With employers shifting away from defined benefit (DB) plans to more cost-effective defined contribution (DC) plans new employees may not have as much at retirement. However, many employers are doing what they can to compensate for the loss.
According to Watson Wyatt, 40% of the 300 large employers surveyed have switched to a DC plan from a DB plan for new hires during the last 10 years.
Companies are making these changes due to the costs of maintaining DB plans, and market volatility. “With the change in markets and the increasingly diverse workforce, retirement plans have also been in flux,” says Alan Glickstein, senior retirement consultant at Watson Wyatt. “Most employers that have changed retirement designs have also enhanced their 401(k)s. The question is whether this will provide enough security for employees to retire when their employers think they will.”
More than three-quarters of the companies surveyed that have closed their DB plans to new hires made changes to their DC plans. A significant change made by 52% of employers is the introduction of non-matching contribution or increased non-matching amount.
Companies who offer new employees both DB and DC plans contribute, on average, a maximum of 4.41% of pay to the DC plan. Those who have closed their DB plans to new employees contribute an additional 1.4% of pay to DC plans to make up the difference. However, the value of these contributions is still less than the value of a typical DB plan.
Despite the emerging trend to shift to a DC-only environment, the majority of companies still offer DC and DB plans to new full-time employees. Also, 59% of these companies say they are committed to offering them in the future as well.
Some companies have been able to stay committed to DB plans by taking an alternative approach and converting to a hybrid plan. In fact, 24% of the companies surveyed have gone to a hybrid plan during the last 10 years.
“As companies search for portable, cost-efficient and secure vehicles to deliver retirement benefits that fit a changing workforce, hybrid plans have become an increasingly attractive option,” says Kevin Wagner, senior retirement consultant at Watson Wyatt, adding that recent regulatory and legal changes will make these plans more popular.
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