The last two decades have witnessed a sweeping shift in retirement offerings from large employers, most of whom now provide only defined contribution (DC) and other account-based plans to new salaried hires. The move away from traditional pensions has been fueled by several factors, including a desire to better manage retirement costs (both level and volatility) — perhaps due to higher compensation and benefit costs elsewhere, especially health care — a more mobile workforce, the simplicity of account-based designs, government and accounting regulations, market trends and global competition.

When DC plans are the primary retirement vehicle, responsibility and risk are transferred from employers to employees, who must manage their own contribution levels, withdrawals, investments and retirement distributions. Most of those working in the private sector for large employers will retire with less secure income guarantees than earlier generations, many of whom had traditional defined benefit (DB) plans. Even workers who make sensible saving and investing decisions could still come up short at retirement due to financial market downturns and/or poor timing.1 For employers, the transition carries other risks. For example, workers who experience a loss of guaranteed retirement income may not exit the workforce in a timely fashion — an outcome that traditional pensions were at least partly designed to avoid. Such counter-cyclical workforce trends could necessitate increased severance pay, raise benefit costs and reduce mobility within an organization.

Willis Towers Watson has analyzed retirement plan offerings to newly hired salaried employees since 1998 among current Fortune 500 companies. This analysis takes a historical look at the primary retirement plans offered to salaried workers by these large employers as well as the ways they have transitioned workers from a traditional DB plan environment into today’s account-balance retirement world.2

Highlights of the analysis include the following:

  • In 2015, only 20% of Fortune 500 companies offered a DB plan (traditional or hybrid) to salaried new hires, down from 59% among the same employers back in 1998.
  • There has been an uptick in plan freezes and closings since the 2008 financial crisis. In 2009, 21% of these employers sponsored frozen pensions, and the same percentage had closed their primary DB plan to new entrants. By 2015, 39% of sponsors had frozen a DB plan, and 24% had stopped offering their primary DB plan to new hires.
  • The recent uptick in freezes has been among plans that were already closed to new hires.
  • Half of the pension sponsors in this analysis adopted a hybrid DB design for their salaried new hires at some point, and 50% of them were still offering the same plan to new hires in 2015.
  • Certain industry sectors, as well as employers whose pensions are relatively small (as compared with their market capitalization) and/or well-funded, are more likely to still offer a traditional DB plan to new hires.
  • When pension accruals in the primary DB plan end, most employers then contribute more to the DC plan to at least partially make up for it.

Evolution of Fortune 500 retirement plans: 1998 – 2015

Tracking the same group of Fortune 500 employers over 17 years shows a dramatic decline in traditional DB offerings. Between 1998 and 2015, the percentage of employers still offering a traditional DB plan to most newly hired employees fell from roughly half (246 companies) to 5% (24 companies, Figure 1).

Figure 1. Retirement plan sponsorship trends, 1998 – 2015*
Click to enlarge image

Retirement plan sponsorship trends, 1998 – 2015*

Notes: Sponsorship is shown as plan type offered to salaried new hires at year-end. Trend data are shown for Fortune 500 companies and capture changes to their retirement plans from 1998 through June 2015.
*In earlier years, sums do not equal 500 because a small number of today’s Fortune 500 companies did not exist at the time. Where there have been mergers or spinoffs, the analysis used the data on the largest salaried plan for results prior to the transaction.
Source: Willis Towers Watson

A traditional DB plan provides a defined amount at retirement, based on a formula that is typically linked to pay and years of service, and expresses the benefit as an annuity. The annual value of benefit accruals increases as a participant nears retirement. Traditional DB plans provide a predictable income stream in retirement, generally with larger benefits for long-tenured employees, so these plans also serve the interests of employers seeking long-term commitment from workers. Over time, however, many employers came to prioritize a more uniform level of retirement benefits for all, often opting to provide more portable, account-based retirement programs such as DC and hybrid DB plans.

