Survey: Lots of Changes Underway at DB, DC Plans

January 22, 2004 ( - US companies are exploring a number of alternatives in an effort to stem their pension costs, while still being able to attract and hang onto quality workers.

A survey of 242 employers by Mercer Human Resource Consulting and Mercer Investment Consulting found that the focused search for strategy options is being driven by volatile markets and low interest rates that have made it all the more difficult to properly fund defined benefit (DB) plans. Unstable defined contribution (DC) account balances just complicate the picture even further, Mercer said.

Not surprisingly, most companies polled said they already have, or would be, altering their plans. Some 96% reported changing one or more of their retirement programs within the last three years or said they are contemplating future changes in the benefit structure. Among the alterations: increasing or restructuring matching 401(k) contributions, freezing DB accruals, closing DB plans to new entrants, and cutting out or reducing the level of employer-paid retiree medical benefits.

Many of the changes were on the DB side with 38% of the respondents changing their DB plan within the last three years. The most common move (by 26% of those who made changes) was a shift from a traditional plan to a hybrid plan (for example, a cash balance plan).

Other moves included:

  • increasing or decreasing the plan’s benefit formula
  • changing the definition of compensation for benefit calculation purposes
  • freezing the plan to cease benefit accruals for current employees
  • closing the plan to new entrants.

Nearly half of current DB plan sponsors said they are considering these and other plan changes, Mercer found.

Althogh the survey found significant interest in hybrid plans, it was fielded prior to the recent court decision that found IBM’s cash   balance and pension equity plans in violation of ERISA age-discrimination rules (See Murphy’s Law: IBM Loses Cash Balance Ruling ).

At the same time six in 10 respondents altered their DC plan within the last three years. The most common move (by 68% of those who made changes) was the introduction of catch-up contributions.

Other changes included:

  • increasing the limits on employee elective deferrals
  • increasing matching contributions or adding a discretionary match
  • decreasing or eliminating/suspending the matching contribution.

Some 37% of current DC plan sponsors are considering plan changes.

Company Stock

When it comes to their investment options, 44% of respondents offer company stock as a DC plan investment option. Among these employers, 74% make the investment of employee contributions in company stock optional, while just 1% make it mandatory. Among the same group of employers, 45% make the investment of employer contributions in company stock optional, while 37% mandate it for at least a portion of the employer’s contribution.  

During the past year, many employers have liberalized participants’ rights to diversify out of the company stock fund: 29% with regard to employer contributions and 8% for employee contributions.

Twenty percent of responding DC plan sponsors changed their investment fund lineups within the past 12 months. Among these, 7% added a lifecycle funds program and 9% added a stable value fund or program. Overall, half of the sponsors include a lifecycle funds program in their plan’s investment lineup.

Mercer said DC plan sponsors face increased scrutiny these days. “With the continuing uncertainty about equity markets and increased scrutiny of retirement plan governance practices, DC plan sponsors are under mounting pressure to take a hard look at their investment fund lineups to make sure they remain appropriate,” said Jeff Schutes, who heads defined contribution consulting in the US for Mercer Ivestment Consulting. “They’re also under pressure to make a higher level of investment education and advice available to their employees.”

Advice Usage

A quarter (24%) of respondents offer their employees a customized investment-advice program. The programs cover such issues as investment diversification, long-term savings strategy, economics and market conditions, company stock investments, and distinctions between DB and DC plans. While the utilization rates for these programs tend to be low – less than 25% on average – utilization has been rising. One-third of respondents reported they would try to drive up plan utilization through a specal awareness campaign.

Finally, more than half of the respondents (56%) that provide retiree medical and prescription drug coverage made changes to these plans during the past three years. These changes included: increasing eligibility requirements; increasing drug plan copayments/coinsurance/deductibles; implementing tiered drug plans; raising medical payments/coinsurance/deductibles; and increasing contribution requirements for retirees and/or dependents.

The report, Survey on Retirement Programs: Coping with the Economy, is available  here .