The latest annual survey of Fortune 100 companies’ retirement plan types confirms the familiar shift to defined contribution plans by most of the largest U.S. firms. As of 2012, 70 of the Fortune 100 companies offered only DC plans to new, salaried employees. Just 11 still offer a traditional defined benefit pension plan to new hires, a complete flip from the way retirement benefits were offered three decades ago.
This year’s installment in the study of Fortune 100 retirement plan trends global consulting firm Towers Watson has conducted since 1985 attributed the continued move from traditional DB plans to either account-based DB plans, hybrid plans or DC plans to the following factors:
- employers’ desire to reduce overall retirement costs;
- perceptions that workers prefer more portable plans;
- market trends; and
- the belief that such a shift reduces financial risk for the plan sponsor.
“Employers are spreading their retirement dollars more evenly across the workforce, rather than concentrating benefits on older and longer-tenured workers,” said the report, which was released in October.
To illustrate the magnitude of the change in types of plan offerings, the report said that at the end of 1998, 90 of the Fortune 100 companies still offered a DC plan and some sort of DB benefit, either a traditional or hybrid (account-based pension, typically cash balance) plan.
A traditional DB plan provides an annual income at retirement defined by a formula that generally relates to pay and years of service. The value of benefit accruals is typically back-loaded, meaning benefit values increase faster as participants near retirement. As such, traditional DB plans are meant to encourage valuable workers to spend most of their productive careers with the employer. Gradually, however, the employer focus changed to providing more uniform retirement-directed capital accumulation for all workers, prompting many companies to freeze or close their traditional DB plans, according to the Towers Watson report.
Beyond the reasons noted above, the report said changes in retirement plan offerings are attributable to shifts in the sector makeup of the Fortune 100 over the last 20 to 30 years. For example, 30 years ago, most Fortune 100 companies were in manufacturing, and that sector typically offered traditional pension plans to new hires. By now, high-technology companies — most of which never offered DB retirement plans — have replaced these manufacturing companies in the group.