Hybrid DB plans define the retirement benefit as an account balance rather than an annuity. Hybrid benefits typically accrue more evenly across a worker’s career (although designs can increase benefit accruals by age, service or a combination of the two). When hybrid plan participants leave their employer, they usually take their account balance with them. As hybrids are DB plans, they must offer participants the right to an annuity as the primary option.3

In 1998, 59% of the Fortune 500 offered some form of DB plan to salaried new hires, and 41% offered only a DC plan. Even 17 years ago, however, DB plan sponsorship varied by industry (as discussed later in this analysis), and retail and high-tech employers tended not to offer DB pensions.

Today’s DC-only sponsorship rate is partly attributable to changes in the Fortune 500, as more employers joining the list over the years have never maintained a DB plan as a primary retirement vehicle. Slightly more than half (273) of the employers in this analysis were in the Fortune 500 back in 1998, and 24% of them offered only a DC plan to salaried workers at that time. Traditional DB sponsors have been more likely to remain on the list: 19 of the 24 traditional DB sponsors in today’s Fortune 500 list were also on the list in 1998.

Twenty percent of Fortune 500 employers still offered a DB plan to salaried new hires in 2015 (Figure 2), and nearly 70% of those employers offered a cash balance plan (the most common type of hybrid design). At 23%, traditional final average pay plans were the next most popular DB offering.

Figure 2. Retirement plan types offered in 2015*
Click to enlarge

*Value is less than 1%.
N=500
Source: Willis Towers Watson

Employers followed different paths to their current retirement programs. Figure 3 depicts the most recent retirement plan action taken by these Fortune 500 companies.

Figure 3. Most recent changes to retirement programs since 1998
Click to enlarge

N=500
Source: Willis Towers Watson

When a sponsor freezes a DB plan, some or all benefits stop accruing for some or all participants. For example, the plan might stop accruing benefits linked to service but continue those linked to pay.4 Benefits might stop accruing for all participants younger than 50 with 15 or fewer years of service. After a sponsor closes a pension plan, benefits continue to accrue for participants but no one else can join the plan.

Since 1998, 23% of Fortune 500 employers have frozen their primary DB plan, and 15% have closed the plan to new hires.5 Twelve percent of employers amended their traditional DB plan to a hybrid design and were still offering these plans in 2015. Two percent of employers terminated their primary DB plan, meaning benefits were frozen and then fully settled via annuity purchases and or/lump sum payments. Nearly half — 48% — of these employers have not changed their retirement plan type since 1998, and 40% have been DC-only over the entire period. Only 8% of these Fortune 500 employers retained the same DB structure from 1998 to 2015.

As shown in Figure 4, employers often took more than one path to arrive at their current plan structure.

Figure 4. Various paths taken by DB sponsors to arrive at 2015 offering for new hires
Click to enlarge image

Note: Includes changes made since 1998 and excludes companies that terminated their DB plan.
*Includes plans that did not exist in 1998.
Source: Willis Towers Watson

Approximately 90% of employers that sponsored traditional DB plans in 1998 have changed the retirement benefit for new hires since then. Forty-seven percent froze or closed their primary plan and transitioned to a DC-only environment for salaried new hires, and 43% amended the traditional DB plan to a hybrid DB design.

Thirty percent of employers that offered hybrid plans to salaried new hires in 1998 were still offering them in 2015, and 58% of employers that converted their traditional DB plans to hybrids after 1997 still offered them to new hires.

The shift away from DB plans is less sweeping when hybrid sponsors are considered. In 2015, 50% of all Fortune 500 employers that had established a hybrid plan for salaried workers at some point (or half of all DB plan sponsors) still offered it to new hires.

Among Fortune 500 companies that offered a DB pension in 1998, the most common course of action has been to freeze the primary DB plan. Figure 5 depicts the evolution of open, closed, frozen and terminated pensions for all Fortune 500 companies that sponsored a pension in 1998.

Figure 5. Evolution of DB plan sponsorship for Fortune 500 companies, 1998 – 2015
Click to enlarge image

Source: Willis Towers Watson

The incidence of pension freezes has risen significantly since the 2008 financial crisis. By 2014, sponsors of a frozen plan outnumbered those with an open primary plan for the first time since 1998. Back in 2009, 21% of plan sponsors had frozen pensions and 21% had closed their primary plan to new entrants. By 2015, 39% sponsored a frozen plan and 24% had closed their primary plan to new hires.

