Data & Research May 24, 2012

Sponsors of Active DB Plans Remain Committed

A significant number of employers that still offer defined benefit (DB) pension plans say they remain committed to providing those benefits to new salaried employees.
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A Towers Watson survey of 424 midsize and large U.S. employers with DB plans found that more than two-thirds (68%) of respondents that currently offer a DB plan to new salaried employees remain committed to offering a DB plan to new hires over the next two to three years. More than one-third (36%) of respondents currently offer a DB plan to new employees. The survey also found support for DB plans is strongest at companies that cover the most participants: among the largest 10th percentile of respondents, 45% still offer a DB plan to new hires.   

When asked why they are committed to offering a DB plan to new hires, more than seven in 10 (71%) respondents cited promoting employee attraction and retention as the key reason, followed by maintaining employee morale, cited by 50% of respondents. The survey noted that only one-fourth of respondents with active DB plans are not firmly committed to their DB plan, and a small percentage (7%) plan to close or freeze their plan over the next two to three years.  

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“[D]espite a vastly changed landscape for retirement plans, the fact that many employers remain committed to DB plans is encouraging, especially since it is more difficult for employees to rely on a DC plan as an effective stand-alone retirement plan,” said Alan Glickstein, a senior retirement consultant at Towers Watson. 

 

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The survey also found employers are adding features to their defined contribution (DC) plans that mirror features of DB plans. Nearly six in 10 (59%) respondents use automatic enrollment, and about half of those have implemented automatic escalation, which typically increases the employee contribution annually. Additionally, while virtually all employers offer at least a matching contribution to DC plan participants, more employers (42% now versus 33% in 2007) are providing non-matching contributions.   

“Effective DC retirement plans require that workers understand and take full advantage of them — which is why organizations are moving beyond merely making these benefits available,” said Mike Archer, senior retirement consultant at Towers Watson.   

Other key findings from the survey include: 

  • Hybrid plans, primarily cash balance plans that combine features of 401(k) plans and traditional pension plans, are now the most prevalent type of DB plan for new hires. More than half (54%) of DB plans are hybrid plans, while 46% are traditional plans. 
  • More than three-fourths (78%) of DB plan sponsors for new hires believe employees value the guaranteed benefits from pensions more than other features, compared with only 50% of DC-only sponsors.  
  • Additionally, 54% of DB sponsors for new hires believe employees value income throughout retirement, while only 28% of DC-only sponsors do. 

The Towers Watson survey, “Pensions in Transition: Retirement Plan Changes and Employer Motivations,” was conducted from October to December 2011. More information is here. 

 

Data & Research May 23, 2012

Key Drivers of Retirement Readiness Include Working with Advisers

Those who are best prepared for retirement are most likely to work with a financial adviser, according to the Putnam Lifetime Income Score.

 

 

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It is one of a number of steps participants can take to improve their readiness for retirement and increase their confidence in their ability to make financial decisions. Robert Reynolds, Putnam’s chief executive, pointed out that lifetime income is only partly about actual income.

“Any 401(k) plan participant scores the same as people with household incomes of $175,000,” Reynolds said at a Putnam forum, “Health, Wealth and the Future of Retirement.”

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Reynolds called the rapidly rising poverty of senior Americans and the projected shortfall in Social Security trust funds “deeply disappointing developments.”

“We have to have healthy public systems, of course, and very healthy private systems,” Reynolds said.

The company’s survey of nearly 4,000 working Americans indicates that a critical factor in retirement readiness continues to be savings behavior. The best-prepared are active participants in a workplace savings plan, deferring at least 10% of income and using the services of a financial adviser. These workers indicated higher confidence in their ability to make financial decisions.

The decision to work with an adviser also had a material impact on Lifetime Income Scores, Reynolds said. Those who worked with an adviser had scores of 89 this year (a rise from last year’s score of 82), while those who did not work with an adviser scored 58 (a drop from last year’s score of 61).

The research examined behavioral tendencies, mortality factors, retirement and non-retirement assets, such as home equity, investment securities, annuities and cash value life insurance, to estimate the level of income that U.S. households are currently on track to replace in retirement.

 

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