Corporate America’s commitment to workers’ retirement plans, measured by benefits values as a percentage of pay, has dropped consistently over the past several years, according to an October 2009 research report by consultancy Watson Wyatt, Employer Commitment to Retirement Plans in the United States.
The analysis of 183 employers found that the total retirement benefits—defined benefit (DB) plans, defined contribution (DC) plans and retiree health plans—provided to employees decreased from 7.8 percent of pay in 2002 to 6.9 percent of pay in 2008. For the 79 companies that maintained DB plans throughout this period, the value of the overall benefits declined from 9.4 percent to 8.6 percent of pay, mostly attributable to a significant cut in post-retirement health benefits. In the same time period, the 61 companies that provided only a DC plan saw a small increase in overall benefits value—from 5.3 percent to 5.6 percent of pay—attributable to enhanced employer contributions.
The remaining 43 companies in the sample transitioned from DB to DC-only coverage between 2002 and 2008. Although these companies increased their DC benefit values by an average of 2.7 percentage points, this gain covered only approximately half of the DB value loss that was incurred by closing or freezing plans. For these companies, overall commitment fell substantially, from 8.7 percent of pay in 2002 to 5.5 percent of pay in 2008.
“The tumult of the last decade, with its market bubbles and crashes, two recessions, rising health care expenses and compensation pressures, has caused employers to scramble to look for savings,” says Jim Shaddy, North America retirement practice director at Watson Wyatt. “As a result, a number of employers have pushed some of the risk and cost in their retirement plans onto employees’ shoulders.”
An analysis of a larger data set of more than 600 companies found that some industries—manufacturing, transportation (including the airline sector) and communications—experienced declines greater than 30 percent in their retirement plan values from 1998 to 2008. More profitable industries, such as chemicals, drugs and pharmaceuticals, had a smaller decrease in the same time frame, or in some cases (e.g., the health care sector) even a small increase, although from a lower level.
“In difficult times, when employers are under pressure to alleviate escalating costs and displace risk, reducing retirement benefits can be seen as the easy solution since it is comfortably far off,” says Kevin Wagner, senior retirement consultant for Watson Wyatt. “However, companies can benefit from considering the impact of their actions on the retirement adequacy of their workers’ benefit plans while also thinking about new solutions, such as hybrid plans, which can provide secure retirement income as well as lower risk for employers.”
Workers Remain Committed to
Their Workplace Retirement Plans
A survey by the ING Institute for Retirement Research found that despite uncertain market conditions, most Americans who participate in employer-sponsored defined contribution plans value these plans greatly and have continued to support them.
According to the October 2009 survey report, The Hearts and Minds of Retirement Investors, an overwhelming majority (84 percent) consider their employer’s plan a “very important” part of their retirement strategy. Additionally, nearly all (92 percent) say that the best way to save is by having their investments automatically deducted from their paycheck.
“The economy and the critics have not discouraged those who are regularly participating in a defined contribution plan,” comments Catherine Smith, CEO of ING U.S. Retirement Services, in a statement. “The average American preparing for retirement recognizes the important role their employer-sponsored plan plays in achieving their savings goals, and they value the conveniences and options these plans afford.”
Other findings demonstrated that participants did not radically change their behavior or abandon these plans in response to the market downturn. Since the fall of 2008:
• More people (nearly 40 percent) reported joining an employer’s plan or increasing their contributions than decreasing or stopping contributions (less than 30 percent).
• While more than one-third of participants (37 percent) changed to a more conservative asset allocation, nearly one-fifth (19 percent) saw an opportunity to become more aggressive in their investment strategy.
• Very few reported either taking money out through a hardship withdrawal (6 percent) or a loan (5 percent).
The survey, conducted between April 9 and June 6, 2009, polled more than 1,000 men and women of all ages participating in defined contribution plans managed by ING, including 401(k) plans, 403(b) plans and 457 plans.
Stephen Miller is an online editor/manager for SHRM.
SHRM Online Benefits Discipline