DB Closures Generally Paired with DC Improvements

Although a majority of defined benefit plan sponsors have either closed the plan to new hires or frozen it for all participants in the last two years, most of those sponsors have also bettered their 401(k) offering.

A news release from the Employee Benefit Research Institute (EBRI) said a survey of 162 plan sponsors EBRI conducted with Mercer Human Resource Consulting found that about two-thirds have cut back their DB program or plan to do so in the next two years. At the same time, the vast majority of employers closing their pension plans have also upped their defined contribution plan payments.

According to the news release, just over 35% of the respondents changed their defined benefit plan in the last two years with 25.3% closing it to new hires and 12.9% freezing it completely.

Just over a third that had not already made a DB change indicated they were likely to do so in the next 24 months. The most common planned change was to close the plan to new hires (19%), while 14.2% said they planned to freeze their defined benefit plan for all participants.

Meanwhile, among those that closed their defined benefit plan to new hires in the last two years, 78 reported they would increase employer contributions to the defined contribution plan. For those that plan to close their pension in the next two years, 80.9% reported they would step up their DC payments at the same time.

EBRI data show that among private-sector American workers who have a retirement benefit at work, about 37% have a defined benefit pension and 63% have a 401(k)-type retirement plan.

The news release said automatic enrollment in 401(k) plans is popular among many defined benefit plan sponsors. Of those sponsors that have already closed the pension plan to new hires, 59% have adopted automatic enrollment features in the 401(k) plan, as opposed to 42% of those that have not.

Of those sponsors that will close the plan to new hires in the next two years, 61% have adopted automatic enrollment features, compared with 39% of those that do not plan to close the plan in the next 24 months.

Pension plan sponsors say the driving forces behind these benefit changes are new funding requirements in the Pension Protection Act of 2006 (PPA) and/or new and pending accounting rules by the Financial Accounting Standards Board (FASB), the survey showed. The news release said that changes are expected to dramatically increase the cost and risk of offering a pension benefit.

The results of the spring 2007 survey are at http://www.ebri.org/pdf/EBRI_IB_07-2007.pdf.