The shift from defined benefit plans to 401(k)s has been swift and dramatic, but here’s a stat that should still garner attention.
According to Towers Watson, between 1998 and 2015, the percentage of employers still offering a traditional defined benefit plan to most newly-hired employees fell from roughly 50 percent to 5 percent.
Additionally, and as one might expect, there has been an uptick in plan freezes and closings since the 2008 financial crisis, according to a new report from the firm that analyzed retirement plan offerings to newly hired salaried employees among Fortune 500 companies..
The move away from traditional pensions has been fueled by several factors, including a desire to better manage retirement costs, a more mobile workforce, the simplicity of account-based designs, government and accounting regulations, market trends and global competition.
The result?
“[W]orkers who experience a loss of guaranteed retirement income may not exit the workforce in a timely fashion—an outcome that traditional pensions were at least partly designed to avoid. Such counter-cyclical workforce trends could necessitate increased severance pay, raise benefit costs and reduce mobility within an organization.”
Highlights (or lowlights, depending on one’s viewpoint) of the analysis include the following:
- In 2015, only 20 percent of Fortune 500 companies offered a DB plan (traditional or hybrid) to salaried new hires, down from 59 percent among the same employers back in 1998.
- There has been an uptick in plan freezes and closings since the 2008 financial crisis. In 2009, 21 percent of these employers sponsored frozen pensions, and the same percentage had closed their primary DB plan to new entrants. By 2015, 39 percent of sponsors had frozen a DB plan, and 24 percent had stopped offering their primary DB plan to new hires.
- The recent uptick in freezes has been among plans that were already closed to new hires.
- Half of the pension sponsors in this analysis adopted a hybrid DB design for their salaried new hires at some point, and 50 percent of them were still offering the same plan to new hires in 2015.
- Certain industry sectors, as well as employers whose pensions are relatively small (as compared with their market capitalization) and/or well-funded, are more likely to still offer a traditional DB plan to new hires.
- When pension accruals in the primary DB plan end, most employers then contribute more to the DC plan to at least partially make up for it.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
this is a near 85% reversal of what existed in the 70’s to a pitiful state today. And sadly much of those savings are going to the privelidged few at the top and in the board rooms. this will breed a generation of people who are un prepared to meet retirement and thereby lower our countrys standard of living which had become the envy of the world.