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5 Tips for Employers Reconsidering Pensions

Closeup of a hand putting money into a jar labeled "pension"

Pensions are on the lips of many industry insiders in light of the news that IBM is switching to a defined benefit plan, as well as the fact that employers are rethinking retirement strategies in wake of several dire statistics.

While a comeback of pensions might not be widespread, it has potential, industry experts said. For employers reconsidering a pension plan, here are some tips.

Study your employees and their retirement challenges. First things first, said Beth Ashmore, managing director, retirement, at consulting firm WTW: Know what retirement programs are in place and where employees are situated within their retirement plans. “How are your employees currently saving? What challenges are they facing?” she said. “Understand where you are starting from, because that informs quite a bit.”

Think about how a pension fits with other total rewards. Employers would be wise to take stock of where a pension plan sits relative to the broader rewards they are delivering, Ashmore said.

“When you start talking about affordability from a retirement program, you can’t do that fully in a silo,” she said. “That is going to inform a lot relative to, ‘How might we think about the process of the design?’ It’s also going to influence the financial picture. And then if you’re thinking, ‘OK, this defined benefit plan is potentially something of interest,’ then you have an interesting conversation around, ‘How do we think about the design of the retirement programs in a way that’s going to be understandable by employees?’ and how to meet those objectives both in terms of employee financials and the company’s financials.”

Consider not eliminating the matching contribution. While turning to a defined benefit plan has its advantages, organizations may not want to completely do away with matching in an employee’s 401(k). “When sponsors eliminate the [defined contribution] match, employees lose a significant incentive to contribute themselves,” said Justin Owens, director and co-head of strategic asset allocation at Russell Investments in Seattle. “Additional employer contributions also provide more assets for the employees to work with to invest.”

Instead, an employer could consider reducing the employer match—say, from 100 percent of the first 5 percent to 50 percent of the first 5 percent. “This could be paired with a reduced pay credit within the cash balance benefit of about 3 percent to keep the benefit similar to what it was before the plan change,” Owens said. “The cost savings and use of pension surplus still would be significant, and potentially last longer, while maintaining the incentive for participants to keep saving.”

John Lowell, a partner with consulting firm October Three in Woodstock, Ga., agreed. “If I were an HR leader, and this was something that I chose to look at for my company, I would never personally eliminate the 401(k) match,” he said. “I would cut it, potentially, so that I could afford the pension. But I would not eliminate it. That sends a horrible message to employees.”

Be cognizant of your messaging. When an organization turns to a pension, the news can be good for employees, so it’s beneficial that employers frame it as such. Tell employees why the organization is making the change, and explain how it works and how it can help.

“You’ve got to tell the story right,” Lowell said. “Messaging is key. It needs to be about taking what employees say the challenges they’re facing are and building an answer around those challenges.”

Jonathan Price, national retirement practice leader at benefits consulting firm Segal, agreed.

“Like every other change in benefits, it is important to be able to explain why and how it’s helpful to the individual. In this case, it’s not just helpful to the individual in that it can take away some incredible stressors in their lives, but there’s a great opportunity for an employer to win, too,” he explained. “They will win doubly if they find the right ways to communicate it to their people in a way that employees realize, ‘We care about you, and we’re putting you in a situation where you can flourish.’”

Educate employees. Finally, it’s important that communication not be a one-and-done situation, but instead constant. HR and benefits leaders would be well-served to continue to educate employees about the new retirement offering—and how it can work in tandem with 401(k)s and other plans. This can be done through emails; company postings in offices and online; and webinars and meetings.

See also: Are Pensions Poised to Make a Comeback?


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