HW "Skip" Weldon wrote:
- quote -

That one would be tough to answer without doing an in depth study of
the terms of both the IBM 401(k) plan and the IBM defined benefit
plan (which was set up with a cash balance feature). The key
difference between a defined contribution plan (which is what a
401(k) plan is) and a defined benefit plan (which is what a cash
balance plan is) is who carries the risks and benefits on the
underlying investments.

The thread on the government pension plan had a fairly good
explanation of the defined benefit situation by Tad. In a DB plan,
the sponsor bears the cost of under performance and gets the benefit
of over performance of the plan investments. What a cash balance
plan essentially provides is a guaranteed return, guaranteed in the
sense that the employer is "on the hook" to be sure the funds are
there when payout is due. If the plan's investments do better than
expected, the employer gets that benefit. If they do worse, then
the employer has to reach into its pocket and come up with the
difference.

In a defined contribution plan (of which a 401(k) profit sharing
plan would be one type), there is a separate account for each
participant, and that account bears the investment gains and losses
of the investments made for that account. In most 401(k) plans, the
employee has the ability to direct investments to some extent (note,
though, this is *NOT* required) and, in all such plans, bears the
risks and benefits of the investments.

What a cash balance plan does is attempt to "mimic" a defined
contribution style plan via a defined benefit plan. That is, there
is an "account" for the employee that receives the "income" for that
account. As well, the plan is tested for discrimination by
cross-testing it as if it were a defined contribution plan (the
opposite--testing a defined contribution plan as if it were a
defined benefit--was made popular much earlier for small plans, and
supports "fancy" defined contribution plan designs like age-weighted
profit sharing plans, new comparability plans, etc. and actually
goes all the way back to target benefit pension plans, though those
are mainly a historical footnote today, though you still could start
one).

But it is important to note that it is a defined benefit plan
mimicking a defined contribution plan, and not a true defined
contribution plan. The good news is that the return is a known in
the plan, assuming you continue to work and vest. The bad news is
that if you could invest to out earn the implicit rate, you can't
benefit from that (of course, reality is that *MOST* people manage
to do so poorly that they are probably better off though, just as
certainly, a large portion of those that believe they'd out earn the
plan would lose their shirts if in control of the investments <grin> ).

--
Ed Zollars, CPA
Phoenix, Arizona

On Fri, 10 Dec 2004 09:07:14 CST, BreadWithSpam[at]fractious.net wrote:


- quote -

IBM in particular.


-HW "Skip" Weldon
Columbia, SC

"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> writes:

- quote -

401k in general or IBMs in particular?

- quote -

Varies by employer and plan. My employer, for example,
matches 50% of the first 6% employee contribution. And
the match is made at the time of each payroll/contribution.

A previous employer matched more (I forget the percentage)
but the match came as a lump sum at the end of the year,
not paycheck by paycheck.

Lump sum vs. paycheck by paycheck have interesting
consequences. In order to max out the match on
paycheck by paycheck, one needs to stretch out his
contributions rather than max it out and stop making
contributions once the 401k contribution limit has been
reached. In order to get the lump sum, one needs to
stay employed with that employer through the end of
the year.

- quote -

Employee contributions never have vesting. They belong
to the employee. But employer matches frequently do
have vesting.

- quote -

Again, varies by employer. Almost always a bad idea
anyway, though, so not much of a difference worth caring
about as far as I'm concerned.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

IBM just announced that they would scrap their cash balance (CB)
pension plan (basically an employer-pay-all defined contribution
arrangement with vesting requirements). This situation has been
widely followed because IBM had been sued for discrimination when the
CB plan replaced a traditional pension plan.

Other employers, desirous of getting away from a pension plan's costs,
have been watching this case carefully. Now that IBM has apparently
decided to go with a 401k instead of CB, the expectation is that we
will see more pensions scrapped in favor of a 401k instead of a cash
balance.

- quote -


1. 401k will match 100% of the employee's first 6% contribution. Thus
the employee must contribute to get an employer contribution. The CB
plan had no such requirement.

2. 401k will have no vesting. The CB had a 5-year cliff vesting
requirement.

3. Employee can borrow from a 401k.

Can anyone come up with other differences?

-HW "Skip" Weldon
Columbia, SC