The migration away from defined benefit (DB) plans among large U.S. companies continues, as plan sponsors seek to shift pension risk to plan members amid a fragile economic recovery, according to Towers Watson.
A study by the firm finds that Fortune 100 companies are closing their DB plans in favour of account-based defined contribution (DC) plans such as 401(k) plans and hybrid pension plans.
Fifty-eight companies in the Fortune 100 currently offer only a DC plan to new hires, compared with 55 companies at the end of last year and 51 companies at the end of 2008, says Towers Watson. Three companies announced this year that they will switch from a hybrid plan to a DC-only plan, while three companies are converting from a traditional DB to a hybrid plan. Seventeen companies continue to offer a traditional DB plan, down from 20 at the end of last year and 24 at the end of 2008.
“The movement toward account-based plans appears to be steady and strong, as companies shift away from traditional pensions,” says Kevin Wagner, senior retirement consultant at Towers Watson. “And while most of the shifting has been toward 401(k) plans, we are seeing employer interest in cash balance plans too, as the provisions of the Pension Protection Act, which creates a more friendly environment for these plans, begin to take effect.”
The study also finds that 25 of the 42 companies with DB plans offer hybrids such as cash balance plans, which reduce cost and funding volatility for employers while providing more visible benefits for employees than traditional DB plans. Unlike most 401(k) accounts, cash balance plans continued to see their pension accounts grow during the financial crisis.
“Providing visible and adequate retirement benefits for their workers remains a high priority for large employers,” says Alan Glickstein, senior retirement consultant at Towers Watson. “As the economic climate improves, we fully expect to see the trend toward account-based plans to continue in the foreseeable future. Employers will be better positioned to take advantage of recent legislative and regulatory changes that make cash balance plans more appealing to them and to their employees.”
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