Somewhere in the middle - Gabriel, Roeder, Smith & Company

The recent financial downturn and resulting economic (i.e., 2 percent x 30 years x $50,000). Generally, the benefit is decline have put substantial fiscal pressures on state paid as a guaranteed lifetime annuity, and it often includes and local governments. As a result, many states have a postemployment COLA to protect retirees from inflation. In m T ade significant changes to their retirement plans. Most of the addition, most state and local DB plans also provide disability changes were made within the existing defined benefit frame- and survivor benefits that are based on

service and salary. In work. Generally, the changes involved: 1) increasing employee a typical DB plan, the plan sponsor bears most of the risk. contributions; 2) lowering benefit formulas for newly hired Defined Contribution Plans. DC plans benefits are based employees; and 3) reducing post retirement cost-of-living on accumulated employer and employee contributions adjustments. However, some states made more fundamental made to an employee’s individual account, combined with changes. While only a few established new defined contribu- actual investment earnings. Members usually have significant tion plans, several introduced plans that combine elements control over how their accounts are invested. The benefit of DB and DC plans, including two states that recently estab- depends largely on investment returns and is not guaranteed lished cash balance plans. over an employee’s lifetime. Generally, the benefit is paid as Cash balance plans are not new to state and local gov- a lump sum, which can be rolled over into other retirement ernments. The Texas Municipal Retirement System is a accounts. DC plans do not provide disability and survivor cash balance plan that has been operating since 1947, and benefits, other than for the distribution of the employee’s the Texas County and District Retirement System is a cash account balance. In a typical DC plan, the plan participant balance plan that has been operating since 1967. In 2002, bears most of the risk. Nebraska established a cash balance plan to replace its DC plans for state and county employees. Cash Balance Plans. Cash balance More recently, in 2012, Kansas and plans are similar to DC plans in that In considering the advantages and Louisiana also established cash bal- the benefit is based on an employee’s disadvantages of plan designs, the ance plans. However, while cash bal- account balance. Under cash balance ance plans are not new, their benefit overall goals of both employers and plans, employees contribute a fixed design is fundamentally different from percentage of pay and employers also employees need to be considered. traditional DB plans. The goal of this provide contributions (referred to as article is to provide readers with a “pay credits”). However, unlike DC better understanding of how cash bal- plans, the account is a hypothetical ance plans work and their key advan- “nominal” account that keeps track of tages and disadvantages. the benefit accrual, but the related contributions and investment earnings are held and invested by the cash balance...

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