Thirty-four percent of companies sponsoring frozen DB plans had closed their plans at an earlier date before freezing them. Sixty companies have frozen their plans since 2010, and half had closed the plan at an earlier date. This pattern of first closing, then later freezing, has become more common over the past few years: 26 companies have frozen their primary DB pension since 2013, and 65% of these plans were already closed prior to the freeze.

Figure 6 shows the interval between closing and freezing for DB plans that followed the close-then-freeze pattern. The average interval was 4.5 years and the median was four years.

Figure 6. Interval between DB plan closures and freezes among Fortune 500 companies
  Years from close to freeze
Average 4.5 years
90th percentile 9 years
75th percentile 6 years
50th percentile 4 years
90th percentile 9 years
25th percentile 2 years
10th percentile 1.3 years

Source: Willis Towers Watson

While most shifts from DB to DC plans occurred before 2010, roughly half of the 201 companies that closed their primary DB plan to new hires between 1998 and 2015 have taken further action since 2010. Over the last six years, 35 companies closed their primary DB plan to new entrants, 30 froze an open plan, and 30 froze a plan that had already been closed.

Retirement plan design trends by industry

While the shift to a DC-only environment has been widespread, there are variations among sectors. Figure 7 shows the primary retirement plans offered to new hires by Fortune 500 employers at the beginning and end of the analysis period by sector.

Figure 7. Plans offered to new hires by industry (sorted by open DB plan prevalence) in 1998 versus 2015
1998 2015 1998 – 2015
Industry (number of companies) Traditional DB plus DC Hybrid plus DC DC only Traditional DB plus DC Hybrid plus DC DC only Growth in DC-only sponsorship
Utilities (29) 66% 24% 10% 3% 52% 45% +35%
Insurance (36) 83% 6% 11% 14% 36% 50% +39%
Energy/Natural Resources (48) 65% 6% 29% 4% 33% 63% +34%
Health Care/ Pharmaceuticals (13) 61% 0% 39% 23% 8% 69% +30%
Food and Beverage (23) 74% 17% 9% 8% 14% 74% +65%
Transportation (21) 68% 6% 26% 10% 15% 75% +49%
Manufacturing (65) 67% 13% 20% 6% 15% 79% +59%
Finance (38) 50% 14% 36% 3% 14% 83% +47%
Wholesale (19) 42% 0% 58% 0% 11% 89% +31%
Health Care (22) 9% 14% 77% 0% 9% 91% +14%
Communications (25) 64% 8% 28% 4% 4% 92% +64%
Services (23) 24% 10% 66% 4% 4% 92% +26%
Automobiles and Transportation Equipment (15) 79% 7% 14% 7% 0% 93% +79%
High-Tech (37) 24% 11% 65% 3% 3% 94% +29%
Retail (61) 17% 5% 78% 0% 3% 97% +19%
Aerospace and Defense (5) 100% 0% 0% 0% 0% 100% +100%
Property and Construction (10) 0% 10% 90% 0% 0% 100% +10%
Tourism and Leisure (10) 11% 0% 89% 0% 0% 100% +11%

Source: Willis Towers Watson

At least half of the Fortune 500 employers in the Utilities and Insurance sectors still offer DB plans to new hires. Utilities are typically heavily unionized and generally prefer to keep their retirement structure consistent between their union and nonunion workforces. Moreover, many jobs at Utilities companies are physically demanding, and DB plans facilitate retirement at an appropriate time.

While hybrid plans are the most prevalent DB offering in almost all sectors, some Insurance and Pharmaceutical companies still offer traditional DB plans to most salaried new hires. These two sectors sponsor one-third of all traditional DB offerings today. Insurance-sector employees may be more likely than other workers to understand and appreciate DB plans.

