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Defined benefit system gets a welcome boost


While three large employers taking similar actions hardly constitute a trend, we think the decision of those organizations to stay in the defined benefit plan system is significant.

SunTrust Banks Inc. is converting its traditional pension plan to a cash balance plan, a step MeadWestvaco Corp. took last year, while Phoenix Cos. Inc., a big player in the annuity market, is moving to a pension equity plan, another type of defined benefit plan.

The actions of these employers is a contrast to the pension storyline of the last couple of years in which one employer after another announced that it was phasing out its defined benefit plan, typically in favor of an enhanced 401(k) plan.

Certainly, there are good reasons for employers to wind down defined benefit plans. The annual cost of such plans—due to fluctuations in interest rates and investment returns—can be unpredictable, which is anathema to risk-averse companies.

While that is a legitimate issue, it doesn't tell the whole story. Defined benefit plans are financially volatile, but that is not always a bad thing. Consider the above-average investment results defined benefit plan sponsors earned on plan assets during the last few years, which will allow employers to cut back on future contributions.

By contrast, investment results play no role in employer contributions to defined contribution plans. If the return on assets is 5% or 50%, the employer contribution isn't going to change.

On benefit design, defined contribution plans aren't without problems. Employees in such plans who join in mid-career may not be around long enough to earn meaningful benefits. Defined benefit plans lend themselves to designs that address that problem.

All pension plan approaches have pros and cons, and no single design is best for all employers. We say that because we believe a herd mentality—rather than careful analysis—has driven many employers away from the defined benefit system. When it comes to pensions, employers must act thoughtfully, not on impulse or as copycats.