Why Are Healthy Companies Freezing Pension Plans?

Trend: Individuals must assume more responsibility for retirement savings as corporations reduce benefit expenses.

Kim Snider summarizes the new brief by the Center for Retirement Research focusing on healthy companies freezing pension plans.

Link: Kimmunications: Why Are Helathy Companies Freezing Pension Plans?

Healthy companies with well funded pension plans are freezing those plans and replacing them with defined contribution plans.

Already in 2006, Coca-Cola, Nissan, IBM and Alcoa have frozen their plans. In 2005, Verizon, Sprint, Lockheed Martin, and Hewlett Packard, among others, did the same. A new brief by the Center for Retirement Research looks at why these healthy employers are freezing their pension plans and the impact on American Workers.

The brief offers four possible explanations:

The first is that some U.S. companies are cutting pensions to reduce workers’ total compensation in the face of intense global competition.

The second explanation is that employers have been forced to cut back on pensions in the face of growing health benefits to maintain existing compensation levels.

The third explanation, by contrast, points to the finances of the plans themselves — specifically, their market risk, longevity risk, and regulatory risk that make defined benefit pensions unattractive to employers.

The final explanation is that with the enormous growth in CEO compensation, traditional qualified pensions have become irrelevant to upper management who now receive virtually all their retirement benefits through non-qualified plans.

Each of these explanations contains a kernel of truth, and they all help explain the current trend.

The report concludes:

This change has an immediate adverse effect on mid-career workers, and, even though younger workers do not recognize it, the shift will probably mean that many young workers will end up with an inadequate retirement income. For, while 401(k) plans are fine in theory and could even be superior for the mobile employee, they transfer too much of the responsibility to the individuals and individuals make mistakes at every step along the way. Median 401(k)/IRA balances in 2004 were only $35,000 in 2004 according the Federal Reserve Board’s most recent Survey of Consumer Finances.

There are more than enough explanations for the new trend. A desire to control compensation costs, the pressures of rising health care outlays, the confluence of economic, demographic, and regulatory risks, and the emergence of a two-tier pension system all make the sponsorship of defined benefit pension plans relatively unattractive. Moreover, the genie is out of the bottle. Given that the employer-sponsored pension system is a voluntary arrangement, nothing is likely to stop other healthy companies from following suit and closing down their defined benefit plans.

Comments

[Kim Snider]

Thanks for the link and I enjoy your blog. I guess I should probably fix the spelling mistake in the title, huh?