Young Workers Craving Defined Benefit Plans

Ed Willis, assistant vice president of compensation and benefits for Union Pacific Corp., recently ran into a new employee in the company’s lobby. She had just graduated from college, and Willis wanted to talk with her about the company’s defined benefit retirement plan and what it would offer her over time.

Her response? “She said she knew exactly what it was,” Willis says. “There are so many kids like her who are focused on saving.” When Willis travels to some of the colleges where the Omaha, Nebraska-based railroad company recruits, prospective candidates often want to know whether a defined benefit plan is available, even if they don’t completely understand the details. “They’ll ask questions about it, and they know the difference between a pension plan and a 401(k),” Willis says.

Union Pacific sees its defined benefit plan as an employee retention tool. The plan’s cost is worth the value it provides in retaining well-trained employees, Willis says. “We have made cost trade-offs in other benefit areas that keep our total benefits plan value competitive.”

At a time when defined benefit or pension plans are growing scarcer, they have become a more potent recruiting and retention tool. Clearly, employees still value the security the retirement plans promise, based on the results of a recent Towers Watson & Co. survey. In the report, 80 percent of employees at companies with defined benefit plans said they intend to stay until retirement compared with 62 percent of workers at organizations with defined contribution plans.

Perhaps most striking is the appeal of traditional pension plans to younger employees. In the Towers Watson study, nearly two-thirds of workers under 40 said defined benefit plans are a key factor in their decision to stay with their companies compared with only a quarter of those with defined contribution plans.

Defined benefit plans promise a monthly annual benefit upon retirement that is typically derived from a formula based on an employee’s age, years of service and final salary. The employer bears the burden of funding and investing the assets in the plan. In contrast, defined contribution plans require employees to contribute part of their pretax income. The employee typically invests the assets, and the employer can choose to match a portion of the worker’s contribution.

Particularly as companies “move out of this recession and into more of a hiring mode, retirement benefits are becoming a factor for employees,” says David Speier, senior retirement consultant in Towers Watson’s Arlington, Virginia, office. “I think younger individuals are looking at their parents and seeing the struggles they are going through—having to delay retirement—and are reacting.”

But traditional pension plans are harder to find these days. In 2010, only 17 of the Fortune 100 companies sponsored such plans compared with 89 in 1985, a Towers Watson analysis showed. On the other hand, 58 of the Fortune 100 companies offered defined contribution plans last year, compared with only 10 in 1985.

Cost, increased regulation and the recession are among the reasons companies have been dropping defined benefit plans. Last December, General Electric Co. announced the end of its defined benefit plan for new employees. Workers hired after Jan. 1, 2011, will have a defined contribution plan.

While many companies have phased out traditional pension plans and established 401(k) plans for new employees, UPS Inc. decided to hang onto the defined benefit concept and established a cash balance plan. Such plans look and feel like 401(k) plans, but are a defined benefit. The employer makes a contribution that is usually based on a percentage of the employee’s compensation and sets a specific interest rate for earnings each year. The interest credit is a guaranteed rate and doesn’t hinge on market fluctuations, so employees can’t lose money. The defined benefit concept “was an important feature to total compensation,” says Justine Peddle, UPS retirement and financial portfolio manager.

While cash balance plans have come under scrutiny in the past, the Internal Revenue Service released rules last October to help clarify some uncertainty—namely the interest rate that employers use to credit cash balance accounts.

A spokeswoman says UPS changed the plan because of cost, as well as employees’ desire for both security and portability. As with all cash balance plans, employees who meet UPS’ vesting requirement can take their accumulated benefit if they leave the company.

Workforce Management, March 2011, p. 16 — Subscribe Now!