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Shift away from traditional defined benefit pension plans continues
An annual analysis of retirement plans at the largest 100 U.S. companies shows the continued erosion of traditional defined benefit (DB) pension plans.
Fortune 100 companies (the 100 largest U.S. corporations ranked by gross revenue), a growing majority have replaced their DB pension plans with only account-based retirement plans for new salaried employees, according to an analysis by consultancy Towers Watson. Account-based plans include defined contribution (DC) retirement plans, such as 401(k)s, and hybrid pension plans, typically cash balance plans.
According to the Towers Watson 2010 analysis:
Fortune 100 Companies Continue Shift to Account-Based Plans*
Type of Retirement Plan
Defined contribution only
Source: Towers Watson.*
Numbers indicate plans offered to new salaried hires at the end of each year. The 2010 column includes changes made this year and announcements of future plan changes through May 12, 2010.
“The movement toward account-based plans appears to be steady and strong as companies shift away from traditional pensions,” says Kevin Wagner, senior retirement consultant at Towers Watson. “And while most of the shifting has been toward 401(k) plans, we are seeing employer interest in cash balance plans, too, as the provisions of the Pension Protection Act, which creates a more friendly environment for these plans, begin to take effect.”
Cash balance and other hybrid plans are designed to reduce cost and funded status volatility for employers while providing more visible benefits for employees than traditional DB plans. Participants in cash balance plans continued to see their pension accounts grow during the financial crisis, in marked contrast to most 401(k) accounts.
(To learn more about these often overlooked plans, see the box at the end of this article.)
“Providing visible and adequate retirement benefits for their workers remains a high priority for large employers,” says Alan Glickstein, senior retirement consultant at Towers Watson. “As the economic climate improves, we fully expect to see the trend toward account-based plans to continue in the foreseeable future. Employers will be better positioned to take advantage of recent legislative and regulatory changes that make cash balance plans more appealing to them and to their employees.”
Cash Balance Plans: A Review
Under a cash balance plan, employees receive career-average "pay credits" to a hypothetical account. Those amounts are then credited with "interest credits" until the "account" is paid out, typically as a lump sum at termination of employment. This design mimics a defined contribution plan, albeit one that is employer-funded.
But cash balance plan interest credits are determined mathematically, without regard to the performance of fund assets (which are managed by the employer), and the employer is responsible for any asset shortfall, as with a defined benefit plan. Participants in cash balance plans continued to see their pension accounts go up during the 2008-09 financial crisis—in marked contrast to most 401(k) accounts.
As career-average plans, funding a cash balance plan can be substantially less for employers than the cost of a defined benefit plan in which lifetime benefit payments are based on the employees' final years of pay. In short, cash balance plans reduce cost volatility for employers while providing more visible benefits for employees than traditional DB plans.
is an online editor/manager for SHRM.
How to Weigh Alternatives for Defined Benefit Plans,
SHRM Online Benefits Discipline, April 2007
Cash Balance Plans and the Pension Protection Act: A Changed Landscape,
SHRM Online Benefits Discipline, August 2006
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