The High-Tech, Services and Retail sectors have had historically low DB sponsorship rates, and DC plans are probably a better fit for them (e.g., their relatively high turnover makes portability more important).6

Economic conditions and workforce demographics affect plan design trends. Between 1998 and 2015, the most striking uptick in DC-only sponsorship has been in the Automobiles and Transportation Equipment, Food and Beverage, Communications, Manufacturing, Transportation and Finance industries: 47% in Finance and nearly 80% in Automobiles and Transportation Equipment, with the others falling in between. These sectors, along with the Wholesale industry, have also had significant shifts (over 20%) from DB to DC-only since the financial crisis started in 2008. Employers in the Communications sector have had an especially high number of DB-to-DC transitions over the past few years (not shown in the figures).

Looking only at companies that offered a DB pension to salaried new hires at some point, most sectors — with the exceptions of Aerospace and Defense, Food and Beverage, Manufacturing and Utilities — have very high concentrations of frozen pension plans relative to closed plans (Figure 8).

Figure 8. Current status of Fortune 500 DB plans by industry
Click to enlarge

Source: Willis Towers Watson

DB plan sponsorship by relative plan size

There is a relationship between plan size and pension changes. Figure 9 shows pension size at fiscal year-end (FYE) 2014 — as measured by comparing a company’s projected benefit obligation (PBO) to market capitalization — by the most recent change to the primary DB plan.

Figure 9. Average plan size at FYE 2014 by last retirement plan action taken
Average 25th percentile 50th percentile 75th percentile
Always hybrid (N=14) 11.4% 3.2% 6.5% 14.0%
Always traditional DB (N=19) 12.6% 6.2% 9.0% 17.5%
Hybrid conversions (N=53) 19.9% 6.6% 10.2% 22.1%
Frozen (N=103) 26.8% 5.3% 13.0% 28.0%
Closed (N=69) 30.6% 7.1% 18.6% 34.1%

N=258
Note: Results are shown for companies whose financial data were readily available.
Source: Willis Towers Watson

As shown in Figure 9, on a median basis, open DB plans were slightly smaller than frozen and closed plans. The difference is even more pronounced on an average basis, mostly because employers with outsize plans are more likely to close their primary DB plan to new hires. Figure 10 depicts 2015 plan status for all DB plan sponsors in the Fortune 500 — open, closed or frozen — broken out by pension size. Ninety percent of employers whose DB plan obligations were more than 100% of the firm’s value have switched to a DC-only environment.

Figure 10. Retirement plan status in 2015 based on relative plan size at FYE 2014
Size (PBO/market capitalization) FYE 2014                  Plan status in 2015
DB plan plus DC plan DC plan only
100% or greater 10% 90%
50% to 99% 26% 74%
30% to 49% 25% 75%
20% to 29% 28% 72%
10% to 19% 33% 67%
5% to 9% 52% 48%
Less than 5% 27% 73%

N=258
Note: Results are shown for companies whose financial data were readily available.
Source: Willis Towers Watson

Most employers whose DB plans were between 5% and 9% of their firm value still offered the plan to salaried new hires in 2015. These employers’ relatively low pension risk might have affected their decision to keep their primary DB plan open. On the other hand, only 27% of plans whose obligations were less than 5% of the sponsor’s market capitalization remained open to new hires in 2015. Many employers in the Finance sector have small plans relative to firm value, yet Finance has one of the highest growth rates in DC-only sponsorship, perhaps due to external pressures to control costs.

Plan sponsorship also varies with the plan’s funding deficit/surplus relative to the sponsor’s market capitalization. A plan might have large obligations relative to the value of its sponsor but also have manageable funding levels or even a surplus. Figure 11 depicts the relationship between relative funding deficits/surpluses and the status of the primary DB plan. Plans with significant deficits relative to the sponsor’s market capitalization are more likely to be closed or frozen than those with surpluses.

