PBGC Pension Insurance Data Book 2002

Hybrid Plans

The characteristics of the plans PBGC insures are changing. During the middle and late 1990s, a growing percentage of insured single-employer plans became hybrid plans. (The two most common types of hybrid plans are Cash Balance plans and Pension Equity Plans.) Hybrid plans incorporate elements of both defined benefit and defined contribution plans into their design. Like 401(k) plans, they often express benefits in terms of an account balance. Unlike a 401(k) plan, however, the sponsor typically makes all contributions to the hybrid plan and bears all the plan?s investment risk. Benefits in hybrid plans often accrue faster early in a participant?s working career than they do in traditional defined benefit final average pay plans. This benefits workers who spend only a few years working for the plan?s sponsor. Hybrid plans are also more likely than more traditional defined benefit plans to provide a lump sum payment option that the participant can exercise upon termination of employment with the plan?s sponsor. This feature is common in defined contribution plans. The greater availability of the lump sum payment option makes the benefits of hybrid plans more portable than those in most other defined benefit pension plans.

Data from the 2000 Form 5500 filings suggest that about four percent of the single-employer plans that PBGC insured in 2000 (about 1,230 plans) were hybrid plans.

The hybrid plan feature code was first included on the 1999 Form 5500. However, the 1999 data were incomplete because of processing problems. The 2000 Form 5500 data are the first that provide reliable estimates of the number of hybrid plans PBGC insures.

PBGC identifies a hybrid plan as one either checking the hybrid plan feature code on the Form 5500 or having "Cash Balance," "Pension Equity," or another term in the plan name that indicates the plan is a hybrid plan. The feature code does not distinguish among various types of hybrid plans, although it emphasizes that Cash Balance plans are hybrid plans. Very few (about 25) PBGC-insured multiemployer plans are hybrid plans.

Table 1. Number of PBGC-Insured Single-Employer Plans and Estimated Number of Insured Single-Employer Hybrid Plans, by Plan Size, 2000

Source: PBGC data and PBGC calculations from the 2000 Form 5500.

This percentage increased rapidly as the size of the plan grew. (See Table 1.) The data indicate that less than two percent of single-employer plans with fewer than 100 participants were hybrid plans but more than 25 percent of the plans with 10,000 or more participants were.

The proliferation of hybrid plans among the largest PBGC-insured single-employer plans means a large proportion, more than 20 percent, of PBGC-covered single-employer participants are now in hybrid plans. (See Table 2.) Not all these participants will receive benefits based on the hybrid plan design, however. Many hybrid plans converted from more traditional defined benefit plans, and most of their retired, separated and even some active participants will receive benefits based on the original plan design.
Available data suggests that most active participants in hybrid plans will take a lump sum distribution when they retire or separate from employment with the plan's sponsor rather than take an immediate or deferred retirement annuity. This will reduce the number of PBGC-covered retirees, beneficiaries, and separated vested participants because taking a lump sum distribution removes the participant from PBGC's insurance coverage.

Table 2. Number of PBGC-Covered Participants in Single-Employer Plans and Estimated Number of Participants in Insured Hybrid Plans, by Plan Size, 2000

Source: PBGC data and PBGC calculations from the 2000 Form 5500.

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