Under the pension change, current employees over age 40 have the choice of remaining in Sears' defined benefit pension plan or participating in the company's new, enhanced 401(k) plan. They also could remain in the defined benefit plan and participate in the company's former 401(k) plan. New employees and current employees who are under 40 can participate only in the enhanced 401(k) plan, under which the company's matching contribution will be increased.
"We are going to actually match $1.50 for each dollar they put in up to 1% and then $1 for each dollar after that contributed up to 4% of pay," the spokesman explained.
Vesting requirements are also increasing to three years from one year for 401(k) plan participants.
Sears would not disclose how many employees would be affected by the change, but according to the Money Market Directory, the company's defined benefit plan had 231,000 members at year-end 2000. And according to Hoover's Inc., Sears had 289,000 employees at year-end 2002.
Sears' move did not come as a surprise to benefits experts, who say many companies are dropping their defined benefit plans because of recent investment losses that have resulted in many plans becoming underfunded, forcing employers to boost their contributions.
Although over the past 10 years the average return on defined benefit plans' long-term investments has averaged between 9% and 9.5%, "a number of organizations are rethinking the commitment to the defined benefit promise," said Kevin Wagner, retirement practice director for Watson Wyatt Worldwide in Southfield, Mich.
"The problem has been the volatility. You went from a period of time where a lot of companies, through the application of accounting rules, were generating accounting income," he said. "Companies are now generating substantial accounting expense as a result of the plans being underfunded because of the drop in interest rates and asset values," he noted.