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Insurance, utilities sectors buck trend away from traditional pensions to DC plans

The retirement plan landscape is stabilizing as fewer U.S. companies last year moved from defined benefit (DB) plans to offering only a defined contribution (DC) plan to new salaried employees than in any other year over the past decade, according to a new analysis by global professional services company Towers Watson (NYSE, NASDAQ: TW). The analysis also found that a few industry sectors — insurance and utilities — are bucking the trend from DB to DC plans. More than half the companies in these sectors still offer DB and DC retirement plans to new salaried employees.

The Towers Watson analysis found that only 118 Fortune 500 companies (24%) offered any type of DB plan to new hires at the end of 2013, down from 299 companies (60%) 15 years ago. Among these companies, 84 offered a hybrid plan, and 34 offered a traditional plan. While the number of Fortune 500 companies with open DB plans reached a record low in 2013, the number of companies (five) that moved away from DB plans last year is the lowest number that shifted to DC plans in more than 10 years. Moreover, nearly half of Fortune 500 companies that no longer provide DB benefits to new hires still have active employees who are accruing benefits.

While traditional pension plans have taken the hardest hit during the shift from DB to DC plans over the past 15 years, hybrid pension plans have held relatively steady. Half of the employers that sponsored a DB plan maintained a hybrid plan — typically a cash balance plan — during that period. More than half (57%) of employers that established a hybrid plan either before or after 1998 still offered a hybrid plan to new hires in 2013.

 

Retirement plan sponsorship trends, 1998 – 2013*

      1998    

1999

    2000     2001     2002     2003     2004     2005     2006     2007     2008     2009     2010     2011     2012     2013 Total DB     299     296     294     290     285     277     263     242     224     202     185     171     151     139     123     118 plans                                                                                                 Traditional 251 236 228 206 187 169 157 138 125 105 88 75 57 48 39 34 DB plans                                                                                                 Hybrid DB 48 60 66 84 98 108 106 104 99 97 97 96 94 91 84 84 plans                                                                                                 DC plan 195 200 202 206 212 220 234 256 275 297 315 329 349 361 377 382 only                                                                                                

*Numbers indicate plans offered to new salaried hires at the end of each year.

 

“With DC plans steadily becoming the primary retirement vehicle for millions of workers, more responsibility and risk is being shifted to employees,” said Alan Glickstein, senior retirement consultant at Towers Watson. “Employees must increasingly take ownership of managing their own contribution levels, investments and distributions. The move also carries risks for employers, such as having workers delay retirement when market performance is poor, which in turn can result in higher benefit costs and less mobility within their organizations.”

The analysis also found that certain sectors – utilities and insurance, for example – are retaining their pension plans. Among insurance companies, 66% offer a pension and DC plan to new hires while 59% of utilities do so. Additionally, utilities tend to have lower turnover and more long-term career workers than other sectors.

The insurance sector includes mutual insurance companies that are not publicly traded, and these companies face different external pressures and have different objectives from other industries. Additionally, due to the nature of their work, insurance industry employees may be more inclined to understand and appreciate DB plans than workers in other sectors.

The analysis also noted that DB plans are not a one-size-fits-all solution. The high-tech, services and retail sectors have historically had low DB sponsorship rates, and DC plans are likely a better fit for their business needs. In fact, overall DB plan sponsorship for these sectors never exceeded 36%.

“It’s noteworthy that DB plans still serve certain industries and companies well, especially those with particular talent and retention needs. At the same time, the broader shift from DB to DC is helping fuel growing concern over employees’ ability to retire comfortably. As a result, employers will need to carefully consider their overall retirement plan strategies to make sure whatever plans they offer new employees will help them with their retirement readiness efforts and align with their expectations,” said Kevin Wagner, senior retirement consultant at Towers Watson.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at towerswatson.com.

Towers WatsonEd Emerman, +1 609-275-5162eemerman@eaglepr.comorBinoli Savani, +1 703-258-7648binoli.savani@towerswatson.com