Pension Protection Act Blog

Dow Chemical announced that, starting in 2008, new eligible salaried employees will be enrolled in the company’s new cash balance plan instead of their existing traditional defined benefit plan. The new plan is named their Personal Pension Account.

A traditional defined benefit plan provides participants with a specific retirement benefit for life calculated using the formula in the plan document. For example, a traditional defined benefit plan could provide a participant with an accrued benefit calculated based on 2% of compensation for each year of service not to exceed 20 years of service. The employer contributes an amount of money to the plan each year, and that amount is invested. The employer’s goal is that the plan will have enough contributions and earnings to pay participants the retirement benefits they have been promised by the time the participants retire.

Cash balance plans also provide participants with specific retirement benefits, but the difference is that cash balance plans provide benefits based on a hypothetical account balance assigned to the participant. Each year, the employer credits a participant’s hypothetical account with an amount comprised of a contribution credit and an interest credit. The interest credit is hypothetical - it is not the amount of actual earnings on an investment made by the plan. Instead, the interest credit is a percentage stated in the plan document, or is a variable percentage based on an index, such as the plan stating that the interest credit is the one-year Treasury bill rate. The contribution credit typically is based on a percentage of compensation, such as a participant receiving a contribution credit of 5% of compensation each year.

Dow Chemical’s new cash balance plan includes a hypothetical account balance for each participant based on 5% of compensation plus an interest credit. The press release does not state what the interest credit is.

Dow’s press release also states that the cash balance plan has a 3-year vesting schedule and provides a lump-sum benefit. The 3-year vesting schedule is the maximum permissible vesting schedule for cash balance plans provided for in Section 904 of the Pension Protection Act.

Dow’s current traditional defined benefit plan, called Dow Employees’ Pension Plan, provides for benefits based on the highest three consecutive years of pay using an age-weighted contribution formula.

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