NEW YORK (Money Magazine) -
As she moved up the ranks at AT&T, the last thing Jane Banfield worried about was her pension.
She'd started out in sales in 1982, worked her way up to management and, by the late 1990s, was starting to dream of early retirement. Then in 1997 AT&T changed its pension plan, and veterans like Banfield saw their benefits slashed.
Now 54, she'll receive about $15,000 a year when she turns 65, instead of the $30,000 she had been expecting. "I didn't think this could happen," Banfield says. "It's a benefit I always assumed would just be there."
No more assuming. The pensions that have anchored American retirements for 80 years have gotten incredibly expensive. As of last year, the country's largest companies were about $323 billion shy of meeting their $1.2 trillion pension obligation (a shortfall that could hurt corporate earnings but shouldn't jeopardize pension safety).
To cut costs, employers are increasingly turning to a cheaper pension called a cash-balance plan. Because the benefits accrue more evenly than in a traditional pension, these plans pay off for younger, mobile workers but significantly penalize longtime employees like Banfield -- a disparity that has made cash-balance plans controversial.
Nevertheless, new IRS rules mean that these pensions are about to get more popular. Here's what the fuss is about.
Traditional pensions, called "final average pay" plans, are based on your salary and years of service, with an emphasis on what you make right before you retire. In a typical plan, a 65-year-old executive with a 30-year tenure and pay averaging $100,000 in her last five years will take home $45,000 a year in retirement. (Most workers, however, don't stay at jobs long enough to earn pensions that big.)
With a cash-balance plan, your employer credits you with a set percentage of your salary every year, typically 5 percent, plus interest. Your annual statement shows the hypothetical lump-sum balance available in your account, as well as the annual payment that sum will buy you at age 65.
Another key difference: If you leave the company before retirement age, you may take a cash-balance pension as a lump sum and roll it into an IRA. A traditional pension isn't portable.
The steady buildup of benefits means that younger workers who leave walk away with an amount greater than they would have earned in a traditional pension. Work long enough for one company, though, and your cash balance will lag far behind the value of a traditional pension.
Worse, cash-balance plans typically don't include subsidies for early retirement.
On top of that, because of the way conversions work, older workers who are shifted to a cash-balance plan may not earn additional benefits for several years -- a period referred to as wearaway. After AT&T's switch, employees older than 44 faced wearaways lasting from one to eight years. Manager Banfield's lasted five years.
As a result of these disadvantages for older workers, more than 800 age-discrimination claims have been filed with the Equal Employment Opportunity Commission, and several employers who've switched to cash-balance pensions -- including AT&T and IBM -- are embroiled in class-action lawsuits challenging the plans.
But new IRS rules, expected to become final this year, clarify how employers can convert to cash-balance plans without violating age-discrimination laws. Already, 348 cash-balance switches are awaiting IRS approval.
Unfortunately, if your employer switches to a cash-balance plan, there's probably little you can do. The law requires companies to notify workers just 15 days before they change benefits significantly. Given that, here are your best moves.
EDUCATE YOURSELF You'll find information on cash-balance plans, benefit calculators, and links to news and lawsuit documents at the Pension Rights Center (www.pensionrights.org) and www.cashpensions.org.
ASK FOR CONCESSIONS Employers can offer employees with, say, more than 20 years of service a one-time pension bonus or higher pay credits. After IBM workers protested their conversion, IBM expanded the number of workers who could opt to stay with the old pension from employees within five years of retirement to all those over age 40 with 10 years of service.
RE-EVALUATE YOUR PLANS You'll probably need to boost your savings to make up for a reduced pension. For former IBM software manager Warren Patterson, 40, of Apex, N.C., IBM's conversion to cash balance in 1999 would have cut his pension by more than half if he'd stayed at the company until age 65.
After he left in 2000 to start his own software company, he rolled his $53,000 lump sum into an IRA, invested aggressively and contributed more. He's confident that his strategy will work, noting, "I'm young, and I can afford to take some more risk."