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Cover | Published in July 2006

Collateral Damage

By Randy Myers | July 2006
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Despite a seemingly inexorable decline in the number of defined benefit retirement plans, a fair number of employers operate plans that continue to thrive

Despite a seemingly inexorable decline in the number of defined benefit retirement plans, a fair number of employers operate plans that continue to thrive

Thanks to their volatile and sometimes onerous appetite for cash—and the availability of cheaper-to-fund 401(k) plans—the number of defined benefit pension plans offered by private employers in the US has shriveled dramatically since the mid-1980s, from 112,000 to about 30,300. With so many employers convinced that defined benefit plans no longer make sense, it must have seemed strange to colleagues of Shapiro, Lifschitz and Schram Managing Partner Steven Schram when, several years ago, he started to push for a defined benefit plan for their Washington law firm. Schram prevailed, though, and, in 2000, his firm got its new pension plan.   As it turns out, it was not alone. A report from the Hudson Institute, a public policy research organization, reveals that, from 1988 through 2004, the number of pension plans offered by firms with one to 24 employees actually has increased by 7%, while the number offered by firms with 25 to 99 employees increased by 11%.

Traditional pension plans may be down in numbers, but they are hardly out. Even as troubled automakers and airlines struggle to keep their plans afloat—and blue-chip icons like International Business Machines and Motorola shift their benefit focus to defined contribution designs, thousands of employers remain committed to making them work. For some, especially small professional firms like Shapiro, Lifschitz and Schram, the goal is to accrue richer retirement benefits than a defined contribution plan could offer. For others, like Gloucester, Massachusetts-based seafood company Gorton's, or GuideOne Insurance in Des Moines, Iowa, the programs continue to be viewed as a valuable tool for attracting and retaining workers.

"We work with clients who have frozen their plans if they have gotten into financial ­difficulty, but we also work with lots of financially healthy companies across a variety of industries that are still committed to defined benefit plans," says Elizabeth Hammond, director of actuarial services for Wells Fargo Benefits Consulting. Larry Zimpleman, president of retirement and investor services for insurance company and plan administrator Principal Financial Group, adds: "[Defined benefit plans remain the] most efficient form of retirement plan we have today, and the most effective for rewarding valued, long-term employees.

Both factors remain important in the eyes and minds of a good-size group of employers."

Of course, appreciating what a defined benefit plan can do for your company and its employees, and finding a way to afford it, are two different matters. Industry experts legitimately can debate whether a defined contribution plan is cheaper to administer than a defined benefit offering, but there is little question that offering a defined benefit plan that yields meaningful pension benefits for retirees costs more to fund than a typical 401(k) plan where the employer kicks in 3% or so of an employee's salary. "Realistically, if employers were able to contribute somewhere between 5% and 6% of payroll, they could have reasonably attractive defined benefit plans," says Zimpleman. "If they were able to get it up to the 8% or 9% range, they would have very adequate plans."

Therein lies the rub for many defined benefit proponents—comparing the costs of a defined benefit plan that yields "meaningful benefits" with the costs of a defined contribution program whose design may be "typical" but, nonetheless, likely would fall well short of a comparable "meaningful benefits" test.

It is, however, the measure of benefits that defines the essence of a defined benefit plan, and the ensuing costs to employers of providing those benefits has continued to escalate, even as the proportion of retirees to workers tilts—not in favor of those workers that employers want to attract and retain, but toward workers who no longer are active workforce participants. Consider that, in 1985, according to the Pension Benefit Guaranty Corporation, which insures private pension plans, only about 28% of participants in single-employer defined benefit plans were inactive.

Today, they account for approximately 50% of all plan participants.

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