The Big Pension Swap

After 19 years on the job, Herb Schrayshuen, 44, an engineer at a public utility in upstate New York, thought he knew the drill: toil away for another 15 or 20 years, then drift off into a cozy retirement on the back of a nice, fat company pension. But last summer his employer threw a wrench into that plan. The utility converted the old-fashioned pension system, in which employees earn the bulk of benefits during their last few years, into a new cash-balance plan, in which they earn at a steadier rate throughout their careers. It sounded simple enough, but once he did the math, Schrayshuen found his future pension would be reduced by $150,000. Maybe they'll throw in a gold watch.

If the plan sounds controversial, it is--at least to older workers, who stand to lose the most. Says David Certner, senior coordinator for economic issues at AARP: "Just when you're about to get to the most valuable part of a plan, it's not there anymore. It takes away an incentive for older workers to stay."

That disincentive, labor leaders charge, and a lower annual cost are fueling the rising popularity of cash-balance plans. Some 20% of FORTUNE 500 companies, including AT&T and Xerox, now offer these plans, which cover close to 10 million workers nationwide. Two weeks ago giant Citigroup disclosed that it too is making the changeover; the week before, CBS made the switch as part of a comprehensive benefits overhaul. Both firms are sweetening the pot with stock options to keep workers focused on performance rather than longevity. IBM is reportedly contemplating a similar change that would save $200 million a year.

While consultants argue that these new plans offer a majority of workers a more flexible benefits package, opponents say it's a calculated attack on the financial security of millions of aging baby boomers just as they're entering their prime earning years, when pension accruals increase substantially. Democratic Senator Daniel Patrick Moynihan of New York has introduced a bill to require firms to provide adequate information to workers on such benefit makeovers.

The switch to cash-balance plans reflects an economy in which job hopping--voluntary and otherwise--is the norm. In fact, close to two-thirds of workers fare better under the plans. Here's why: each year, an employer contributes a defined amount (usually 5% to 8%) of an employee's salary into an interest-bearing account. It's more like a 401(k) savings plan than a traditional pension, which is typically based on an average final salary and total years of service. So instead of having to hang around for the long haul to reap most of the benefits, workers can carry their cash-balance earnings whenever and wherever they go.