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Benefits Column

Benefit Trends Mean Later Retirements

Even though the notion that everyone retired with a gold watch and a pension is a myth, the recent trend of companies shifting from defined-benefit plans will still affect recruiting and retention, as well as corporate loyalty and culture.

Monday, March 20, 2006
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IBM. Verizon. Sears. Hewlitt Packard. ALCOA. The New York Times Co. These are just a few of the firms that have announced a shift from defined-benefit pension plans to enhanced 401(k) plans for workers they hire in the future or, in some cases, for all future accruals for all workers. None of these employers announced terminations of their existing plans. All committed to keeping their promises to pay earned benefits when due.

US Airways and United Airlines have gone further. They have terminated plans and turned them over to the Pension Benefit Guaranty Corporation. The U.S. Senate has passed legislation that would give other airlines special funding rules if they will agree to hard-freeze their plans (so that there are no additional benefit accruals).

Secretary of the Treasury John Snow was asked on CNBC about the decision by IBM to hard-freeze their plans in 2008 and move to an enhanced 401(k). In response, he never mentioned IBM as he stated the administration wanted to assure that employers keep the benefits promises they had made, and that Congress should pass changes proposed by the administration to improve pension-plan funding.

The executive director of the PBGC has stressed that the administration does not care what type of plans employers and unions sponsor as long as all plans are well funded and promised benefits are paid. Because a plan that is turned over to the PBGC is hard-frozen, paying benefits accrued to date can be interpreted as meeting his definition of keeping promises.

Since 1975, PBGC has processed more than 160,000 terminations, in which the plans had sufficient assets -- and less than 3,500 terminations with shortfalls.

The trend away from defined-benefit plans affects more than financial comfort in retirement. It affects recruiting and retention, as well as corporate loyalty and culture. These benefit revisions require employers to completely analyze the planned -- and unplanned results -- of such actions. Workers, too, need to think about the implications of such corporate decisions on their personal lives.

As employers have announced these changes they have commonly identified (1) domestic and global competition, (2) the desire for predictability of cost, (3) new-hire desire for, and understanding of, defined-contribution plans, (4) lack of appreciation for, and understanding of, defined-benefit plans, (5) the desire to end early-retirement subsidies and (6) the desire to keep employees in the workforce longer. Many have also mentioned increased labor-force mobility and the reality of individuals holding many jobs over their adult lives.

The notion that in the good old days everyone retired with a gold watch and a pension after a full career with one employer is a myth. At the height of that era, fewer than 25 percent of private-sector retirees received pension checks.

But, the rules were quite different before legislation of the '70s and '80s. Also, with vesting periods of 15 or more years, high unemployment relative to today and very high availability of new labor-force entrants, it made perfect sense for employers to seek to retire workers who had spent full careers with the company.

Now, with very low unemployment, very low availability of new labor-force entrants, and the desire to keep many workers working longer, HR executives are finding that new plan designs make sense -- particularly for an employer with high rates of new-product innovation, short product lifecycles and competitors that already rely on defined-contribution plans.

The last five years have seen a small change in work patterns for our oldest workers, as more are working longer.

The workforce -- even if it once believed the gold watch and pension myth -- no longer does. Recent surveys suggest that even workers who have defined-benefit pension plans are getting worried about the future. Will the employer stay in business? Even if it stays in business, will it keep the pension plan and continue to accrue employee benefits?

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Trust. Concern. Greater acknowledgement of an individual's need to have accumulated savings in case concerns turn into reality.

A number of media companies have been at the leading edge of the movement away from traditional final-pay early-retirement-subsidy defined-benefit plans for years, affecting the attitudes of reporters and financial columnists. Having experienced benefit-plan conversions or cutbacks themselves, which the reporters felt had hurt them financially, reporting on conversions and cutbacks has sometimes taken on an adversarial or editorial tone.

There are sectors of the economy that have evaluated whether or not they should follow the movement away from defined-benefit plans and have concluded that they should not. Some have very long product-development cycles and need to be certain to retain their researchers and keep them focused on research. It's desirable for such employers to maintain a good pension and retiree health insurance and to provide a secure retirement.

Others maintain a focus on growing most of their talent internally and keeping people with the firm. For employers that have switched to 401(k)s, or never had a defined-benefit plan, and never contributed large amounts to a defined-contribution plan, it may be decades before they know if they made the right decision for purposes of workforce management.

Mobility in those segments of the labor force in which there never were defined-benefit pensions was always higher than for those in which such pensions were offered.

Higher mobility may become a self-fulfilling prophecy in a world of recognized individual responsibility. Longer work lives are sure to follow, pulled by later Social Security normal retirement ages, lower Social Security benefits, higher Medicare premiums, less employer-based retiree health insurance, and other trends.

Working forever or taking individual responsibility will be the common options as the true implications of an ownership society sink in. 

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