ABA Banking Journal - November 2007 - (Page 28)

Community Banking freezing” the defined benefit plan that they’ve offered for years. This entails safeguarding what employees have already earned, but cutting the plan off on some given date. After that point, the bank puts its new spending on retirement plans into an enhanced 401K for everyone. “That’s not the best approach,” cautions Rausser. When a hard-freeze goes on, he explains, younger employees wind up getting a windfall and older employees wind up getting shortchanged. Rausser suggests a better alternative: establishing a two-tier program. Using this approach, the bank announces that as of a given date, new hires won’t enter the defined-benefit program at all. Instead, they will have an enhanced 401K, while existing employees won’t lose the base they’ve come to expect in the defined benefit program. Alternatively, Rausser says, the bank could choose to give newer hires a leaner plan. Setting up a multiple tier plan, in compliance with relevant pension law rules, represents a legitimate strategy for addressing rising benefit costs. Yet, “changing the benefit structure is something that banks don’t take lightly,” says Rausser. He notes that out of the company’s approximately 300 clients offering defined benefit plans in some fashion, at this point only 15% have adopted some variation on the two-tier approach. Sometimes, he says, bank management has to step up to this significant decision, and do what is best for the bank in the long-term. There is a tendency, he says, in banks offering a blend of 401K and defined benefit plans, for the employees with ten or more years of service to be getting the lion’s share of the benefit dollar. That’s even though 401K plans tend to be a better deal for the younger, newer employee not planning to stay on. Rausser explains that the longer the employee stays, the better a defined-benefit program looks. Typically the defined benefit payoff is based on years of service, resulting in a steadily higher percentage multiplier applied to the employee’s salary, which rises to the final level before retirement. Defined benefit plans require ongoing contributions from the employer for the duration of the program, while 401Ks entail at most the employer contribution made in a given period, plus the costs of operating the plan. Rausser warns that any tiering of plans must be structured carefully. Over time, a bank that doesn’t handle this properly can find itself bumping into federal rules that apply “coverage and participation tests.” These rules guard against ap- 28 NOVEMBER 2007/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - November 2007

ABA Banking Journal - November 2007 Contents Editor’s Column Briefing: Good News for Mortgages Sleight of Mind N.Y. Hiring Bonanza May Be Bane Snapshot: A Look at Held-For-Investment Loan Growth ABA Resources ABA Chairman’s Position “The Moose Bank” Thrives on Manufactured Housing Loans Finding the Middle Way for Your Bank’s Retirement Program Pass the Aspirin Cover Story: Self-Service Steps Up DIY U.K. Style Marketing to Millennials Getting Real With “Gen Wired” Ethnic Marketing: Disinterested Banking Getting Good at Global Sourcing Case in Point Turn Compliance on It's Head Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2007

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