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CCH® PENSION AND BENEFITS — 4/9/08

Employers turning to hybrid plans, DC plan enhancements, Wyatt finds

During the past 10 years, over forty percent of large employers have closed or frozen their defined benefit plans and replaced them with defined contribution plans, according to a survey released by employee benefits consultant Watson Wyatt. During the same period, nearly one-fourth of the surveyed employers have modified their defined benefit plans into hybrid plans.

The survey of 300 large employers conducted by Watson Wyatt found that three-quarters of the employers made some enhancement to their defined contribution plans, now their main retirement vehicle for new hires, after closing or freezing their defined benefit plans. The enhancement usually took the form of introducing or increasing a non-matching contribution.

While employers that have shifted from defined benefit plans to defined contribution plans contribute an additional 1.4 percent of pay to employees’ defined contribution plans, these additional contributions replace only a portion of the benefits provided by a defined benefit plan, typically valued at 5.5 percent of pay, according to Watson Wyatt. In order to maintain the retirement security offered under defined benefit plans, many employers are converting their traditional defined benefit plans to hybrid defined benefit plans (e.g., cash balance plans).

Hybrid conversions accelerated in the late 1990s but declined in the early 2000s because of increased uncertainty in the legal and regulatory environment, according to Watson Wyatt. “With recent regulatory and legal changes, hybrid plans will only continue to grow in popularity,” said Kevin Wagner, senior retirement consultant at Watson Wyatt. “As companies search for portable, cost-efficient and secure vehicles to deliver retirement benefits that fit a changing workforce, hybrid plans have become an increasingly attractive option.”