Large firms continue moving away from defined benefit plans: SurveyPosted On: Sep. 4, 2014 12:00 AM CST
The number of defined benefit pension plans sponsored by the nation's largest corporations continues to dwindle.
Just 118, or about 24%, of Fortune 500 companies offered a defined benefit plan to new salaried employees in 2013, down from 123 in 2012 and a steep decline compared with the 277, or 55%, that offered the plans in 2003, according to a Towers Watson & Co. survey released Thursday.
Frequently cited reasons for the decline in employer sponsorship of defined benefit plans include longer employee lifespans, which increases benefit costs; decreased corporate tolerance of fluctuating contribution requirements, which can jump up and down due to investment results; and escalating Pension Benefit Guaranty Corp. insurance rates.
Still, there are risks to employers when shifting to only defined contribution plans, Towers Watson consultants say.
Such a move “carries risks for employers, such as having workers delay retirement when market performance is poor, which in turn can result in higher benefit costs and less mobility within their organizations,” Alan Glickstein, a senior retirement consultant at Towers Watson in Dallas, said in a statement.
The move away from defined benefit plans varies by industry.
For example, among the 35 insurers in the Fortune 500, 34% now only offer a defined contribution plan to new salaried employees, while 41% of the 29 utility companies in the survey offer only defined contribution plans.
By contrast, 74% of the 66 manufacturing firms now offer only defined contribution plans to new salaried employees, while 80% of the 35 surveyed finance companies offer only defined contribution plans.
The survey noted that the high rate of defined benefit plan sponsorship in the utility industry may be due to several factors, including that many utility industry jobs are “physically demanding and DB plans encourage/allow workers to retire at an appropriate time.”
In addition, utility companies typically are heavily unionized, with many choosing “to keep their retirement structure consistent between their union and nonunion workforces.”
Among insurers, the relative high percentage of companies still offering defined benefit plans may be influenced by the fact that “due to their training and the nature of their work, employees in the insurance sector may be more inclined to understand and appreciate DB plans relative to workers in other sectors,” the survey said.
The survey also found that the move away from defined benefit plans has been especially pronounced among employers sponsoring traditional plans, such as final average pay plans. Last year, just 34 Fortune 500 companies still offered traditional defined benefit plans to new salaried employees, a huge drop from the 169 companies that offered such plans in 2003.
Sponsorship of hybrid plans, such as cash balance plans, which have both defined benefit and defined contribution plan features, but legally are defined benefit plans, also has declined. But that decline has not been as sharp compared with traditional plans.
For example, 84 Fortune 500 companies offered a hybrid plan to new salaried employees last year, unchanged from 2012 and a relatively modest drop compared with 108 companies that offered the plans in 2003.