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Sarbanes-Oxley News & Developments
FASB: Time To Define Cash-Balance PlansCompanies may find new rules much less attractive.
> > The Financial Accounting Standards Board is considering new rules that could wipe out the appeal of cash balance pension plans.
Cash balance plans promise employees a lum sum when they retire, based on their average salary over their years of employment. A FASA task force had initially recommended that companies use an interest rate tied to a market index, such as a one-year Treasury bill, to value liabilities under cash balance plans. Companies and compensation consultants preferred to continue using the higher rates for high-quality, long-term corporate bonds; a switch would force companies to report increases in pension liability on their balance sheets.
Cash balance plans began to catch on in the 1980s since they result in lower overall pension costs, and since they appeal to younger employees. Last month, a federal judge ruled that the cash balance pension plan at IBM discriminated against older employees. Under traditional pension plans, the retirement benefits of workers increase at a much faster rate during their last years of service because workers generally make more money near the end of their careers. The big criticism of cash-balance plans is that if such plans are instituted right as experienced workers approach retirement age, companies will deprive those employees of anticipated gains and leave them without enough working years to accrue equivalent cash balance benefits.
Source: CFO
Published:2003-09-26
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