Figure 11. Retirement plan status in 2015 based on funding deficit/surplus over market capitalization at FYE 2014
Pension deficit/surplus over market capitalization FYE 2014              Plan status in 2015
DB plan plus DC plan DC plan only
10% or greater 19% 81%
5% – 9.9% 21% 79%
3% – 4.9% 25% 75%
1% – 2.9% 43% 57%
0% – 0.9% 33% 66%
Surplus 53% 47%

N=258
Note: Results are shown for companies whose financial data were readily available.
Source: Willis Towers Watson

Transitioning workers from a DB plan to a DC plan

Most employers take one of three broad approaches to transitioning to a DC-only environment. The first is to close the primary DB plan to new hires but continue accruing benefits for current participants. The second approach is a partial plan freeze, in which only participants who meet certain age and/or service requirements continue accruing benefits. All other participants are switched to the primary retirement plan offered to salaried new hires. The third approach is a complete freeze, where the plan stops all accruals and all participants are moved to the retirement program offered to new hires.

Of employers that adopted a DC-only approach since 1998, 38% closed the primary DB plan to new hires, 7% partially froze the primary DB plan,7 and the remaining 55% froze the primary plan completely.8

As shown in Figure 12, employers varied the details within the three broad transition approaches. The most frequent approach (41%) was freezing the primary DB plan completely and enhancing benefits in the DC plan for all workers. The next most common practice (32%) was keeping the primary DB plan open for current participants and increasing DC benefits for newly hired workers. Ten percent of employers froze the primary DB plan completely, enhanced DC benefits for everyone and gave former DB plan participants a larger DC benefit than new hires.

Figure 12. Transition approaches in moving from DB to DC-only environment
Click to enlarge

N=190
Note: Results are shown where transition data were available.
Source: Willis Towers Watson

Changes made to DC plans after eliminating the DB formula

Almost all employers that closed their primary DB plan increased benefits for salaried new hires in the DC plan. As shown in Figure 13, the most prevalent approach (54%) was to add a non-matching contribution to the DC plan, meaning the employer contributes whether or not the employee does (similar to cash balance plan pay credits). Seventeen percent of employers increased the match for newly hired employees and also added a non-matching component to their plan design. An additional 11% of employers that kept their primary DB plans open for existing participants increased the match for newly hired workers.

Figure 13. Changes to DC plans in companies that closed their DB plans
Click to enlarge

N=72
Note: Results are shown where transition data were available.
Source: Willis Towers Watson

Because non-pension-eligible workers received higher DC benefits than DB plan participants, we next quantify DC contributions as a percentage of pay for these two groups of workers among employers that closed their primary DB plan to new hires. Figure 14 shows total DC employer contributions for two 35-year-old employees earning $50,000 per year: one a new hire and the other a continuing DB plan participant with five years of service.

Figure 14. Employer contributions to DC plans at companies that closed their primary DB plan (% of pay)
N Total matching contribution Total non-matching contribution Total DC contribution
Continuing DB plan participants 68 4.1% 0.4 % 4.5%
Hybrid sponsors 25 4.5% 0.1% 4.6%
Traditional DB sponsors 43 3.7% 0.4% 4.1%
New hires 68 4.5% 3.1% 7.5%
Hybrid sponsors 25 5.2% 2.3% 7.5%
Traditional DB sponsors 43 4.1% 3.4% 7.5%

N=68
Notes: Results are shown where full contribution data were available. If discretionary contributions were shown in ranges, the maximum value was used. The data assume employees make the contributions necessary to receive the maximum matching contribution.
Source: Willis Towers Watson

Total employer contributions to DC plans for new hires were an average 3% of compensation higher than contributions for their pension-eligible counterparts. Most of the increase reflects higher non-matching contributions for new hires (which generally do not fully replace the pension loss).9

We next analyze changes to the DC plan when the sponsor partially froze the primary DB plan, meaning some workers remained pension-eligible while others were moved into the DC-only program. As shown in Figure 15, the most prevalent action (43%) was to add a non-matching contribution for former DB participants and new hires. The second most popular transition strategy was to increase the employer match in the DC plan (29%). One employer provided an additional benefit to both new hires and former DB participants. The new hires received the additional value through a DC match, while the former DB participants received it through a non-matching contribution.

