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Big employers continue defined benefit exodus

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The nation's largest companies continue to move away from traditional and hybrid defined benefit pension plans in favor of 401(k) and other defined contribution plans, according to a survey.

Last year, 58% of Fortune 100 companies offered a defined benefit plan to new salaried employees. That's down from 63% in 2005 and 74% in 2004, according to a Watson Wyatt Worldwide survey released last week.

By plan type, traditional defined benefit plans posted the greatest decline. Last year, 31% of Fortune 100 companies offered a traditional plan to new employees, compared with 35% in 2005 and 40% in 2004. In 1985, the overwhelming majority--89%--offered a traditional plan, according to the Arlington, Va.-based consultant's survey, which is based on corporate financial reports and announcements.

By contrast, more large U.S. corporations are offering only defined contribution plans to their new hires. While just 10% of Fortune 100 companies offered solely a defined contribution plan in 1985, 42% did so in 2006. Last year's figures also showed significant increases compared with more recent years--in 2005, 37% offered only defined contribution plans and 26% offered just those plans in 2004.

Employers moving away from defined benefit plans often have said they did so out of concern about the volatility of contributions. The amount of required contributions can swing wildly due to fluctuations in interest rates and the equities markets.

Sponsorship of hybrids--such as cash balance and pension equity plans, which have defined benefit and defined contribution plan elements but legally are defined benefit plans--also is declining among large employers, but at a much slower rate than traditional plans.

Last year, 27% of Fortune 100 companies offered a hybrid plan, down from 28% in 2005 and 34% in 2004.

As part of a comprehensive pension funding reform measure last year, Congress made clear that new cash balance plans would be protected from age discrimination suits. At the same time, most courts--including two appellate courts--have ruled within the past year that existing cash balance plans are not age-discriminatory.

Those developments, says Kevin Wagner, a senior retirement consultant in Watson Wyatt's Atlanta office, could lead to a mild resurgence of the plans.

"Several large companies have already announced plans to switch to hybrid plans, and a number of firms are considering them," he said.

Since passage of the Pension Protection Act, at least two major companies have started to offer cash balance plans.

On Jan. 1, MeadWestvaco Corp., a Richmond, Va.-based paper packaging and office products company, began offering a cash balance plan to new employees. On Jan. 1, 2008, employees age 40 and older can move to the cash balance plan or remain in the traditional plan.

Also on Jan. 1, 2008, Atlanta-based SunTrust Banks Inc. will offer a cash balance plan to new hires, while giving employees with 20 or more years of service the option of staying in the traditional plan under a reduced benefit formula or earning future benefits under the cash balance plan.

On the other hand, the wave of major employers phasing out their traditional defined benefit plans in favor of enhanced 401(k) plans shows no sign of abating, with announcements of such changes coming almost weekly since the start of the year.

This month alone, two very large employers--ArvinMeritor Inc., a Troy, Mich.-based automotive components manufacturer, and Philadelphia-based Lincoln Financial Group, which is one of the nation's biggest life insurers--announced they are phasing out their defined benefit plans.

A summary of the survey is available at www.watsonwyatt.com.