Retirement used to be simple. After decades of hard work and loyal
service, retirees received gold watches along with pensions that
promised a secure, comfortable future. A study released this month
shows, however, that nearly two-thirds of companies surveyed are moving
away from traditional, or defined-benefit, pension plans.
In the past two years, one-third of employers offering traditional
pensions have either closed them to new hires or frozen them for all
participants, according to the study released by the Employee Benefit
Research Institute and Mercer Human Resource Consulting. Over the next
two years, another third are looking to close or freeze their pensions,
the survey indicated.
"We knew this was going to happen. We just didn't know to what extent,"
said Jack VanDerhei, author of the study and a business professor at
Temple University. "I think all of us were shocked by how big the
numbers are."
The study highlights a major shift in strategy -- from defined-benefit
plans such as pensions, in which employees are promised a certain level
of compensation (often based on salary level and years of employment),
to defined-contribution plans, typically 401(k) plans. Already, 63
percent of private-sector American workers who have a retirement benefit
receive it in the form of a defined-contribution plan, according to EBRI
data.
"It is data that we've confirmed for the last decade," said Nancy
Griffin, state director of AARP Indiana. "Defined-benefit pensions are
just going away." The bottom line is that the risk associated with
investing retirement money now falls increasingly to employees, rather
than employers.
But, human-resources experts say, the change doesn't come without
benefits for workers."I've met plenty of folks who thought they had a
pension waiting for them, and at the end of the day they didn't," said
Steve Kellam, president of Quantum Human Resources and co-director for
legislative matters for the Indiana State Council of the Society for
Human Resource Management.
As employees change jobs more often, Kellam said, defined-contribution
plans such as 401(k)s generally offer better portability. "You end up
with more control and a lot more knowledge about what's there for your
future," he said.
Companies that freeze pension plans generally do not leave workers
empty-handed, the study showed.
In fact, 78 percent of companies that have frozen pension plans in the
past two years also have increased their contributions to employees'
defined-contribution benefits.Many of these companies also have adopted
an automatic- enrollment policy for defined-contribution benefits so
that employees must opt out, rather than opting in.
The study identifies several potential causes for the shift away from
defined-benefit plans. One is the Pension Protection Act of 2006, which
requires companies with underfunded pension plans to correct the problem
-- a potentially massive expense for employers.
Several pending accounting rule changes, from the Federal Accounting
Standards Board, also are causing companies to rethink pension plans.
"The volatility, if you invest in stocks, is much more likely to hit the
employers' bottom line if these accounting standards are modified than
under the current situation," VanDerhei said.
Those who plan to retire soon probably won't notice much change in their
benefits, VanDerhei said. The real impact will be on younger workers who
are just beginning to build retirement nest eggs. "The ball's going to
be almost entirely in their court," he said.
