Study: Two-Thirds of Employers to Keep Defined Benefits Plans for New Hires

New York — May 24

A significant number of U.S. employers that still offer defined benefit (DB) pension plans say they remain committed to providing those benefits to new salaried employees, according to a survey by global professional services firm Towers Watson.

The survey also found that employers are adding features to their defined contribution (DC) plans that mirror DB design to help close possible savings gaps created by the shift from DB to DC plans.

The Towers Watson survey, based on responses from 424 midsize and large employers with DB plans, found that 68 percent of respondents that currently offer a DB plan to new salaried employees remain committed to offering a DB to new hires over the next two to three years. About 36 percent of respondents currently offer a DB plan to new employees.

The survey also found that support for DB plans is strongest at companies that cover the most participants: Among the largest 10th percentile of respondents, 45 percent still offer a DB plan to new hires.

When asked why they are committed to offering a DB plan to new hires, 71 percent of respondents cited promoting employee attraction and retention as the key reason, the study said, followed by maintaining employee morale, which was cited by 50 percent of respondents.

The survey noted that only one-fourth of respondents with active DB plans are not firmly committed to their DB plan, and just 7 percent plan to close or freeze their plan over the next two to three years.

The survey also found that employers — recognizing the need to help employees save for and feel more secure about retirement — are adding features to their DC plans that mirror features of DB plans.

For example, nearly 60 percent of respondents use automatic enrollment, and about half of those have implemented automatic escalation — which typically increases the employee contribution annually.

Additionally, while virtually all employers offer at least a matching contribution to DC plan participants — 42 percent now, vs. 33 percent in 2007 — are providing non-matching contributions.

Also, Hybrid plans — primarily cash balance plans that combine features of 401(k) plans and traditional pension plans — are now the most prevalent type of DB plan for new hires, according to the study. About 54 percent of DB plans are hybrid plans, while 46 percent are traditional plans.

Over three-fourths (78 percent) of DB plan sponsors for new hires believe employees value the guaranteed benefits from pensions more than other features, compared with only 50 percent of DC-only sponsors, the study said.

Additionally, 54 percent of DB sponsors for new hires believe employees value income throughout retirement, while only 28 percent of DC-only sponsors do.

Other Towers Watson research shows a growing number of employees are willing to pay more from each paycheck to ensure a guaranteed retirement benefit.

Source: Towers Watson