Corporate pension plans mark sad milestone

Corporate America's move away from defined benefit plans hit a dubious milestone: For the first time since Pensions & Investments began listing the largest U.S. retirement plans, not a single corporate name appears in the ranking of the 10 largest defined benefit plans.

General Motors Co., Detroit, was the final company to make the top 10. But GM transferred $29 billion to a group annuity in the fourth quarter of 2012. As a result, its DB assets fell to $73.5 billion as of Sept. 30, ranking it 12th.

The previous year, GM ranked seventh, with $101.9 billion.

The corporate-less top 10 is the inevitable result of a retirement plan landscape that has changed drastically in the past 30 years, when P&I began providing rankings of the largest defined benefit and defined contribution plan assets.

Thirty years ago, four corporate plans were among the 10 largest defined benefit plans: GM; American Telephone & Telegraph Co.; International Business Machines Inc.; and General Electric Co.

At that time, A&T had the most assets of any U.S. pension plan — corporate, public, union or miscellaneous — with $53.9 billion as of Sept. 30, 1983.

It was the last time a corporate plan would lead the ranking, thanks to the U.S. government-mandated breakup of the company into eight baby Bells the following year.

IBM fell from the top 10 in 1988; GE, in 1991. After its breakup, AT&T remained in the top 10 until 1996, when the company split again, into three separate companies with three separate plans.

Many separate, and yet intertwined, events in the 1980s led to the new corporate retirement plan reality that created for the first time a top 10 with no corporate plans.

The 401(k) plan was born in the early 1980s and by 1984, there were just more than 17,000 such plans in the U.S., with total assets of $91.75 billion, according to the Employee Research Benefit Institute, Washington. By 1990, assets climbed to $385 billion and by 1996, $1.06 trillion.

This year, as of Sept. 30, P&I data show the 1,000 largest U.S. retirement plans have a total of $2.7 trillion in DC assets, of which $652 billion is in 401(k) plans.

Before the 401(k) plan, the profit-sharing plan was the defined contribution plan of choice and made up a small fraction of U.S. retirement plan assets. In 1982, for example, the 25 largest profit-sharing plans in P&I's universe had a total of $13.4 billion in assets, less than GM had in DB assets. Profit-sharing assets were soon dwarfed by those in 401(k) plans. In an interview for this article, Dallas Salisbury, president and CEO of EBRI, cited the guaranteed investment contract as one of the first drivers in the growth of 401(k) plans.

The GIC was particularly attractive in an era of high interest rates, “offering as much as 14% guaranteed for 15 years,” Mr. Salisbury said.

According to a survey by Hewitt Associates, by mid-1985, the average 401(k) participant had 38% of his or her assets in GICs. Equity mutual funds and employer stock were next, with 19% each (P&I, Oct. 19, 1998).

Mr. Salisbury also said the rise of the 401(k) plan had its roots in the Reagan administration's preference for individual accounts.

“Reagan administration proposals beginning in 1982 were set up to reduce tax preferences for plan sponsors and increase them for individual retirement accounts,” he said.

Among the laws the administration backed was the Federal Employees Retirement Act of 1986, which created a three-legged retirement system for federal employees to replace the traditional defined benefit Civil Service Retirement System: Social Security, a new defined benefit plan and a defined contribution plan called the Federal Retirement Thrift Savings Plan.

The Feb. 23, 1987, issue of P&I stated the TSP would “one day boast the largest pool of assets of any in the United States, possibly the world.” Today, the plan is by far the largest in the U.S., with $375 billion in assets as of Sept. 30, according to P&I data.

By establishing a combined defined benefit-defined contribution retirement plan structure for its own workforce, the federal government essentially endorsed that kind of structure for corporations, according to Mr. Salisbury.

Another piece of legislation that led to the rise of 401(k) plans was the Tax Reform Act of 1986, which overhauled vesting, integration and coverage rules for defined benefit plans. As a result, many newer, smaller employers eschewed traditional pension plans in favor of 401(k) plans.

That law precipitated an editorial in the Oct. 13, 1986, P&I titled “Defined benefit plans slowly dying.” It warned that companies that find themselves exposed to an alternative minimum tax provision in the law would avoid the problem by abandoning DB plans.

The dire warning was all too true.

Corporations already had been wary of defined benefit plans because of some of the requirements of the Employee Retirement Income Security Act of 1974. Now tax reform, as well as Financial Accounting Standard 87, which required pension liabilities be shown on the balance sheet, made corporations even more cautious.

Further budget acts in 1986 and 1987 — restricting the tax exemption of senior management's pension plans and adding other costs — increased corporations' desire to move from defined benefit plans.

The impact of all these changes became clear in the late 1980s and early '90s.

By 1993, the top 10 defined contribution plans, already led by TSP — which had accumulated $19.5 billion by that point — represented a total of $98.3 billion in P&I's survey.

Eight of the 10 largest DC plans were corporate, while that year only two of the top 10 DB plans were corporate plans.

Five years later, in 1998, the top 10 DC plans accounted for a combined $220 billion in assets; now, they have a combined $650 billion.

Meanwhile, corporations are increasingly freezing their defined benefit plans as corporate financial executives became more sensitive to the risk of market volatility following the tech bubble recession and Great Recession and how it affects liabilities.

Many corporations are doing their utmost to get out of defined benefit plans.

As of Sept. 30, DC plans account for 32.1% of the top 1,000 U.S. retirement plan assets, up from 23.2% in 1993.

While DB plans still account for the majority of retirement plan assets, it is the DC plan that is the future.

“The real change (to DC from DB) has to do with cost” of DB plans, said David C. John, senior strategic policy adviser at the AARP Public Policy Institute, Washington, “and the fact was that the DB plans ended up — through no conscious fault of anyone — being much more expensive than anticipated, and that's partly due to the fact of market volatility, partly due to the fact of longevity changes that weren't anticipated and partly due to the way that benefit promises were made.”

The main problem, according to Mr. John, however, is whether DC plans can provide participants with the kind of retirement security pension plans provided.

“There is a very real question as to whether or not the people of, say, my daughter's age — she's 27 — whether she is going to see the same kind of retirement security her grandfather had,” Mr. John said. “It's a democratization, but a democratization with significant gaps and holes.”

“I think that this debate, particularly in corporate America, has become very detached from workers and retirees,” said Karen Friedman, executive vice president and policy director at the Pension Rights Center, Washington.

“It's sort of a colorless conversation about pension liabilities just being something to wipe off the books, and we need to put the flesh and blood of what they need in the conversation.”