ABA Banking Journal - November 2007 - (Page 30)

Community Banking proaches that favor higher-compensated levels of employees. structured with several providers involved, one handling administration, another investment management, and so forth. Others rely on a single vendor who offers a bundled approach. The latter may save some money. Rausser says this is a matter of shopping around. More complicated is performing an analysis of program costs, and determining what the bank can trim while still giving employees a square deal. tice was designed such that employees could retire early, and take their defined benefit pension in a lump sum at a better rate than their age would necessarily dictate. Current plans often still include these subsidies as a legacy of that period. The subsidy came in as follows. An employee in a nonsubsidized plan might have been able to retire at 55 and take a lump sum based on 50% of their entitlement. Thus, the employee would have a 50% “haircut.” However, in a subsidized plan, the haircut would be less, say, only 30%. (Rausser says some plans went as far down as 45 years old.) “These subsidies can be very expensive,” says Rausser, “and they can make a defined benefit plan a heck of a lot more expensive to fund.” Rausser says that nowadays spending on subsidies can represent 10% to 15% of total plan costs. How do you change the approach in mid-stream, so to speak? Rausser explains that benefits earned to date would be eligible for the subsidy, as previously called for; benefits accumulated after the given date would be subject to the new policy. “The key concept under pension law is that you must protect the benefits earned to date,” says Rausser. Another common plan feature is the post-retirement increase in benefits. This is the equivalent of a “cost of living allowance” for retirees. Rausser says six in ten of his clients’ plans incorporate such features. Not offering such features in the future would save between 3% and 5%. Adjusting defined benefit plans Another factor in banks’ decisionmaking in defined benefits, according to Rausser, is their tendency to be more paternalistic to employees than other types of employers. He says that banking organizations have a stronger tendency to keep offering defined benefit plans, as a result, than other firms. (De novo banks are generally an exception, Rausser notes, with most starting out with 401K plans, and many of those not including any employer match feature.) Yet there are potential savings that can still be realized, even while maintaining a defined benefit plan for all employees, Rausser says. Administrative savings represent one means of cutting costs. Some plans are Cleaning out the plan’s closet Part of this analysis requires taking a hard look at features that have been added, over time, to longstanding defined benefit plans. Those elements may be a tad generous for current conditions. One example cited by Rausser is the “early retirement subsidy.” He explains that during the 1990s the retirement field saw a stress on “portability.” This prac- Federal reform progresses All providers of pension plans have been busy analyzing the potential impact on their programs of the Pension Protection Act of 2006, signed into law in August 2006. Most changes will not be effective until 2008, and some are being phased in over three to four years. Rausser says Pentegra’s analysis thus far—much IRS guidance remained to be issued when he was being interviewed— brings some good news for banks. Analyses of banking clients’ plans indicates that the act should not result in any huge differentials between pre-law and post-law requirements in expenses for banks offering defined benefit. Rausser says the typical community bank client won’t be affected in any material way. BJ 30 NOVEMBER 2007/ABA BANKING JOURNAL http://www.ababj.com/subscribe http://www.ababj.com/subscribe

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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