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FedEx Shifts from Traditional DB to Cash-Balance Plan, Ups 401(k) Match
By: Stephen Miller
[From SHRM Online's Compensation & Benefits Focus Area]
In another sign of companies moving away from traditional defined benefit (DB) retirement plans, FedEx Corp. announced that, effective June 1, 2008, most of its eligible 275,000-plus employees and contractors who participate in the company's DB pension will begin accruing future benefits under a cash- balance "hybrid" formula that FedEx calls its Portable Pension Account, first introduced by the company in 2003. Benefits accrued under the traditional pension benefit formula will be capped as of May 31, 2008, and will be payable monthly at retirement (i.e., the plan will be "frozen"). These changes won't affect the benefits of current retirees.
FedEx said the new measures will modernize its retirement plans and are in direct response to:
• Recently adopted and proposed changes in pension accounting rules, which some see as increasing the volatility of defined benefit plan funding.
• The Pension Protection Act enacted in 2006, which provides a liability safe harbor to enhance 401(k) plans with automatic enrollment and stepped-up deferrals, and to expand the use of cash-balance plans.
• Shifting demographic trends among retirees resulting in greater life expectancy, healthier lifestyles and desire for greater control, portability and inheritability of retirement benefits.
Enhanced 401(k) with Higher Match
In addition, FedEx said that under its 401(k) plan, the company will increase its matching contributions for most employees and provide additional investment options (the company did not provide exact figures for the match increase). In addition, FedEx plans to begin enrolling employees automatically in its 401(k) and to increase their contributions each year.
The company announced it expects to spend about the same amount on its employees’ retirement plans over the long run as it would have spent under the current design and current rules.
More Predictability for Employers
"A major advantage of a 'cash-balance plan plus enhanced 401(k)' approach is greater predictability for employer pension costs and the impact of those costs on future financial statements," says John MacDonald, a partner for compensation and benefits with SMART Business Advisory and Consulting. "Much like a 401(k), once money is put into a cash-balance plan it's accounted for, whereas traditional DB pensions present future—and undetermined—funding obligations."
Under a cash-balance plan, employees receive a pay credit for each year they are with the organization. These pay credits accumulate and grow with additional interest credits. This differs from a traditional DB pension plan, which grows with salary increases and can appreciate significantly in later years as an employee's pay reaches its highest levels, while the pay credits in a cash-balance plan will more evenly reflect the lower compensation levels of earlier years.
"In that sense, it might be seen as a 'watered down' DB benefit," comments Robert Cohen, a senior manager and actuary at SMART. "Longer-term employees may receive a smaller benefit, typically a negative for those
over age 45 with a cash-balance vs. a traditional DB approach."
More Portability for Employees
On the other hand, "There are segments of your workforce, especially younger employees, that would appreciate a cash-balance approach even more than a traditional DB plan," Cohen says. "It can be a more meaningful benefit for those not intending to stay around the same organization for their full career."
That's because cash-balance accounts are portable with employees even if their tenure is short, much like a 401 (k)—a positive aspect that FedEx is highlighting. The company's release noted that its Portable Pension Account cash-balance plan offers the following advantages:
• Employees can take their vested benefit with them if they leave FedEx.
• It's flexible and offers the choice of monthly benefit payments or a lump-sum payment.
• Pre-retirement death benefits can be paid to a spouse or any other designated beneficiary.
• There is no limit on years of service under which benefits accrue.
• Benefits will be vested after three years of credited service, compared to five years currently.
• Eligible employees who have accrued benefits under the traditional pension benefit formula will receive transition credits.
As recommended by benefits specialists, FedEx summarized its retirement plan changes and what it views as their positive aspects in a series of communications to employees. The company announced that it will share additional information and educational materials in the coming months.
‘Right Thing To Do’
“The retirement landscape is shifting dramatically, and we have a responsibility to our employees and shareowners to meet these challenges head on," said Alan B. Graf Jr., executive vice president and chief financial officer of FedEx Corp., in a statement. “In light of the unacceptable risk and volatility that the accounting rule and funding changes are presenting, FedEx is making necessary changes to ensure that the company will remain competitive and help our employees prepare for a comfortable retirement,” he added, noting that “given the circumstances, this is the right thing to do for our employees.”
“The future is clear: Employees are living and working longer, and retirement plans need to offer greater flexibility,” said William J. Cahill, FedEx corporate vice president, human resources. “Updated FedEx 401(k) plans will make saving easier and investments more diversified so retirees can better control their finances.”
Still, says MacDonald, converting or (as in FedEx's case) freezing traditional DB pensions in favor of cash-balance plans for future accruals, even with the addition of enhanced 401(k)s, is likely to remain controversial because "there are a number of constituencies, some of which will be benefited and some of which will not, as these changes go forward."
Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area. |
