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Cafeteria pension plans balance the now against later

The trend toward flexible benefits or ''cafeteria plans'' illustrates about as clearly as anything the way people are being expected to take more responsibility for their own retirement planning.

''Employees can no longer sit back and say, 'My employer will take care of me ,' '' says Stewart Lawrence, vice-president of the Martin E. Segal Company, compensation analysts in New York.

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Experts say cafeteria plans are generally set up in a way that keeps people from making what one observer calls off-the-wall selections. But it's still important to think through one's needs and career plans carefully to make the best decisions.

Carson E. Beadle, managing director of William M. Mercer Inc., another compensation consulting firm in New York, explains that cafeteria plans typically involve these alternatives:

* A matrix, or menu, of choices, generally among benefits handled by insurance; that is, on some basis of pooled risk.

* A spending account, whereby the employee is allocated certain credits (pretax dollars) applicable on a reimbursement basis to child care, tuition, extra vacation time, or ''capital accumulation.''

* Some combination of both.

It is the capital accumulation option that fits cafeteria plans into retirement planning. An employee decides to give up some current consumption - education benefits, perhaps - to be sure of an adequate retirement. Typically this is done through a 401(k) plan, with the deferred earnings invested, pre-tax , in an annuity, in mutual funds, or in some other sort of investment vehicle. (Of course, contributions to 401(k) plans can come out of ordinary salary or bonuses, not just ''spending account'' dollars (see related story in this section).

The crucial thing for employees considering what trade-offs to make, says Mr. Lawrence, is to look hard at their basic pension benefits and see to what extent these need supplementing. ''One of the cautions here is that people should not be shortchanging themselves during their working years to save for retirement.''

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A rule of thumb he cites is that people will need 75 percent of their salary at retirement to live comfortably at retirement. Some of this, he says, will come from social security. ''If your pension is going to be 50 percent of your working income, or if your employer is kicking in 7 percent of your salary annually to your pension, and you're starting in early enough, you're probably okay.'' If not, there's a shortfall to be made up, presumably through a 401(k).

Those deciding on a cafeteria plan should also look hard at their career plans. Getting a good basic pension will be harder for job-hoppers, or those in and out of the labor force - raising children or retooling for new careers, for example.

''If you have a new job every five years - and that happens all the time - you may find yourself with no accrued benefits.'' Such people should be putting ''lots of bucks'' into a 401(k), which, Mr. Lawrence notes, is vested - portable - and thus will not end with the job.

Mr. Beadle's advice to employees with retirement plans is simple. He says: ''Think out your needs carefully, and know that your needs change. Take a fresh look at the program every year.

''The nature of these things is that they get a lot of attention when they first come out,'' but then people forget to rethink their choices regularly.

Cafeteria plans can help two-career couples sort out the embarrassment of riches resulting from duplicative benefits; a couple can give up health insurance from one employer for child-care benefits, for example.

But Mr. Beadle cautions that such couples are the most ''vulnerable on choices'' in cafeteria plans if they divide benefits between themselves this way. A job is not always forever; if the spouse whose health insurance has been covering the whole family gets laid off, the family can be left high and dry.

Giving up some life insurance to get more of other benefits may be an appropriate cafeteria choice for singles, childless couples, or empty nesters. But Mr. Beadle also notes that life insurance is on each life; both spouses should have their own. He recommends employers require a minimum life insurance coverage of one year's salary.

Speaking of the move to cafeteria plans, William W. Chip, counsel to the 100 -member Employers Council on Flexible Compensation, commented: ''It's not a trend, it's a tidal wave.'' Such plans were first provided for in 1978 by Section 125 of the federal tax code. This section allowed for conversion of some benefits (which are not taxable) to cash (which is taxable). Since so many employee benefits are ''family-oriented'' and not really meaningful for those without dependents, this provision for such conversion has enabled employers to meet their workers' needs better and has made cafeteria plans truly worthwhile.

The programs have generally been quite popular; one survey found that 90 percent of employees under one firm's cafeteria plan considered benefits good or excellent. Another survey found that 90 percent of employees covered by a firm's plan changed their benefits as soon as flexibility was introduced; this indicates that people do avail themselves of options.

The Educational Testing Service, head-quartered in Princeton, N.J., was the first employer in the country to introduce flexible benefits. ''We've had a very positive employee response,'' says Mary Jane Klansky, director of employee benefits at ETS. She notes particularly the importance of two-way communication. People send her memos or drop into her office to suggest new benefits they would like to see on the ''menu.'' ''Communication like that you can't buy.''

For some years there were just a handful of companies with such plans, but now, Mr. Chip says, hundreds of firms offer them, and their numbers may rise into the thousands for 1984, he speculates.

Companies were deterred from launching flexible plans in recent years by a number of factors: lack of IRS regulations for Section 125, union opposition, and lack of appropriate computer software. But employers are deciding to go ahead without waiting for regulations (obtaining private letter rulings, in some cases), union opposition is fading, and computers are being given the necessary reprogramming.

Mr. Chip cites one informal survey of companies that found the transition to flexible compensation was expensive and difficult, ''but once the transition was made, the program was only a little more of a problem, or no problem at all, to administer than the old system.'' The number of companies to revert to their old systems after trying flexible compensation was nearly zero, he adds.

Management of health-care costs, currently rising 20 to 30 percent annually, is a main reason, if not the main reason, for companies to launch cafeteria plans. ''The idea is to involve the employee in the direct costs of health care, '' Mr. Beadle says. This may be done by raising the deductible for health insurance from $50 to $500, for example, and then giving employees $500 apiece in their flexible spending account - to spend to cover the deductible, or to spend on other benefits.

He distinguishes carefully between cost management and cost shifting. The deductible - and the spending account allocation - have to be big enough to be a meaningful incentive to the employee to control health care costs.

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