A Pension Formula That Pays Off

Don't let the complexities of a defined benefit pension package deter you from trumpeting its pluses to your employees.

By Lin Grensing-Pophal Feb 1, 2003

HR Magazine, February 2003With the economy limping, stock markets struggling and 401(k) retirement account balances in retreat, employers who still provide the traditional stalwart of pension arrangements—a defined benefit plan—should tell their employees what a plus it is for them. That’s the view of many retirement benefit experts, who also offer concrete suggestions on what to say and how to say it.

But why make the effort to get out such a message? Essentially, experts say, employers should get credit for maintaining such plans by making sure employees understand the benefit’s strengths.

Defined benefit plans, which promise a specific monthly benefit at retirement and do not require employee contributions, usually represent a substantial employer investment, says William Arnone, a partner in employee financial education and counseling with Ernst & Young LLP in New York. That investment, he notes, includes not only contributions to the plan but also actuarial fees, administrative costs and premiums paid to the federal Pension Benefit Guaranty Corp., which protects the retirement incomes of about 44 million American workers in more than 35,000 private defined benefit pension plans. “If employees don’t even know the plan exists or don’t understand what it means to them,” Arnone says, “then the employer is really getting no return on that investment in terms of employee appreciation or satisfaction.”

Moreover, HR can increase employees’ loyalty by showing them how these plans can benefit them in the long run, Arnone adds.

Some retirement plan experts say this is an especially good time to communicate the value of the presumably stodgy plans. Though they can be hard to decipher, they’re becoming easier to appreciate.

“We’re missing a golden opportunity if we don’t talk about [the defined benefit plan] during this down market,” says Barbara Green, director of retirement plans for Trinity Health, a multiple-state health system based in Farmington Hills, Mich. “I, as an employee, am very glad that part of my money is safe right now.”

Pam Rollins, communication practice leader in Detroit for the Washington, D.C.-based consulting firm Watson Wyatt Worldwide, says: “When the stock market was providing high returns, the focus shifted from defined benefit plans to defined contribution plans like 401(k) or 403(b) plans. [A 403(b) is a retirement plan for certain employees of public schools and tax-exempt organizations.] In today’s climate, though, employees are really focused on security and are starting to rediscover the value of defined benefit plans.” Testifying before the House Ways and Means Committee in early 2002, Ann L. Combs, assistant secretary of the U.S. Department of Labor’s Pension and Welfare Benefits Administration (PWBA), noted that “the employment-based private pension system has been shifting toward defined contribution plans,” and that such plans now enroll more than three-fourths of all workers with pension plans. Nonetheless, she said, defined benefit plans, with their assurance of a predictable retirement benefit, continue to be “a vital component of our retirement system.”

Although workers who have only defined benefit plans are now outnumbered by those with only defined contribution arrangements such as 401(k) plans, there were about 15 million U.S. workers taking part in both types of plans as recently as 1998, according to the most recent study by the PWBA, and more than 5 million workers had defined benefit plans only.

Static in the Message

Explaining defined benefit plans can be daunting for employers, however, because the plans involve complex formulas, require some broad assumptions and lack appeal for younger employees and those who change jobs from time to time.

Estimating how valuable a plan will be by the time an employee starts tapping it can rest on long-range assumptions, says David L. Wolfe, a partner in the Chicago office of the law firm Gardner Carton & Douglas. “For you to tell me what my pension is going to be at normal retirement age while I’m in the middle of my career, you have to assume how long I’m going to work and what my salary is going to be over time,” he says. “Probably the only thing that’s certain is that when I get my final number at age 65, it will be different from every one of those previous disclosures.”

What the employer must decide, says Wolfe, is how much to communicate. “If you don’t tell [employees] enough, they won’t value the plan. Of course, the flip side is if you’re really precise about what my benefit is, I may overvalue the pension. Or, when you start telling me what it’s worth in today’s dollars, it doesn’t sound like much money and I may be disappointed instead of happy.”

And although defined benefit pensions can be rewarding for long-term employees, they hold little appeal for many younger workers. Defined benefit plans, unlike 401(k) accounts, aren’t portable, and their typical vesting schedules effectively prevent employees who change jobs every few years from acquiring a stake in a company’s retirement plan.

“Suppose your company has a vesting period of five years,” says Jerome Mattern, SPHR, a member of the Society for Human Resource Management’s Compensation and Benefits Committee. “If you work there six years, you have a very small amount in the plan. If you do that often, after working for multiple employers, you really never get to enjoy your defined benefit plan. That’s been the real negative to these plans.”

Says Ernst & Young’s Arnone: “The plans themselves are typically so complicated they really don’t generate much value for short-service employees. All [employees] care about really is the 401(k) plan because it’s something that’s more visible and they can get it when they leave.” Nonetheless, he adds, “If employers believe there are certain segments in their population who they may want to retain over the long haul, defined benefit plans can be a great retention tool—once employees understand them.”

