Human Capital & Careers

Companies Reap Surprising Benefit

Defined benefit plans may be kinder than defined contribution plans to a company's bottom line.
Michael O'LoughlinFebruary 1, 2000

An unexpected twist, courtesy of a booming stock market: Defined benefit plans may be kinder than defined contribution plans to a company’s bottom line. Although counterintuitive, a study from employee benefits consultant Towers Perrin finds the high-flying market has swelled the coffers of some companies’ defined benefit plans. As a result, pension plans may prove cheaper to maintain than 401(k) plans.

Instead of earmarking future contributions to these pension funds, such companies find they are off the hook–in some cases, for years. Annual savings, according to the consultants, can run into the tens, and even hundreds, of millions of dollars.

The study, which looked at the 28 companies in the Dow Jones Industrial Average that sponsored defined benefit plans, found that in 1998, pension income boosted the operating income of nine companies with overfunded pension plans (versus just six the previous year), an average of nearly 5 percent. The group’s total defined benefit expenses plummeted, from $2.6 billion in 1997 to just $1 billion a year later.

Defined contribution plans, says the study, are pulling down corporate earnings, thanks to the matching contributions most companies must toss into the pot.

But that doesn’t mean companies should abandon their 401(k) plans. The markets are notoriously volatile, warns Gordon Gould, chief actuary in Towers Perrin’s Denver office.

“Companies with strong pension programs aren’t recording a lot of pension expense, because they’re reaping the benefits of a strong capital market and strong equity performance,” says Gould. “With defined benefit plans, companies reap the benefits of good performance. And with defined contribution plans, it’s the employees who reap the benefits of good performance.”