the Internal Revenue Code (IRC) had been problematic for some plans. IRC amendments in the Retirement Protection Act of 1994 and release of an Internal Revenue Service notice providing proposed guidance on application of certain qualifications requirements to cash balance plans will help alleviate the problems faced by some plan sponsors.
- Keep a watchful eye on the new tax reform debate, however, as the game could change significantly as we enter the new millenium.