Biggest Employers Have Moved A Long Way on Retirement

The Fortune 500 listing is often thought of as a pillar of stability, but that description hardly fits the way the world's biggest companies have handled retirement benefits in the last 20 years. 

The last two decades have witnessed a sweeping shift in retirement offerings from large employers, most of whom now provide only defined contribution (DC) and other account-based plans to new salaried hires, according to an analysis from Willis Towers Watson.

The firm analyzed retirement plan offerings to newly hired salaried employees since 1998 among current Fortune 500 companies. Comparing companies on the Fortune 500 list in 1998 to those on the list in 2015, the percentage of employers still offering a traditional, final salary defined benefit (DB) plan to most newly hired employees fell from roughly half (246 companies) to 5% (25 companies).

In 1998, 59% of the Fortune 500 offered some form of DB plan to salaried new hires, and 41% offered only a DC plan. However, the makeup of companies on the Fortune 500 list has changed. Today’s DC-only sponsorship rate is partly attributable to changes in the Fortune 500, as more employers joining the list over the years have never maintained a DB plan as a primary retirement vehicle. Slightly more than half (273) of the employers in this analysis were in the Fortune 500 back in 1998, and 24% of them offered only a DC plan to salaried workers at that time. Traditional DB sponsors have been more likely to remain on the list: 19 of the 24 traditional DB sponsors in today’s Fortune 500 list were also on the list in 1998.

Twenty percent of Fortune 500 employers still offered a DB plan of some type to salaried new hires in 2015, and nearly 70% of those employers offered a cash balance plan (the most common type of hybrid design). At 23%, traditional final average pay plans were the next most popular DB offering.

NEXT: Paths to shifting

Employers often took more than one path to arrive at their current plan structure, the analysis finds. Since 1998, 23% of Fortune 500 employers have frozen their primary DB plan, and 15% have closed the plan to new hires. Twelve percent of employers amended their traditional DB plan to a hybrid design and were still offering these plans in 2015. Two percent of employers terminated their primary DB plan, meaning benefits were frozen and then fully settled via annuity purchases and or/lump sum payments. Nearly half (48%) of these employers have not changed their retirement plan type since 1998, and 40% have been DC-only over the entire period. Only 8% of these Fortune 500 employers retained the same DB structure from 1998 to 2015.

The incidence of pension freezes has risen significantly since the 2008 financial crisis. By 2014, sponsors of a frozen plan outnumbered those with an open primary plan for the first time since 1998. Back in 2009, 21% of plan sponsors had frozen pensions and 21% had closed their primary plan to new entrants. By 2015, 39% sponsored a frozen plan and 24% had closed their primary plan to new hires.

Thirty-four percent of companies sponsoring frozen DB plans had closed their plans at an earlier date before freezing them. Sixty companies have frozen their plans since 2010, and half had closed the plan at an earlier date. This pattern of first closing, then later freezing, has become more common over the past few years: 26 companies have frozen their primary DB pension since 2013, and 65% of these plans were already closed prior to the freeze.

While most shifts from DB to DC plans occurred before 2010, roughly half of the 201 companies that closed their primary DB plan to new hires between 1998 and 2015 have taken further action since 2010. Over the last six years, 35 companies closed their primary DB plan to new entrants, 30 froze an open plan, and 30 froze a plan that had already been closed.

Almost all employers that closed their primary DB plan increased benefits for salaried new hires in the DC plan. The most prevalent approach (54%) was to add a non-matching contribution to the DC plan, meaning the employer contributes whether or not the employee does (similar to cash balance plan pay credits). Seventeen percent of employers increased the match for newly hired employees and also added a non-matching component to their plan design. An additional 11% of employers that kept their primary DB plans open for existing participants increased the match for newly hired workers.

While the shift to a DC-only environment has been widespread, there are variations among sectors, and the analysis found there is a relationship between plan size and pension changes.

More data from the Willis Towers Watson analysis is here.