Conversation on Coverage | The Individual Advantage Plan

The Individual Advantage Plan design uses a cash balance plan in tandem with a defined benefit formula to better address the needs and expectations of both younger and older employees. Traditional defined benefit features generally offer the most value to older (especially long-service) employees, while younger employees receive less value. The Individual Advantage Plan design adopts some defined contribution features, but remain part of the defined benefit plan system and achieve many of the positives offered by such arrangements.

The Individual Advantage Plan: Balancing the Needs of Older and Younger Employees

The Individual Advantage Retirement Plan is a compromise solution to the ongoing debate between older workers who appreciate and benefit greatly from traditional pension plans and younger workers who prefer an account-balance format, including the cash balance plan. Jim Davis describes the individual advantage plan design as having characteristics that "depend on the mechanics of both structures, and effectively mimic a 'greater of' approach."

The Individual Advantage design:

Provides better value to older employees than a cash balance plan
Provides better value to younger employees than a traditional defined benefit plan
Facilitates presentation of an account balance benefit, thereby providing a better understood and appreciated benefit that also can easily be integrated with 401(k) and other plans
Directs a retirement "bonus" toward older employees, who place a higher value on retirement benefits and are most aware of retirement income needs
Helps employers optimally deploy benefit dollars to balance the competing interests of responding to both old and young employees.

An illustration in the Jim Davis article published in the Fall 2000 issue of Benefits Perspective compares the three plan types both numerically and graphically. According to Davis, "One of the biggest problems encountered by defined benefit plans is the difficulty in communicating the benefits in terms that can be readily understood and accepted by participants." He goes on to point to how the Individual Advantage Plan design can "easily overcome the imbalance between understanding and value." His final point is that Individual Advantage Plans provide an enhanced benefit to those employees who will appreciate them the most; that is, employees who are approaching retirement.

An Individual Advantage Plan "is an attempt to balance the needs and demands of younger and older workers while producing a benefit that remains understandable, which establishes it as an attractive alternative in the retirement plan design spectrum."