Verizon move seen as new blow to DB funds

STAMFORD, Conn. — Verizon Communications Inc.'s announcement that it will freeze its $39 billion cash balance plan for management employees is being called the latest nail in the coffin for defined benefit plans.

"Another one bites the dust. They're the latest company to decide that a pension plan is too darn expensive to maintain," said Rick Meigs, founder of 401khelpcenter.com, Portland, Ore., a website dedicated to 401(k) plan information.

Verizon's announcement last week that it will freeze the plan on June 30 will affect 50,000 management employees, about 25% of the work forces.

In an e-mail to employees announcing that the cash balance and subsidized retiree medical plans would be frozen, Ivan Seidenberg, chairman and chief executive officer of Verizon, said: "These changes will provide us with a more affordable benefit cost structure…. This restructuring reflects the realities of our changing world. Companies today, including many we compete with, are not adopting defined benefit plans or subsidized retiree medical benefits. We must ensure that we remain competitive."

Company officials tried to lessen the blow by also announcing they are boosting the company match in Verizon's $15.7 billion 401(k) plan.

Effective July 1, Verizon will raise its company match to $1 for every dollar employees contribute up to 6%, said spokesman Bob Varettoni. In addition, Verizon will raise its match to $1.50 if the company reaches certain financial targets, said Mr. Varettoni. The current match is $1 for every dollar up to 5%.

Mr. Varettoni said the restructuring will save Verizon $3 billion over the next decade.

William Heitmann, chief executive officer, and William Raver, chief operating officer of Verizon Investment Management Corp., which oversees the retiree plans, declined to comment. But industry participants aren't surprised by the Stamford-based company's move.

Michael Francis, president of investment consultant Francis Investment Counsel LLC, Hartland, Wis., said: "DB plans are largely on their way out as an effective benefit plan in corporate America … mostly because of cost and uncertainty."

"We have a handful of clients that are on their way to figuring out whether to freeze a plan," Mr. Francis said.

Jim Morris, senior vice president of retirement solutions for SEI Investments, Oaks, Pa., said Verizon — like many plan sponsors — thinks its defined benefit plan is no longer affordable or no longer fits with employee demographics.

SEI released a paper last week about the impact of freezing a defined benefit plan. The paper concluded that freezing a plan changes, but doesn't eradicate, market risk. Nor does it make it more controllable or predictable, Mr. Morris said. The report said pension executives must identify their risks and goals before freezing a plan.

"There are many plan sponsors that froze their plans and thought they were done — that they capped their liability. Many of them are in worse shape because they failed to connect that they need a new process. The frozen plan is still subject to risk and some are underfunded. A frozen plan needs to be managed as actively as an active plan," Mr. Morris said.

Mr. Varettoni declined to say if either the cash balance plan or the 20-option 401(k) plan would undergo any investment changes. The cash balance plan uses 24 money managers; $9.5 billion is managed in-house. The 401(k) plan is managed by Fidelity Institutional Retirement Services, Boston.

David Wray, president of the Profit Sharing/401(k) Council of America, Chicago, said Verizon came up with "a very substantial DC plan with a strong match."

"That match would put them in the top 98% of companies," said Mr. Wray. "Verizon is giving employees a shot at a very significant balance when they retire."

Mr. Meigs agreed. "The positive part in all this is the match. It's a very rich plan and employees should be very happy."

But Dallas Salisbury, president and chief executive officer at the Employee Benefit Research Institute, Washington, said companies that shift to defined contribution plans intend to save money and increase flexibility for employees, but that flexibility comes at a price.

"In this kind of transition, people clearly end up with losses," he said. "For those in the plan that is going to be frozen — those that have been at the company for a significant period of time and have another 10 working years left — won't have much to gain from a 401(k) plan," he said.