|Exhibit 1: Converting to a Cash Balance Plan|
| The examples assume the
Defined benefit plan
Cash balance plan
Amounts shown for both the traditional defined benefit plan and cash balance plan have been actuarially determined and amounts have been rounded for ease of presentation.
Example 1. Effect of conversion to a cash balance formula on participant A, age 30, vested in the plan with five years of service and earning $25,000 in the year of conversion. Assume a 4% discount rate is used to determine the hypothetical opening account balance:
By using a 4% discount rate to determine the hypothetical opening account balance, benefits accrued under the cash balance formula exceed benefits that would have accrued under the traditional defined benefit plan formula. In fact, if the employee leaves the company in year two, he or she would receive a windfall benefit because the annuity value under the cash balance formula ($1,600) exceeds the value of the annuity the employee would have earned under the traditional defined benefit plan ($1,400). Because the participant immediately accrues additional benefits under the cash balance formula, there is no wear-away of benefits in this example.
Example 2. Effect of conversion to a cash balance formula on participant B, who is age 60 and earning $50,000 in the year of conversion. Assume that a 6% interest rate is used to determine the opening account balance:
By using a 6% discount rate to determine the opening account balance, no new pension benefits accrue during the five years of service subsequent to the conversion. It should be noted that much of the negative publicity surrounding cash balance formulas is focused on older employees who typically lose future benefits upon conversion, as demonstrated in this example. However, some employers grandfather older employees under the old plan or provide transition credits upon converting to a cash balance formula to prevent this reduction in the accrual of future benefits.