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Wearaway provides employees the option of receiving the greater of their frozen benefit under the phased out pension plan formula, or their total benefit under the cash balance formula. A transition device, called "wearaway," is sometimes offered to employees with long service when traditional defined benefit pension plans are converted to cash balance plans.
Special Examination Applications of Fiduciary Responsibility Provisions (1). ESOP Plans - Employer Securities Investments - Prudence (5). The most common type of defined benefit plan is the traditional pension plan. Self-Directed Custodial IRAs - Non Bank Deposits 4. Savings Incentive Match Plan for Employees (SIMPLE) H. The Pension Benefit Guarantee Corporation (PBGC) insures the benefits of private defined benefit plans to the extent provided in Title IV of ERISA. Self-Directed Custodial IRAs - Own Bank Deposits b. Other methods of paying benefits are installment payments and lump sum distributions, with options sometimes given to the participant. Employer accruals under a typical cash balance plan remain relatively level, increasing only slightly toward the end of an employee's career. Furthermore, beginning balances under the cash balance plan may be set lower than the present value of the phased out plan's accrued benefit. Some employers temper the adverse conversion impact on long service employees by: (a) "grandfathering" them under the older plan's benefit formula, (b) providing higher "pay credits," (c) setting their opening balances higher, or (d) permitting employees to choose between benefit formulas under the old or new plans. This tends to make cash balance plans less costly to fund and operate than traditional defined benefit pension plans.
Employer accruals under a traditional defined benefit pension plan begin relatively low, but increase sharply as an employee approaches retirement.
Benefits calculated in this manner are said to be integrated with Social Security retirement benefits.
Compliance With the Employee Retirement Income Security Act of 1974 (ERISA) 1. Accounts Covered/Not Covered by ERISA - ERISA Section 401 3. In private plans, it is common for retirement benefits payable under the pension plan to be set in conjunction with Social Security benefits.
Despite this protection, some conversions by high profile employers have attracted media attention.
Most of these plans have emerged as conversions from overfunded traditional defined benefit pension plans. And employers cannot remove overfunded assets unless the plan has been terminated and full benefits under the terminated plan have been funded.
In recent years, this type of plan has become increasingly popular.