Human Capital & Careers

Demise of Defined Benefits: New Evidence

One in five companies will consider providing defined contribution plans only, according to a recent study.
Stephen TaubJanuary 19, 2005

Even as the Bush Administration discusses strengthening the Pension Benefit Guaranty Corp., a growing number of companies are backing away from traditional defined benefit plans.

In a study by Hewitt Associates of nearly 200 large companies, 27 percent said they will consider amending their defined benefit plan to exclude new employees from participation, and 20 percent will consider providing defined contribution plans only.

“Concern over cost volatility and regulatory uncertainty are making pension plans less attractive to employers,” said Lori Lucas, director of participant research at Hewitt. “If the environment doesn’t improve, some employers may find their best course is to limit their future commitment to defined benefit plans. That leaves the 401(k) plan to fill the void — and it’s up to employees to take ownership of their retirement planning.”

The results of the Hewitt survey are consistent with a recent study by consultancy SEI Investments, which found that more than one-third of 100 CFOs at North American companies expect to close their plans to new entrants within the next year.

Indeed, late last year IBM rocked the pension world when it announced that it will no longer offer its pension plan to new employees. And a number of unions at several troubled airlines have agreed to terminate their defined benefit plans to help cut costs and keep their employers aloft.

The shift away from defined benefit plans has been under way for several decades, but the Hewitt survey also underscores the risks of denying individuals a basic pension.

The benefits consultancy found that only 18 percent of the large companies it surveyed feel confident that their employees will retire with sufficient retirement assets. What’s more, just 12 percent feel confident that their employees even understand their retirement benefits and are taking responsibility for their financial future.

“Many employees are just not actively using the retirement programs that are available to them — either it’s not a burning platform, or they don’t feel up to the task. Whatever the reason, companies want to see a change here,” said Lucas. “Because they may not be able to rely on a pension plan to fund their retirement, employees need to make better use of remaining retirement savings vehicles such as 401(k) plans”