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Staffing Management: Smoothing a Rough Road to Recruitment

Diane Cadrain   1/4/2006
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Staffing Management, Oct - Dec  2005

Vol. 2, No. 2

Working for your company offers plenty of perks. But what happens to your recruiting efforts when you scrap a highly visible benefit--such as your traditional pension plan?

How important to job applicants is that high-profile benefit your company offers? If it goes away, will the applicants go away also?

Consider the traditional pension plan, which is going the way of the electric typewriter. The list of employers freezing or closing their defined benefit pension plans reads like a Who’s Who of corporate America’s elite: IBM, Hewlett-Packard, Sears, Alcoa, Armstrong, Verizon, Motorola and others.

Fearing unpredictable costs, firms are replacing pensions with defined contribution plans, essentially giving employees the burden of looking out for their own retirement savings. Is the loss of this benefit an embarrassing fact for recruiters to gloss over … or a non-issue?

“It depends on who you’re recruiting,” says Sheldon Gamzon, a principal in the retirement practice at PricewaterhouseCoopers. “If you’re targeting younger applicants, in the first five years of their careers, elimination of a defined benefit plan won’t have much effect. But if you’re recruiting executives or mid-career employees, who would benefit from a traditional pension plan over the next 15 to 20 years, then it would affect recruitment.”

“For recruitment purposes, defined contribution plans are better for younger, more mobile people because they’re more easily understood—it’s easy to calculate matching contributions,” agrees Richard McEvoy, a principal and retirement actuary with human resource consulting firm Mercer. “And they’re portable. But younger recruits don’t always see the value of defined benefit plans.”

“If you’re trying to recruit people in mid-career, you shouldn’t do it,” Judy Schub says of eliminating defined benefit plans. Schub is managing director of the committee on the investment of employee benefit assets with the Association for Financial Professionals in Bethesda, Md.

A Visible Trend

The movement away from traditional pensions has been clear for more than a decade. In a recent benefits survey conducted by the Society for Human Resource Management, for example, 39 percent of employers offered defined benefit plans in 2005, dropping from 48 percent in 2001.

A convergence of financial and demographic factors kicked off the trend. The financial reasons are based on the fact that a defined benefit plan makes the employer ultimately responsible for paying the benefits promised.

“The downturn in the market from 2000 to 2003 caused a drop in investment value, and in that bear market, employers bore the risk,” observes Greg Pastino, a senior consultant and actuary with the Hay Group in Philadelphia.

“Defined benefit plans are expensive,” adds Leonard Sanicola, senior benefits project leader with WorldatWork in Scottsdale, Ariz.

In fact, every company that has announced a cutback in its defined benefit plan has cited cost reduction as a key motivation. In today’s global market, employers are now competing with firms that don’t provide the richness of a traditional pension plan.

Demographically, as the large baby boom generation reaches retirement age, employers are challenged to generate the level of benefits they’ve promised. And, the coming generations don’t necessarily intend to stay with one employer for their whole lives; because of that mobility, traditional defined benefit plans, which have tended to reward longevity with one company, are less attractive to them.

Thinking It Through

Here are some factors to take into account when sizing up whether freezing or closing your defined benefit plan will adversely affect your recruitment efforts.

What do you want to accomplish with your workforce?

“Employers continue to fit their benefit programs to what they hope to achieve with their workforces,” says Dallas Salisbury, president of the Employee Benefit Research Institute, an organization that encourages the development of sound employee benefit programs.

“Companies that want to keep people for a full career still provide a final pay defined benefit plan that pays big for the last three to five years of work,” Salisbury says. “That helps retain and possibly attract older workers, but surveys show it doesn’t do much to attract young people.”

“By and large, a growing employer, a company increasing its headcount—such as high-tech employers—companies that recruit right out of universities—won’t find their recruitment affected by the presence or absence of a defined benefit pension,” says Gamzon.

What are your competitors doing?

Bob Varretoni, a spokesman for Verizon, says that the company looked long and hard at its competitors’ practices before restructuring its defined benefit plan.

“Our competitors—cable companies like Cablevision [or] Comcast or technology companies in general, like Microsoft or Google—they don’t have both 401(k)s and pension plans,” says Varretoni. “So our offerings are on a par with what they’re offering. We offer a good package of work/life programs, educational benefits, and short-and long-term incentive plans—all very attractive for new entrants seeking tech jobs.”

On its web site, Verizon promotes itself to potential employees as having “a flexible benefits plan that you can tailor to fit your needs,” as well as “performance-based incentive awards, tuition assistance, outstanding career and growth opportunities and a unique environment of talented, diverse people.”

The site lists a number of work/life benefits such as an employee assistance program, dependent life insurance, adoption assistance and, in some locations, day care assistance and tells potential employees that Verizon has “a generous time-off plan including vacation, personal days and holidays.”

Can you sweeten your other retirement plans or other forms of compensation? When IBM stopped the accrual of future benefits in its defined benefit pension plans, effective Dec. 31, 2007, it did so by significantly enhancing its 401(k) savings plan, doubling its current company match and giving participants an annual company contribution of up to 10 percent of pay. IBM claims that this makes its 401(k) one of the richest among U.S. businesses.

“IBM really beefed up their 401(k),” Gamzon remarks. “If the company goal is to break away from defined benefit, and you want to make employees whole, you have to kick in a lot of money. You would be at a competitive disadvantage if you didn’t.”

On its web site, IBM encourages potential employees to “find a job that fits your lifestyle … you need an employer that values the less tangible—but no less critical—benefits that make work a pleasure and a fulfillment. Benefits such as flexibility to help you manage family life; greater freedom in charting your career development; more say in shaping the company’s products and culture. When it comes to having competitive compensation and benefits—tangible and intangible—IBM has long been a leader and remains so today.”

The IBM site also touts cash compensation opportunities that include “base pay, performance bonus, commissions, awards and other forms of earnings. When our business objectives exceed the plan and you perform at the highest level, you’ll have an earnings opportunity that places you among the best-paid employees in the marketplace.”

What’s the future of pension plans?

“In five years, I think there will be no more defined benefit plans in the United States. IBM made it socially acceptable to restructure them,” says Alicia Munnell, director of the Center for Retirement Research at Boston College, in her book Coming Up Short: The Challenge of 401(k) Plans (Brookings, 2004). 

“Unfortunately, too many employers are falling into the herd mentality,” observes Gamzon. “They read about some large, successful employers freezing their pensions and assume it’s got to be the right thing to do. But that couldn’t be farther from the truth.

“Many employers should consider other alternatives rather than freezing defined benefit plans and substituting defined contribution plans. Companies can achieve all their HR objectives at 50 percent of the cost if they would consider alternatives. The question is whether they would take the time to do that.”

Diane Cadrain is an attorney who has been covering workplace-related legal issues for a variety of publications for over 20 years. She is a member of the Human Resource Association of Central Connecticut.

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