Traditional company pensions are going away fast

Nine years ago, Devon Group, small PR and marketing group based in Middletown NJ, began offering a traditional pension plan to its employees. Business was booming, and costs of offering the benefit "seemed very reasonable," says Jeanne Achille, Devon CEO. A pension plan also provided some valuable tax benefits for the firm. But after the economy deteriorated last year, "We realized this was going to be too rich a benefit for us to continue," she says. "You're required to fund the plan every year, regardless of whether your profits are where you'd like them to be." Rather than continue funding the plan, Devon Group voluntarily terminated its pension & sent each employee a check for the amount accrued. The number of companies offering traditional defined benefit pension plans was shrinking even before the recession, but the downturn has accelerated the decline. Since the beginning of the year, at least 20 companies froze their defined pension plans, exceeding the number of plan freezes for all 2008. A recent survey by Watson Wyatt found that, for the 1st time, the majority of Fortune 100 firms are offering new salaried employees only one type of retirement plan: a 401k or similar "defined contribution" plan. The rapid disappearance of traditional pensions comes at a time when workers saw their retirement savings eviscerated by the bear market. The average 401k balance dove 27% last year, according to Fidelity Investments. While young workers have time to make up the difference, workers in their 50s & 60s will have a hard time recovering losses before retirement. "The market collapse has just proven how fundamentally flawed 401(k) plans are as a vehicle to provide retirement income," says Karen Friedman, policy director for the Pension Rights Center. But increasingly, employees can't rely on traditional pensions, either. Reasons they're endangered:
• Declining profits. In late April, Lockheed Martin said its 1st-Q earnings fell 8.7% because rising pension costs outweighed an increase in sales. The defense contractor plans to continue its pension plan for existing participants, it said. But some plan sponsors fear they'll have to close plants or take other drastic actions unless they lower their pension costs, says Lynn Dudley, senior vice president, policy, for the American Benefits Council, a trade group for companies that offer employee benefits. Freezing a plan, she says, "is better than laying people off."
• New funding requirements.
Investment losses in 2008 shrank the assets of the nation's largest pension plans to 79% of projected liabilities, down from 109% at the end of 2007, according to Watson Wyatt. At the same time, pension plan sponsors are facing stricter funding requirements to strengthen the long-term health of pension plans. The requirements, combined with the investment losses, are forcing companies to shovel more money into their pension plans at a time when they can least afford it, says Dena Battle, Dir. of tax policy for the National Assn. of Manufacturers. "The cost of that is jobs, reduction in capital expenditures, a reduction in benefits, and unfortunately, that includes plan freezes," she says.
NAM and other groups representing plan sponsors are pressing lawmakers for temporary relief from the funding rules. So far, Congress hasn't acted. Some Democratic lawmakers and pension-rights advocates have proposed tying funding relief to a guarantee that a company won't freeze its pension for at least five years. "If we do give employers more time to fund their plans, there should be something employers promise in return," Friedman says. Battle says companies wouldn't accept such conditions because they'd limit their ability to manage their businesses. In addition, she says, forcing companies to continue offering a pension would set a dangerous precedent, because this nation's employer-sponsored retirement system has always been voluntary. Concerns that taxpayers could be on the hook for underfunded pension plans could also complicate efforts to ease the funding requirements.
On Wednesday, the Pension Benefit Guaranty, which insures pensions for 44M retirees, reported a $33.5B deficit for the 1st 1/2 of fiscal 2009, up from $11B in fiscal '08. The shortfall, the largest in the agency's 35-yr history, can increase dramatically if the agency is forced to take over pension obligations for GM & Chrysler. The PBGC says it has enough money to cover current liabilities.
• Competitive pressures. Even if Congress approves funding relief, some companies may go ahead & freeze their plans because their competitors aren't offering pensions, says Scott Jarboe, senior retirement consultant in for Mercer, a HR consulting firm. Health insurance giant Cigna, which announced this month it will freeze its pension July 1, said its retirement package was "significantly higher" in value than plans provided by its competitors. "While the company continues to be financially stable, making this change will improve our competitive cost position," Cigna said.
• Lack of interest. When Devon Group adopted a traditional pension, the company thought it was offering a valuable benefit for its employees, CEO Achille says. But she soon learned that young job candidates were more interested in a 401(k) plan, because they assumed they would change jobs several times during their careers. The company plans to offer a 401(k) plan later this year. Company 401(k) plans offer "visibility and portability," says Alan Glickstein, senior retirement consultant at Watson Wyatt. "Everyone understands what an account is worth. With a traditional defined benefit plan, it's hard for employees to really understand their value." However, huge losses in 401(k) plans -- readily apparent to anyone who looks at an account statement -- could change employees' attitudes toward traditional pensions, says Norman Stein, professor at the University of AL School of Law & a pension expert. In this environment, he says, "It shouldn't be a tough sell to get employees to say these are actually pretty valuable plans."
Older workers hardest hit
When a company freezes its pension, employees get to keep the benefits they've already accrued, but they usually won't earn any more. That makes pension freezes particularly hard on older employees, who have less time to make up the difference by saving more. In addition, traditional pensions are worth a lot more at the end of your career than at the beginning of your career, Friedman says. "If the freeze comes in your 40s & 50s, you end up with a much smaller benefit." John Gaz, 46, a flight simulator technician for Delta Air Lines, saw his pension frozen in 2005. While the company upped matching contributions to his 401(k) plan, Gaz says he'll never be able to contribute enough to make up for the loss of his benefits. Gaz plans to leave his job at Delta at age 52, the first year he'll be eligible to draw money from his pension. "I will walk away from the airline industry, because there's nothing to keep me here anymore," he says. In the past, most pension freezes were accompanied by improvements to the company's 401(k) plan. But in these tight-fisted times, that's no longer the case. Retail chain Talbots froze its traditional pension this year and also suspended matching contributions to its 401(k) plan. Similarly, Boise Cascade froze its pension plan for salaried employees and suspended matching contributions during the 1st-Q.
While 401(k) plans are considered less costly than traditional pensions, they're not immune from cutbacks in tough times. Since the beginning of the year, more than 200 employers have reduced or suspended contributions to their 401(k) plans, according to the Pension Rights Center.
Hybrid pensions could be coming
The cutbacks in 401(k) matches and pension freezes reflect companies' struggles to survive during extraordinarily difficult economic times, Glickstein says. And with unemployment approaching 9%, he says, "People aren't going to be haggling over benefits if they can keep their job." But he says he's not ready to write the obituary for pension plans.
When the economy recovers, he predicts, more companies will consider adopting a cash-balance pension plan, a hybrid pension that combines features of a 401(k) plan & a traditional pension. These plans can play a valuable role in encouraging older workers to retire, an important part of workforce management, he says. Millions of workers are postponing retirement because they're afraid they can't afford to stop working. "If people can't leave when they're ready to leave & you're ready to have them leave," Glickstein says, "that's an issue."