Retirement Plans Morphing as Defined Benefits Fade for New Workers

Media company Journal Communications Inc. announced in October 2010 that it would freeze its defined benefit retirement plan for new employees while restoring and enhancing the match to its 401(k) plan.

In the wake of the freeze, Milwaukee-based Journal Communications, which owns newspaper, television and radio stations, including the Milwaukee Journal Sentinel and Journal Broadcast Group, in January began matching half of every employee-contributed dollar up to 7 percent of pay. The media chain had suspended the 401(k) plan match in 2009, which at the time had been half of every dollar contributed, up to 5 percent of pay.

“Our decision to focus on the 401(k) as the primary retirement vehicle provides us with greater certainty regarding the cost of our ongoing retirement benefits,” says Andre Fernandez, Journal Communications’ executive vice president, finance and strategy and chief financial officer. “Additionally, the increase in the employer match is structured to reward greater levels of employee savings.”

Journal Communications is following a trend much larger corporations have been setting for more than a decade: closing defined benefit plans to newly hired workers.

As of May 31, less than a third of Fortune 100 companies offered a defined benefit plan to new employees, data from the July research publication Towers Watson Insider showed. In 2010, 37 percent of Fortune 100 companies offered defined benefit plans to new employees, while 43 percent had them in 2009, and 47 percent offered them in 2008.

It’s a stark contrast to the corporate benevolence of less than a decade ago when 83 percent of the Fortune 100 companies provided defined benefit plans to new hires in 2002. Several issues are contributing to the decline, says Alan Glickstein, a senior consultant with Towers Watson & Co. in Dallas.

Like Journal Communications, many companies say they want more control over their retirement costs. A more mobile workforce that hops from job to job also is demanding account-based designs; combining this with stricter funding rules makes this retirement vehicle less attractive for many employers to provide, he says.

Today, 70 percent of the Fortune 100 offer account-based defined contribution plans—such as 401(k)s—to new employees, Towers Watson data show.

“Right now these [defined benefit] plan sponsors have been through a lot” in a bad economy, Glickstein says. “Long term though, defined benefit plans exist for a reason. They are a very effective way of providing retirement benefits and managing the workforce.”

Defined benefit plans are facing huge challenges in the current economy to keep a healthy funded status, says John Ehrhardt, principal and consulting actuary in the New York office of Milliman Inc. According to Milliman’s latest Pension Funding Index, 100 of the nation’s largest defined benefit plans took a $6 billion investment loss and a $62 billion increase in pension liabilities in July—the largest decline so far in 2011.

Yet most companies today appear to be in good financial shape, Ehrhardt says. Today, the latest available cash piles for nonfinancial companies in Standard & Poor’s 500 stock index are at $1.06 trillion, compared with $748 billion for companies in the same index in the second quarter of 2008, New York City-based research firm Capital IQ data show.

When the financial crisis hit, many companies didn’t have the cash needed to make up for investment losses.

Ehrhardt didn’t think there would be a rush to freeze or close plans to new hires as was the case in 2009 as the recession took hold.

“Companies today, in general, are in a lot better shape than the stock market is,” Ehrhardt says. “I don’t think we’re going to see the rash of plan freezes as we have in the past because these companies kept their plans for a reason.”

But with fewer defined benefit plans among Fortune 100 companies, defined benefit pension advocates such as Karen Friedman, executive vice president and policy director for the Washington, D.C.-based Pension Rights Center, are concerned with how other companies, like Journal Communications, are reacting.

“If companies continue to drop defined benefit plans, it is adding to our retirement crisis,” Friedman says. “Companies know what the competition is doing. If one bar gets lowered, then other companies will feel like they can lower their bar.”

Glickstein sees the steady decline as an opportunity. Cash balance plans, which are a type of defined benefit plan that have a lot of a defined contribution features, might grow once the Internal Revenue Service finalizes the amount of interest that can be credited to employees’ accounts.

A table created by Towers Watson shows cash balance plans aren’t losing traction as quickly as traditional plans. From 2002 to present, 18 Fortune 100 companies dropped a cash balance plan while 35 companies moved away from traditional defined benefit plans in that time frame.

Companies that like traditional defined benefit plans may shift to cash balance instead of switching to defined contribution plans, Glickstein says.

“In many cases, the desire to move away from traditional defined benefit does not necessarily mean moving away from defined benefit period,” he says. “We believe there is much more demand for cash balance and what’s holding [plan sponsors] back is” the IRS rule.

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