Hewitt: Legislative Inaction Could Force Out DB Plans

January 6, 2004 (PLANSPONSOR.com) - If lawmakers do not move fast on defined benefit issues such as interest rate reform, employers may opt to move away from the traditional pension plan.

Plan sponsors are nervous about the uncertainty in the defined benefit market going into 2004. One third of the 200 companies canvassed by Hewitt Associates said their top concern surrounding pension plans was cost volatility, which was followed by the level of overall costs (19%) and cash balance litigation and regulatory uncertainty (13%).

The uncertainty though could have the largest impact on participants and how they plan on retirement.Nearly 40% of the companies polled said they will freeze theirpension plans or provide future benefits through a 401(k) planif Congress does not come through with temporary interest rate relief, a proposal that has been mired in bureaucratic mud since 2003’s proposals failed to clear both the US House of Representatives and Senate (See Congress Adjourns Without Passing Pension Relief Bill ).

Of those 21% indicated a desire to move to a defined contribution plan and 17% said they would provide retirement benefits to current defined benefit plan participants, but would switch all new employees to a defined contribution option.

Despite pondering other options, 45% of the survey sample says they will take a wait-and-see approach.

“The defined benefit plan has long been a cornerstone of American retirement security, but the US pension system is eroding, and it will continue to do so unless congressional or regulatory action is taken to shore it up,” said Mike Johnston,

Hewitt’s North American practice leader for its Retirement and Financial Management Practice in a news release. “Employers would find it most helpful for Congress to clarify its intent by rationalizing funding rules and by giving them reassurance about the viability of cash balance plans.”

Cash Balance Concerns

Away from the legislative uncertainty, ambiguity surrounding legal proceedings also cast a shadow of doubt on the future of cash balance pension plans. Nearly one third of employers (31%) indicate they will freeze their cash balance plans if current legal and accounting issues surrounding them aren’t resolved in the coming year. Only 11% said they would provide future accruals under a traditional defined benefit plan. Similar to interest rate reform, 44% are taking the wait-and-see approach.

“While a significant majority of employers have indicated a willingness to wait for legal guidance regarding cash balance and hybrid plans in the short term, their patience is limited, and these plans could be at risk over the long term,” said Johnston in the news release. “Employers can’t continue to offer these plans if the environment doesn’t improve. Unfortunately, employees will feel the impact as they potentially lose a retirement benefit in the near future.”

Copies of Hewitt’s study, “Current Retirement Plan Challenges: Employers’ Perspectives,” are available from the Hewitt Information Desk, which can be reached at (847)295-5000 or by email at infodesk@hewitt.com.