Hybrid plans are a category of retirement plans that combine features of traditional defined benefit (DB) and defined contribution (DC) plans. These plans aim to provide some of the benefits of both while managing some of the drawbacks. Hybrid plans offer greater flexibility and cost predictability for employers, and they can provide retirement income security for employees. Here are some common types of hybrid plans:
1. Cash Balance Plans:
- Cash balance plans are one of the most popular types of hybrid plans. They offer a guaranteed rate of return on contributions, typically expressed as an annual percentage of pay, and they are often structured as individual accounts. The plan’s benefits are expressed as hypothetical account balances, which grow annually with contributions and interest credits. Upon retirement, employees can choose to receive their account balance as a lump sum or as an annuity.
2. Pension Equity Plans:
- Pension equity plans are a variation of cash balance plans. They use a predetermined formula to calculate an employee’s hypothetical account balance, which is typically based on a combination of factors like age, service, and pay. The employee’s benefit is expressed as an account balance, and it may be converted into an annuity upon retirement.
3. Target Benefit Plans:
- Target benefit plans are often used by multiemployer pension plans (MEPPs). They set a target benefit level for each participant, and contributions are adjusted over time to ensure the plan remains adequately funded to meet those targets. Participants may receive the target benefit, subject to the plan’s financial health.
4. Floor-Offset Plans:
- Floor-offset plans combine elements of DB and DC plans. They provide a guaranteed DB benefit as the “floor” and may offer a supplemental DC component based on contributions and investment returns. This structure ensures a minimum retirement benefit while allowing for potential additional retirement savings.
5. Variable Annuity Plans:
- Variable annuity plans offer annuity payments that can vary based on investment performance. While they are often associated with DC plans, they can be structured as hybrid plans when they include DB-like elements, such as minimum benefit guarantees or employer contributions.
6. Shared Risk Plans:
- Shared risk plans involve risk-sharing between employers and employees. These plans often have flexible benefits that can increase or decrease based on the plan’s financial condition, investment returns, or other factors. Employees and employers may share the financial risks and rewards of the plan’s performance.
7. SERPs with Cash Balance Features:
- Some supplemental executive retirement plans (SERPs) incorporate cash balance plan features to provide certain highly compensated employees with an additional retirement benefit.
Hybrid plans are designed to offer employers a more predictable funding structure compared to traditional DB plans, while still providing employees with retirement income security. However, they can be complex and may require careful plan design and administration to ensure they meet their intended objectives. Employers and plan sponsors should work with actuaries, legal experts, and financial advisors when establishing and managing hybrid plans to ensure compliance with regulatory requirements and to address the unique needs of their workforce.