WASHINGTON — Employers are slowing the pace of replacing traditional defined benefit plans with defined contribution plans as they anticipate conversions to hybrid plans, according to Watson Wyatt executives.
Watson Wyatt Worldwide Inc., Washington, in an annual analysis of retirement plan sponsorship among Fortune 100 companies, found that 54 employers in 2007 offered a DB plan to newly hired workers, down from 58 in 2006 and 63 in 2005. But it’s a long way from the 74 companies that offered DB plans to new workers in 2004, and the smaller declines in the number of companies converting to DC plans show the trend is slowing down.
“The stampede to the exit is slowing down” and will continue to slow, said Kevin Wagner, a senior retirement consultant at Watson Wyatt.
Of the 54 DB pension plans sponsored by Fortune 100 companies, 28 are traditional plans and 26 are hybrids, such as cash balance plans. Most companies that sponsor a DB plan also offer their new employees a DC plan.
The rate of change slowed after passage of the Pension Protection Act of 2006, which established a more supportive environment for hybrid DB plans, Mr. Wagner said.
Companies with defined benefit plans that were converted to cash balance in 2007 include: PacifiCorp, Portland, Ore.; Dow Chemical Co., Midland, Mich.; and FedEx Corp., Memphis, according to documents filed with the Securities and Exchange Commission.
The PPA protects new cash balance plans from age-discrimination lawsuits but imposes tougher burdens on traditional defined benefit plans, such as speeding up the time period in which companies must amortize deficits and requiring companies to make additional contributions to at-risk plans.
But with proposed hybrid plan regulations not expected to be made final until 2009, it could take several years to see the full effect, Mr. Wagner said.
“It’s clear that the pace of which large plan sponsors are getting out of a DB environment is decreasing. The reason you’re seeing that is that the hybrid plans work really well,” he said.
Watson Wyatt executives found that more than 38% were motivated by enhancing employee perception and worker attraction and retention, and one-third of the plan sponsors that converted their traditional DB plan to a hybrid plan did so to reduce costs or cost volatility.
“In fact, as companies evaluate what the new rules mean for them, we could very well see a renewed commitment to hybrid and other DB plans,” said Alan Glickstein, a senior retirement consultant at Watson Wyatt.
Mr. Wagner agreed that conversion to cash balance plans is a continuing story. Some plan executives, however, still choose to convert from a traditional DB plan to a 401(k) plan, he said.
Other consultants have looked at the trend. According to data from Hewitt Associates LLC, Lincolnshire, Ill., 68% of companies Hewitt surveyed offer defined benefit plans. Of those, about three-quarters provide a traditional DB plan, and slightly more than a quarter provide a hybrid plan. Additionally, 15% of those offering traditional DB plans were considering conversion to a hybrid plan. Hewitt surveyed 130 companies of varying size at the end of 2007.
The market is making hybrid plans more attractive, Watson Wyatt’s Mr. Wagner said.
“A lot of employers recognize the realities of globalization — that they’re not a cradle-to-grave employer and you need different types of (retirement) programs. Companies have grown to really like the flexibility of cash balance plans,” Mr. Wagner said. “I think we will continue to see movement from traditional DB plans to cash balance.”
Contact Jenna Gottlieb at [email protected]