Get the Message Across

Rollins of Watson Wyatt recommends a few approaches for telling employees about their defined benefit pension:

  • Focus on the value of the plan, not the formula. Be sure to note that the plan is paid fully by the employer, the employee is guaranteed an income at retirement and the plan rewards careers and loyalty. “What we’ve seen in the past,” says Rollins, “is that people focus more on the formula, which is complex, so employees aren’t really appreciating the plans.”
  • Make it personal. Rollins suggests using individualized statements or a retirement tool on the Internet. Such communications can also be targeted to specific segments of employees. “You need to create a hook for people to engage in,” Rollins says. “Finding ways to create that hook is important.”
  • Communicate the entire retirement program, not just the defined benefit plan. “You really need to help employees understand the whole picture,” Rollins says. “When you look at it as an entire package, you can really help employees understand their responsibility for saving for their retirement.”

Important Themes

When promoting your plan to employees, underscore some key points, experts say. For example, remind employees that “the entire risk of a defined benefit plan is on the shoulders of the employer,” says Green of Trinity Health, which recently went through a large merger and is exploring options for funding its plan. “We’re not going to employees to say, ‘We don’t have any money; we need you to kick in some.’ We have to fund the plan even though the market is down.”

Green adds that it’s important to let employees know their defined benefit pension plan “can represent your ‘safe money,’ so you can be a little riskier in the market. You don’t have to take 401(k) or 403(b) monies and invest conservatively because you know you have the defined benefit account that is not at risk.”

Jeff Couzens, director of corporate communications and public relations for Trinity Health, notes that Trinity has an atypical system for matching employees’ contributions to their 401(k) and 403(b) accounts. Instead of putting the company’s matching contribution into those accounts, Trinity puts the funds into the defined benefit plan. “That was a real hard sell when we told our employees, ‘You don’t have control over that money.’ ” But times and the economy can change, he adds, and it’s easier now to explain a contribution to a defined benefit plan. Personally, he adds, “it’s a good thing; it’s the only part of my portfolio making money.”

Green notes that companies offering both a defined benefit pension and a defined contribution plan should make sure employees know it. “What people want is choice,” Mattern says. “If you put all your eggs in one basket and that basket isn’t very strong, then what do you have? Cracked eggs.” Choice, Mattern adds, can be a strong driver of employee loyalty and commitment.

Gail Nichols, PHR, a practice leader responsible for compensation and benefits in the HR division of NCCI Holdings, a data management company in Boca Raton, Fla., says that in communicating with employees about retirement benefits, “we stress ... the total compensation package. We talk about items that are above and beyond pay, and that it’s important to understand the total value—both dollar value and intrinsic value. We ask individuals to look at their total compensation picture.”

More Than One Way to Say It

As with any communication challenge, employers find that a multi-media approach is often the most effective way to educate employees about benefits. “You can’t build appreciation with just one communication effort or by just sending out one brochure on the plan,” Rollins says. “It really takes an ongoing communication program.”

Trinity Health sends out a variety of messages about benefits, invites feedback and uses a newsletter to address the importance of the employee savings plan. Many documents are issued in multiple versions for various employees in several states. The company also offers employees a hot line for personal questions and a web site for ongoing education. The bottom line, Couzens says, is recognizing that “one size fits all” simply isn’t the right approach for communicating on retirement benefits.

Arnone also supports the use of multiple approaches. “A combination of group learning and individual counseling, to me, is surefire success. You can supplement that with software where people can do modeling or ‘what if’ scenarios. Then you have, pretty much, a complete package.” Unfortunately, he says, “most employers don’t offer that complete a package. They try to do a one-shot deal. Maybe send out a brochure. But even the best brochure doesn’t do it.”

Trinity Health has discovered that employees prefer receiving information about retirement plans through direct mail, says Couzens. “They wanted it to come to their homes when they had time to sit down to go over it with their spouses and think about decisions out of the context of work.” Trinity also has found that group meetings and face-to-face contact are important. “Money is a sensitive subject, so that means that people want more of a face-to-face or high-touch way of communicating.”

Arnone advocates setting up a toll-free phone number for employees. “Issues can get real personal and real confidential,” he says. “Employees might never tell their employer when they want to retire, they might never say it in a workshop. But they’ll share that information one-to-one through an 800 number.”

Education is key, says Couzens. “We’ve done an awful lot with technology and planning tools and articles that try to instill an appreciation for the defined benefit portion of our plan.”

“Organizations spend valuable resources on employee benefits,” Rollins adds. “If those benefits aren’t understood or appreciated, you’re not getting value out of the money that you’re spending.”

Lin Grensing-Pophal, SPHR, is a Wisconsin-based business journalist with HR consulting experience in employee communication, training and management issues. She is the author of Human Resource Essentials: Your Guide to Starting and Running the HR Function (SHRM, 2002) and director of corporate communications at Luther Midelfort-Mayo Health System, in Eau Claire, Wis.

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