Figure 15. Changes to DC plan in companies that partially froze their primary DB plan
Click to enlarge

Changes to DC plan in companies that partially froze their primary DB plan

N=14
Note: Results are shown where transition data were available.
Source: Willis Towers Watson

Figure 16 quantifies DC benefits as a percentage of pay for employers that partially froze their primary DB plan. The total employer contribution for former DB plan participants and new hires was about 2.7% and 2.8% of compensation higher, respectively, than the contribution for continuing DB plan participants. Among these employers, on average, the additional benefit for former DB plan participants and new hires was distributed fairly evenly between the match and non-match. All but one of the employers that partially froze their primary DB plan had provided a traditional plan before moving to a DC-only environment for new hires and former DB plan participants.

Figure 16. Employer contributions to DC plans at companies that partially froze their primary DB plan (% of pay)
N Total matching contribution Total non-matching contribution Total DC contribution
Continuing DB plan participants 14 3.3% 0.2% 3.5%
Former DB plan participants 14 4.3% 1.9% 6.2%
New hires (never DB eligible) 14 4.6% 1.5% 6.1%

N=14
Notes: Results are shown where full contribution data were available. If discretionary contributions were shown in ranges, the maximum value was used. The data assume employees make the contributions necessary to receive the maximum matching contribution.
Source: Willis Towers Watson

We next analyze what happened to DC plans when the sponsor moved all employees to a DC-only program (Figure 17).

Figure 17. Changes to DC plans in companies that fully froze their primary DB plan
Click to enlarge

N=104
Note: Results are shown where transition data were available.
Source: Willis Towers Watson

Employers took many different approaches after a full pension freeze. The changes above are similar to those for the other two transition groups, with the majority of employers either adding a non-matching contribution to the DC plan, increasing the current match or doing some combination of the two. In 17% of companies that completely froze their primary DB plans, former participants received larger DC contributions than those who had never had a pension.

Figure 18 shows average DC employer contributions for former DB plan participants and new hires, as well as what the DC plan used to yield before the primary DB plan was fully frozen.

Figure 18. Employer contributions to DC plans at companies that fully froze their primary DB plan (% of pay)
N Total matching contribution Total non-matching contribution Total DC contribution
DC plan when DB plan was open 99 3.4% 0.2% 3.6%
Hybrid sponsors 45 3.4% 0.2% 3.6%
Traditional DB sponsors 54 3.5% 0.2% 3.7%
DC plan today for former DB participants 99 4.3% 2.8% 7.1%
Hybrid sponsors 45 4.8% 2.6% 7.4%
Traditional DB sponsors 54 4.0% 2.8% 6.8%
DC plan for new hires (never DB eligible) 99 4.3% 2.0% 6.3%
Hybrid sponsors 45 4.9% 1.8% 6.7%
Traditional DB sponsors 54 3.9% 2.1% 6.0%

Note: Results are shown where transition data were available.
Source: Willis Towers Watson

In transitioning from the original to the enhanced DC plan, former DB participants gained an average 3.5% of pay more than the other groups. The difference between new hires and former DB participants was roughly 0.8% of pay, most of which derived from non-matching contributions. Of DB plan sponsors that moved to a DC-only arrangement, 60% of those with hybrid plans fully froze their plans versus 52% of those with traditional DB plans. When hybrid sponsors freeze their plans completely, however, they generally offer a larger matching benefit than their traditional DB plan counterparts (about a 1% differential today).

Transitioning workers from a traditional DB plan to a hybrid plan

In 2015, roughly 76% of active pension sponsors in the Fortune 500 offered a hybrid pension to salaried new hires (or 15% of all Fortune 500 companies), and around 81% of them (61 of 75) started out with a traditional DB design in 1998. Figure 19 depicts the timing of these DB-to-hybrid-plan conversions.

Figure 19. Hybrid conversions (1998 – 2015)
Click to enlarge

N=61
Note: Results are shown only for open hybrid plans in 2015.
Source: Willis Towers Watson

In the earlier years of the analysis, employers were converting traditional pensions to hybrids at a steady pace — more than 59% of these conversions were before 2004. There was a lull between 2004 and 2006, most likely due to the legal and regulatory uncertainty created by court rulings on cash balance plans and age discrimination. Later rulings and the Pension Protection Act of 2006 (PPA) cleared away doubts about the legitimacy of these plans, and conversions picked up again.

