Study: DB Plans Continued Vanishing in 2005

May 3, 2006 (PLANSPONSOR.com) - The steady disappearing act by traditional defined benefit pension plans continued full steam in 2005 according to a new consultant study.

A news release from Watson Wyatt said that its analysis of FORTUNE 100 companies found that 37% offered a traditional pension plan to new hires in 2005, compared with 42% in 2004 and 50% three years ago.

That is down a staggering amount from two decades ago when, in 1985, nearly nine out of 10 FORTUNE 100 companies had a DB plan, Watson Wyatt said.

Also continuing during 2005 was the steady growth of employers turning to a 401(k) or another type of defined contribution program, the study found. The percentage of companies offering workers only a DC plan jumped from 25% in 2004 to 36% in 2005. That is significantly up from 36 months ago when 17% offered just a defined contribution plan.

“As Congress considers a major rewrite of pension laws and the marketplace sorts out the best way to handle employee retirement programs, the defined benefit system finds itself at a very critical stage,” said Sylvester Schieber, director of US benefits consulting at Watson Wyatt, in the news release. “Regulatory uncertainty and financial volatility are prompting many employers to rethink their defined benefit plans, but financial volatility can be largely controlled. Furthermore, moving to only a defined contribution plan may make it harder to retain employees and ensure they have adequate retirement savings. Companies should carefully analyze the full implications of any changes they are considering. Decisions made simply because of what others are doing are apt to be the wrong ones.”

The Watson Wyatt analysis also found that employers are moving away from hybrid pension plans, generally cash balance and pension equity plans. Only 27% had a hybrid plan in 2005, compared with 33% in 2004. Until 2002, hybrid plan adoption was on the rise, but legislative and regulatory challenges have stymied their growth, according to Watson Wyatt.

“It’s unfortunate that some employers are dropping their hybrid pension plans,” Schieber said, in the news release. “Hybrids can be a win-win, offering employers a way to avoid the financial volatility of traditional defined benefit plans while ensuring that employers, not employees, retain the investment risk.”

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