Employers considering freezing their defined-benefit pension plans may want to consider the Retirement Shares Plan. This innovative design, similar to variable-benefit plans, is a little-known type of defined benefit plan that has never come into widespread use. But today's economic conditions and enhancements in technology make the timing right for broad application of this new idea.
How does it work? Employees earn retirement shares in the same manner as in a career-accumulation pension plan. A typical plan provides a benefit formula of 1 percent of pay each year. At the end of the year, the 1 percent of pay is used to buy retirement shares at their end-of-the-year value. The share value is determined based on the value of the retirement trust assets.
By offering two classes of retirement shares -- for instance, Stable Value Shares and Equity Shares -- a plan can allow the employee or retiree to customize the degree of risk and potential growth that is right for them, while freeing them from the burden of selecting individual investments. Equity and stable value funds are selected and monitored by the plan sponsor and professionally invested.
Unfunded liabilities are minimized because the liabilities and assets are always matched. The company funds the benefits earned by participants each year and the plan stays essentially fully funded at all times. Modest gains or losses can develop due to demographic experience, but these are typically quite small.
A well-designed Retirement Shares Plan will provide retirement income comparable to that of a final-average-pay defined-benefit plan, while also offering the retiree the potential of a growing income during retirement. The Retirement Shares Plan also can accept transfers from 401(k) plans, giving employees the opportunity to "purchase" annuities with their defined-contribution account balances at more favorable rates than are generally available in the marketplace and still maintain some equity exposure.