For the first time, the majority of Fortune 100 companies now offer new salaried employees only a defined contribution (DC) plan, such as a 401(k), according to a new analysis by Watson Wyatt, a consulting firm. In another first, more Fortune 100 companies offer hybrid pension plans, such as account-based cash balance plans, rather than traditional defined benefit (DB) plans.
Fifty-five companies in the Fortune 100 offer only DC plans to new hires, a jump from 46 at the end of 2007. The most recent number includes four companies that announced in 2009 they will switch from a DB to a DC-only plan.
“We're entering a new world for retirement benefits,” says Alan Glickstein, senior retirement consultant at Watson Wyatt. “With many current and especially older workers still covered by closed or frozen pension plans, new and younger employees will be the first generation to rely on 401(k) plans exclusively for their retirement savings. It's a big burden for them to carry as recent events have made all too clear.”
Among those companies still offering DB plans, 22 have traditional plans and 23 offer hybrids such as cash balance plans. Cash balance plans reduce volatility for employers while providing more visible benefits for employees than traditional DB plans. Participants in cash balance plans have continued to see their pension accounts go up during the financial crisis in marked contrast to most 401(k) accounts.
“With the economic downturn and full impact of legislative and regulatory changes such as the Pension Protection Act still playing out, we can expect more plan design changes on the horizon,” said Kevin Wagner, senior retirement consultant at Watson Wyatt. “The trend toward account-based plans is likely to continue because of their visibility and transparency. With the exposed weaknesses in 401(k) plans and the ever-present need to manage the workforce, more companies might opt to provide hybrid plans, now seen as a viable alternative to offering only a DC plan. However, to reduce costs, companies might instead continue cutting back on employer-sponsored retirement benefits in general. The two paths will have significant, yet very different, implications for the retirement of millions of workers.”