Retention levels higher for employers with defined benefit plans
A significant number of U.S. employers that still offer defined benefit pension plans are committed to providing those benefits to new salaried employees, according to a survey Towers Watson. The survey also finds that employers are adding features to their defined contribution 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 more than two-thirds (68%) of respondents that currently offer a DB plan to new salaried employees are committed to offering the plan to new hires over the next two to three years. Just over one-third (36%) of DB sponsors currently offer the plan to new employees. The survey also reveals that support for DB plans is strongest at companies that cover the most participants: Among the largest 10th percentile of respondents, 45% still offer a DB plan to new hires.
“Several factors including low interest rates, falling equity values, a deep economic recession with uneven recovery and regulatory and legislative uncertainty have made sponsoring DB plans less attractive to employers over the past decade,” says Alan Glickstein, a senior retirement consultant at Towers Watson. “Yet, despite a vastly changed landscape for retirement plans, the fact that many employers remain committed to DB plans is encouraging, especially since it is more difficult for employees to rely on a DC plan as an effective stand-alone retirement plan.”
Among sponsors’ reasons for offering a DB plan to new hires, more than seven in 10 (71%) respondents cite promoting employee attraction and retention as the key reason, followed by maintaining employee morale, cited by 50% of respondents. The survey noted that only one-fourth of respondents with an active DB plan are not firmly committed to it, and a small percentage (7%) plan to close or freeze the plan over the next two to three years.
The survey also finds 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 DB plans. For example, nearly six in 10 (59%) use auto-enrollment, and about half of those have implemented auto-escalation. Additionally, while virtually all employers offer at least a matching contribution to DC plan participants, more employers (42% now versus 33% in 2007) are providing non-matching contributions.
“Employers that provide DC-only retirement plans recognize they need to increase employee engagement with their plans in order to improve their employees’ retirement readiness. Effective DC retirement plans require that workers understand and take full advantage of them, which is why organizations are moving beyond merely making these benefits available,” says Mike Archer, senior retirement consultant at Towers Watson.
Other key findings from the survey include:
• 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. More than half (54%) of DB plans are hybrid plans, while 46% are traditional plans.
• Over three-fourths (78%) of DB plan sponsors for new hires believe employees value the guaranteed benefits from pensions more than other features, compared with only 50% of DC-only sponsors.
• Additionally, 54% of DB sponsors for new hires believe employees value income throughout retirement, while only 28% 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.