Move From DB Often Includes Improved DC Offering

Many employers who have followed the trend of moving from defined benefit to defined contribution retirement benefits have also beefed up their DC offering, but it is still not as beneficial to workers as having both plan types.

That was the conclusion of a new Watson Wyatt research paper of the results from a new poll of 300 large employers about their retirement plan designs, a news release said.

Over the past decade, four in 10 respondents swapped out their DB plan for a DC plan as their primary retirement savings vehicle for new hires. More than 75% of those enhanced their DC plan, with 52% opting for the addition of or an increase to a non-matching contribution, Watson Wyatt found.

“With the change in markets and the increasingly diverse workforce, retirement plans have also been in flux,” said Alan Glickstein, senior retirement consultant at Watson Wyatt, in the news release. “Most employers that have changed retirement designs have also enhanced their 401(k)s. The question is whether this will provide enough security for employees to retire when their employers think they will.”

Virtually all surveyed companies (97%) contribute to their employees’ DC plans. Companies that offer new hires only a DC plan contribute, on average, a maximum of 5.82% of pay, including matching and non-matching contributions, the research found.

Employers that offer new hires both a DB and a DC plan contribute an average of 4.4% of employees’ pay to their DC accounts. While employers that have shifted from DB plans to DC plans contribute an additional 1.4% of pay to employees’ DC plans, these additional contributions replace only a portion of the benefit provided by a DB plan, typically valued at 5.5% of pay, according to Watson Wyatt’s COMPARISON, a comprehensive benefits database.

Nearly one-fourth (24%) of surveyed companies adopted a hybrid plan during the last 10 years. Hybrid conversions accelerated in the late 1990s but declined in the early 2000s because of increased uncertainty in the legal and regulatory environment. While, the primary reasons for closing or freezing of a DB plan are cost and volatility; the main reasons for converting to a hybrid plan are employee satisfaction and retention, the report said.

Copies of the report, “Retirement Plan Design: Past, Present and Future,’ can be ordered here.