Kodak bucks trend and enhances pension plan while eliminating 401(k) matchReprints
Employers are expected to examine Eastman Kodak Co.'s counter-trend move to sweeten its defined benefit pension plan and eliminate its 401(k) plan match, but benefits experts don't expect the move to lead a significant revival of traditional defined benefit plans.
Bucking a long-standing trend of employers freezing their pension plans, Kodak disclosed last month that it will enrich its 14-year-old cash balance plan. Effective Jan. 1, 2015 plan participants will earn an annual benefit equal to 7% of pay, a big improvement over the current benefit formula in which plan participants earn an amount equal to 4% of pay.
Kodak also will move employees remaining in its traditional final average pay pension plan to the cash balance plan. At the time Kodak set up the cash balance plan in 1999, employees were given the choice of remaining in it or shifting to the cash balance plan.
On the other hand, starting next year, Kodak will stop making matching employee contributions to its 401(k) plan. Currently, Kodak fully matches employees' contributions up to 1% of pay, then matches 50% of employees' salary deferrals up to the next 4% of pay. That match has been available only to cash balance plan participants, and not to employees covered by the traditional pension plan.
Kodak's upcoming enhancement of its cash balance plan flies in the face of the biggest retirement trend of the last decade: the freezing of defined benefit plans by thousands of employers, such as Bank of America Corp., International Business Machines Corp., and Wells Fargo & Co., with many of them simultaneously bolstering their 401(k) plans.
That widespread move away from defined benefit plans largely has been driven by corporate worries about their cost volatility, with factors such as fluctuating interest rates and volatility of equity markets, which are out of employers' control, having a huge effect on plan contributions.
Jeff Clarke, CEO of Eastman Kodak, said in a letter to employees that through this change in retirement plan design “our pension benefit will be competitive with companies in our industry.''
Separately, in a statement, Kodak said it designs its benefit plans to balance “affordability with the ability to attract and retain talent. We believe our changes to the U.S. pension plan strike this balance and are competitive with the market.''
Still, no one predicts that a large number of employers will follow in Kodak's path. “The single biggest reason not to take this approach is risk,” said Art Noonan, a senior vice president with Mercer L.L.C. in Pittsburgh.
With a defined benefit pension plan, Mr. Noonan said, employers can face unexpectedly high costs, such as when a slump in the equities market sends the value of plan assets plummeting and, with that, forces employers to funnel more money into the plan at a time when employers may be least able to afford it.
“The problem with defined benefit plans is cost volatility,'' said Byron Beebe, U.S. retirement market leader with Aon Hewitt in Cleveland. “Plan sponsors have moved away from them because of the lack of cost predictability.''
By contrast, costs are highly predictable and controllable with 401(k) plans, in which employers agree to contribute a fixed amount, typically a set percentage of employees' pay, to their retirement plan accounts. Ups and downs in the equities markets, interest rates fluctuations or changing life expectancies have no bearing on what employers must contribute.
But now, experts say, there is new — albeit modest — employer interest in holding on to and improving their defined benefit plans. “There are good and intelligent reasons for employers'' to consider this approach, said Kevin Wagner, a senior retirement consultant with Towers Watson & Co. in Southfield, Michigan.
One factor driving employer interest is potentially lower retirement benefits costs. For example, Kodak estimated in a presentation to investors and analysts that its pension plan redesign will achieve annual savings of $12 million.
Experts say such savings are possible because employers may be able to provide the same benefit at less cost in a cash balance plan than in a 401(k) plan.
That is because employers, utilizing professional investment advisers, will likely reap greater investment results than employees do when they invest their employers' 401(k) plan contributions on their own. “You may be able to provide bigger benefits at less cost,” said Jack Abraham, a principal with PricewaterhouseCoopers L.L.P. in Chicago.
There are other investment-related factors that could drive employer interest in retaining defined benefit plans and perhaps reducing the generosity of their 401(k) plans.
One factor is that employees may not contribute enough to their 401(k) plans to give them the income they need to retire, forcing them to keep working longer than either they or their employers would like.
“That is a looming problem,” said Nancy Tartaro, a principal with Buck Consultants at Xerox in Secaucus, New Jersey.
“We are entering the time period where some employers are saying, 'My workforce is not retiring as we were thinking and therefore we may reconsider' ” the retirement plan approach, Mr. Noonan said.
On the other hand, some employees whom employers especially value may rack up hefty returns through their defined contribution plan investments and “may retire earlier than their employers want,” Ms. Tartaro said.