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CCH® PENSION AND BENEFITS — 8/17/07

Survey shows employers cut defined benefit plans, but added to 401(k) benefits

A new survey shows that in the last two years about two-thirds of traditional, defined benefit pension sponsors have either closed their plans to new hires or froze them for all participants, or plan to do so in the next two years.

The survey, conducted by the Employee Benefit Research Institute (EBRI) and Mercer Human Resource Consulting in the spring of 2007, was designed to gauge defined benefit plan sponsors’ recent activity as well as planned modifications with respect to both defined benefit and defined contribution plan design, and investment behavior within the defined benefit plans. The survey also was able to determine what, if any, increases in employer contributions to defined contribution plans were provided in conjunction with the defined benefit modifications. A total of 162 plan sponsors participated.

401(k) contributions increase

The survey found that the vast majority of employers that have closed their pension plans have also increased contributions to workers’ defined contribution (401(k)-type) plans, and that a large share of those planning new limits on their pension plan also may increase 401(k) contributions. These findings are significant, because they indicate that reductions to workers’ traditional pensions are being at least partially offset by added benefits on the 401(k) side. In addition, employers that are reducing pension benefits are adopting automatic enrollment of their workers in 401(k) plans, which research has shown could significantly increase retirement coverage and savings.

“There are major structural changes under way in the American retirement system, driven mainly by cost and accounting pressures,” said the study’s author, Jack VanDerhei, Temple University and EBRI Fellow. But, he added, it’s not necessarily a zero-sum game for American workers: “There is a clear trend among employers that are reducing their traditional pension benefits to add automatic enrollment in their 401(k) plans and increase the 401(k) benefits for workers whose pensions are affected. Changes are occurring on both sides of the retirement plan ledger—workers’ retirement wealth is being affected both negatively and positively at the same time.”

Plans are often closed or frozen

EBRI data show that among private-sector American workers who have a retirement benefit at work, about 37 percent have a defined benefit pension and 63 percent have a 401(k)-type defined contribution retirement plan. Further survey results show:

• In the last two years, just over 35 percent of the respondents had made at least one change to their defined benefit plan. The most frequent responses were to close the plan to new hires (25.3 percent) or to freeze the plan for all members (12.9 percent).
• Looking forward, just over 33 percent of respondents that had not already changed their defined benefit plan in the last two years indicated they were likely to make a change in the next two years. Again, the most common change was to close the plan to new hires (19.0 percent), while 14.2 percent said they planned to freeze their defined benefit plan for all participants.

Among plan sponsors that closed their defined benefit plan to new hires in the last two years, 78 percent reported they would increase employer contributions to the defined contribution plan, typically a 401(k) plan. For those that plan to close their pension in the next two years, 80.9 percent reported they would increase employer contributions to their defined contribution plan.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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