- Key insight: Here's why hypercompetitive industries are shifting toward market-based cash-balance retirement plans.
- What's at stake: Whether employers can recruit top talent without facing unpredictable pension costs.
- Supporting data: 65% of all U.S. defined benefit plans utilize one specific design.
Source: Bullets generated by AI with editorial review
This is part one of a two-part series on hybrid pension sponsorships. Read
When it comes to haggling over employee benefits, hybrid defined benefit (DB) pensions have taken center stage in recent years as a generous sweetener advisers suggest to their employer clients.
Among employers that sponsor a retirement plan, the U.S. Bureau of Labor Statistics estimated that nearly all offer a defined contribution (DC) plan such as a 401(k), while only about 10% to 15% sponsor a standalone DB plan or one alongside a DC plan. Benefit consulting firm October Three estimates that cash-balance hybrid DB plans comprise about 65% of all U.S. DB plans, with traditional DB plans accounting for the remaining 35%.
Jonathan Price, vice president and national retirement practice leader at employee benefits and human resources consulting firm Segal, credited the United Auto Workers for placing a stake in the ground to elevate the importance of retirement security in labor negotiations. They have prominently emerged in a multiemployer Taft-Hartley environment where trustees can appreciate the value that those plans can offer their members, he noted.
In addition to hypercompetitive industries, cash-balance plans that meld DB and DC features are also popular with small employers, particularly professional services such as medical and law offices and accounting firms, he said.
Most employers that are reopening old plans or opening new ones are using market-based cash-balance plans, Price, observed. One notable exception is JBS Foods, which introduced a brand-new variable annuity hybrid plan in recent years.
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"By making it a market-based hybrid plan, although with a different design than cash balance, they were able to create an income-based plan where the costs are still stable and the benefits are fairly predictable for their workers," he said.
The message that Segal has heard from both public and private-sector clients, as well as multiemployer and single-employer trustees and sponsors, is a greater desire to measure risk and achieve more predictable costs.
Sponsoring a hybrid DB plan is helping recruit and retain highly sought-after talent in hypercompetitive industries such as commercial aviation. For example, Delta Airlines rolled out a market-based cash-balance plan to its pilots in 2023 and Southwest Airlines followed suit a year later.
All unfrozen DB plans have been hybrid plan designs, not traditional pensions, with cash balance leading the way, according to Zorast Wadia, a principal and consulting actuary with actuarial service provider Milliman.
"None have adopted or continued the final average earnings design, which has proved to be very expensive because it's highly leveraged on pay and service," he said.
For maximum tax efficiency and employer costs, an argument can be made that a DB plan is always better than a DC plan because it allows employers to fund the benefit over the working lifetime of the plan participant. He said 5% of pay contribution is going to cost a DC plan 5% of pay, whereas it will likely cost closer to 4% in a DB plan because the amount is spread over a bigger base.
Cash balance's average type pay design isn't heavily influenced by an employee's later years and has a much smoother benefit accrual pattern without the leveraging effects that could be expensive and harmful in an economic downturn, he added.
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Employees that have a DB and DC plan get the best of both worlds in that the former establishes a monthly floor benefit that will not run out while the latter allows participants to invest even more aggressively because of that safety net, Wadia noted.
Better benefits over higher pay
Wadia believes that many working Americans would be willing to accept lower pay increases in exchange for the promise of a DB plan as the cost of living continues to increase and DC plan assets or personal savings simply aren't enough to live on.
"Based on the average account balance for the average American in their defined contribution plan, their DC plan and personal savings isn't going to be enough to see them through their retirement years based on life expectancies," he said. "They need a source of dependable retirement income to live the remainder of their lives in dignity."
Even with the promise of greater financial security, there's no escaping resistance to new ideas in the employer-provided retirement plan space. As with other very different designs and concepts, there was more interest in October Three's O3 Prime three-year-old hybrid pension than actual uptake.
"Nobody wants to be the proverbial first kid on the block to do much of anything," said John Lowell, a partner with October Three.
