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March 12, 2018
16% of Fortune 500 Companies Offer DB Plans to New Hires; Dramatic Decline Over 20 Years

By Jane Meacham, Contributing Editor

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When a new hire joined a U.S. Fortune 500 company in 1998, there was about a 59% chance he or she would be offered a traditional or hybrid defined benefit (DB) pension. As of 2017, that likelihood dropped to 16% in the same group of employers, according to a new Willis Towers Watson (WTW) retrospective report on large DB plans.

retirement plansThe global benefits consulting firm’s study, released in late February, takes a historical look at the primary retirement plans offered by current Fortune 500 companies between 1998 and 2017, showing how their retirement programs have evolved—and shrunk—over the last 20 years. The study focused on the employers’ largest plan offered to newly hired salaried workers.

In 1998, 238 companies in today’s Fortune 500 offered a traditional DB plan to new workers, compared with 16 of the companies today.

Employers have made the transition to account-based retirement plans in a variety of ways, WTW said in the report. Some closed or froze their traditional DB plans and then moved workers into hybrid pensions, while others transitioned workers to a defined contribution (DC)-only option, sometimes offering a hybrid (cash balance) pension to some along the way.

In total, 25% of Fortune 500 companies have frozen their primary DB plan since 1998, and 15% have closed it, WTW said.

When a plan sponsor freezes a DB plan, some or all benefits stop accruing for some or all participants. For example, WTW said, the plan might stop accruing benefits linked to service but continue those linked to pay. Or benefits might stop accruing for all participants younger than 50 with 15 or fewer years of service. After a sponsor chooses to close a pension plan, benefits continue to accrue for participants but no one else can join the plan.

Shift in Offerings

As most in the retirement plans community know, the last two decades have witnessed a sweeping shift in retirement offerings from large employers, most of which now provide only DC and other account-based plans to newly hired employees.

The move away from traditional DB plans to account balance plans has some positive aspects for an increasingly mobile workforce: more choices, flexibility, and transparency. The phaseout of DB plans also has helped employers manage the costs and risks of providing retirement benefits.

Key Findings

Here are some of the key findings in the study:

  • Fifty-one percent of the current Fortune 500 companies surveyed still employ workers who are actively accruing pension benefits, and, significantly, 93% of those that sponsored a DB plan in 1998 still manage plan obligations and assets.
  • There has been an uptick in plan freezes since the 2008 financial crisis among plans that were already closed to new hires. In 2008, 20% of companies that had offered a DB plan in 1998 had since frozen their pensions, and 19% had closed their primary plan to new entrants. By 2017, 42% sponsored a frozen plan and 24% had closed their primary plan.
  • More than half the pension sponsors in this analysis had a hybrid DB plan at some point, and 44% of them were still offering the same plan to new hires in 2017.
  • Certain industry sectors, as well as employers whose pensions are relatively small (compared withtheir market capitalization) or well-funded, are more likely to offer a traditional pension plan to new hires.
  • After eliminating a DB plan for new hires, most employers contribute more to the DC plan they offer.

Sectors that continue to offer DB plans to new employees include insurance and utilities, the survey found. Some pharmaceutical companies also still sponsor traditional pensions for most salaried new hires. Conversely, the high-technology, services, and retail sectors historically have had low DB sponsorship rates.

Between 1998 and 2017, the survey noted, the most striking uptick in DC-only plan sponsorship occurred in the food and beverage industry, with 79% of the Fortune 500 companies in this business offering a DC plan option.

Jane Meacham is the editor of BLR's retirement plan compliance publications. She has nearly 30 years' experience as a writer/editor of financial services news.

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