If the employees of UAL Corp. want to continue their defined benefit pension plans, they should pay for them.
Employee contributions are virtually unheard of for corporate defined benefit plans. In United Airlines' case, such a move might accomplish several goals:
• Save UAL's pension plans, if the airline emerges from bankruptcy;
• Save the Pension Benefit Guaranty Corp. from the financial burden of having to take over the plans — which had $6.96 billion in assets and $12.65 billion in accumulated pension liabilities as of Dec. 31, according to UAL's 10-K filing — if they are ultimately terminated;
• Bolster efforts to save defined benefit plans at other airlines because a United termination could lead to terminations of plans at other airlines faced with competitive cost pressures;
• Improve the company's credit rating by avoiding some cost of financing its defined benefit program; and
• Give employees a greater sense of ownership of their retirement program and, perhaps, improve employee relations.
Granted, having employees contribute to a corporate-sponsored defined benefit plan would change the way such plans are funded. Corporate plans, with few exceptions, are non-contributory, while most public plans require employee contributions for a portion of the total cost.
Pension regulations now make it difficult for corporate sponsors of defined benefit plans to seek employee contributions, in part because of administrative and record-keeping complications. Also, tax rules make it disadvantageous for employees, because contributions would be made on an after-tax basis. Employees, however, can make pretax contributions to 401(k) plans.
But why shouldn't there be a simple way for employees to contribute to their defined benefit plans? After all, contributory plans were common in the 1950s and 1960s before the development of deferred arrangements, which ultimately culminated in the 401(k) plan.
Legislative reforms could level the playing field of defined benefit and 401(k) plans in terms of tax-deductible contributions.
"Employees prefer to contribute to 401(k)s where contributions are made (on a) before-tax" basis, said Stephen A. Robb, senior vice president, Aon Consulting, Chicago.
"Employees would not have such a heavy burden if they could deduct contributions to defined benefit plans," said Edward H. Friend, president, EFI Actuaries Inc., Washington.
"This sounds like the answer to the problems," Mr. Friend said, supporting employee contributions and referring to the continuing movement by corporations to eliminate their defined benefit plans in part because they are "a costly component to the corporate budget."
Corporate sponsors and employees should lobby Congress to eliminate the barriers to employee contributions, and to make appropriate changes to administrative and tax rules. They also should appeal to Congress to address the issue of portability of defined benefit plans, which would improve their value in a dynamic work force.
Congress might be open to such changes, trading off the loss to the government of tax revenue, if it could help avoid further terminations of defined benefit plans and keep liabilities from further burdening the PBGC.
Employee unions might be against making such contributions, as witnessed by their battles over contributions to medical plans. But non-union employees might be more interested.
Defined benefit plans are valuable to employees, enabling them to count on a certain benefit level. Employees ought to support making contributions to those plans.