GAO Advises Against Cash Balance Conversions

The U.S. General Accounting Office (GAO) has recommended that the Internal Revenue Service continue an unofficial moratorium on cash balance approvals. This is primarily due to insufficient information given to participants about their retirement plans.

Although plans vary from employer to employer, one of the most recent highest-profile stories involved IBM, who adopted cash balance to eliminate early retirement features recently added to their traditional pension plans that were encouraging valuable employees to leave.

Now, after almost a year of research prompted by employee protests and congressional demand, the GAO released two reports on Sept. 29 regarding the impact of, and conversion to, the controversial cash balance plans on retirement income.

According to the studies, about 19 percent of the 420 Fortune 1000 companies interviewed by GAO researchers offer cash balance plans that cover approximately 2.1 million active participants. However, the quality of information to participants varied widely, with most plans providing 'insufficient information to allow a participant to make informed career- and retirement-related decisions.'

The GAO recommended that Labor Department officials fix such disclosure problems by requiring employers to explain clearly 'the hypothetical nature of cash balance accounts,' and to make sure employees know that a conversion to cash balance could reduce future pension accruals. The GAO also suggested that the IRS continue to withhold letters of determination until such issues are resolved.

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