Corporate defined benefit plans could be becoming more of a headache than they are worth.
According to a December survey of 100 chief financial officers by SEI Investments, Oaks, Pa., 34% of respondents plan to close their pension plans to new members within the next year because they're too much of a burden on the company's balance sheet. Each CFO surveyed oversees an average of $344 million in defined benefit or cash-balance assets. The survey is timely, as IBM Corp. recently became the latest large corporation to switch to a 401(k) plan. The survey was released after IBM announced the move.
One of the biggest burdens is volatile contribution levels. About three-quarters of the CFOs — 76% — cited the unpredictability as the largest factor affecting their plans' funding levels. Additionally, 62% of the CFOs said their pension plans have lowered their companies' overall gross profits.
Nearly 30% of respondents said their pension plans negatively affected cash flows. Additionally, 10% of CFOs also said their pension plans have negatively affected their companies' credit ratings.
"What we're basically seeing is the pension tail wagging the corporate dog," said Jim Morris, senior vice president of SEI's Retirement Solutions unit, in an interview. Mr. Morris said U.S. companies must do more to factor pension accounting into their other corporate financial practices. "For example, a company with headquarters oversees that operates a pension plan in the U.S., they might consider using their U.S. dollar-based profits to contribute to their pension plan, rather than kicking it up to their parents. Obviously, a dollar is worth a dollar here," he said.
Mr. Morris also said companies must examine their funding statuses quarterly or perhaps even monthly, rather than annually, as the government requires.