Employers that converted their traditional DB plans to hybrids after 1998 (and still offered them in 2015) used various methods to transition workers into the new hybrid formula. Twenty-six percent of employers kept current workers in the traditional DB plan and enrolled new hires in the hybrid plan. Twenty-eight percent allowed employees to choose between the traditional and hybrid designs. Five percent kept workers who met specific age and/or service criteria in the traditional plan and shifted the others into the hybrid plan.

Thirty-one percent of these active hybrid sponsors froze traditional accruals and moved all workers to the hybrid plan. Among this group, two-thirds used an A + B approach, where A represents the frozen traditional benefit and B represents the accruing hybrid balance. The other one-third froze the traditional DB plan and converted the pension accruals into opening account balances.10

The remaining 10% of employers offered employees the greater of the traditional benefit or the hybrid benefit.

An account balance world

In 2015, 95% of Fortune 500 employers offered only account-based plans as the primary retirement vehicle for newly hired salaried employees (Figure 20).

Figure 20. Traditional DB pensions versus account-based plans, 1998 – 2015
Click to enlarge

N=500
Source: Willis Towers Watson

We next analyze the annual percentage of pay employers allocated to their primary account-based plans. Figure 21 shows retirement (DB plus DC) allocations from Fortune 500 sponsors to account-based plans belonging to 35-year-old newly hired employees earning $50,000 per year.

Figure 21. Annual allocations to account-based plans for new hires (% of pay)
N Total employer retirement contribution Pension value Total DC contribution
Companies that offer hybrid DB plus DC contributions 74 9.7% 4.7% 5.0%
Companies that offer DC contributions only 378 5.6% NA 5.6%
Formerly DB 191 6.6% NA 6.6%
Always DC only 187 4.5% NA 4.5%

Notes: Results are shown where complete contribution data were available. If discretionary contributions were shown in ranges, the maximum value was used. The data assume employees make the contributions necessary to receive the maximum matching contribution and exclude the 24 traditional DB plan sponsors.
Source: Willis Towers Watson

On average, a salaried newly hired employee received retirement benefits worth 9.7% of pay at a company with a hybrid plan versus 5.6% of pay at a DC-only company. Among DC-only companies, employer contributions varied significantly, from an average 4.5% at companies that were always DC-only to 6.6% at companies that once sponsored a pension.

The different allocations shown in Figure 22 between employers that were always DC-only and those that once had open DB plans arise from companies eliminating their primary DB plan and then boosting the match, adding a non-matching contribution or both, as discussed earlier in the analysis.

Figure 22. Annual contributions to account-based plans for new hires (% of pay)
N DC plan contribution Matching contribution Non-matching contribution
Hybrid DB plus DC 74 5.0% 4.5% 0.5%
DC only 378 5.6% 4.2% 1.4%
Formerly DB 191 6.6% 4.4% 2.2%
Always DC only 187 4.5% 4.0% 0.5%

Notes: Results are shown where complete contribution data were available. If discretionary contributions were shown in ranges, the maximum value was used. The data assume employees make the contributions necessary to receive the maximum matching contribution and exclude 24 traditional DB plan sponsors.
Source: Willis Towers Watson

Figure 23 shows retirement allocations as a percentage of pay for various industry sectors,11 and the level of benefits varies widely. Retirement benefits tend to be more generous in sectors that provide a hybrid pension, which include the Energy/Natural Resources and Utilities industries.

Figure 23. Annual contributions to account-based plans for new hires by industry
Click to enlarge

Notes: Employer contributions shown for newly hired employee at age 35 earning $50,000. Results shown where full contribution data were available. If discretionary contributions were shown in ranges, the maximum value was used. Matching and non-matching contributions included. The data assume employees make contributions necessary to receive the maximum matching contribution. The results exclude 24 traditional DB sponsors and industries with fewer than 10 observations.
Source: Willis Towers Watson

Conclusion

Retirement plans at Fortune 500 companies have changed dramatically since 1998, when 59% of these employers offered a DB plan to newly hired salaried workers. By 2015, only 20% offered any DB plan — traditional or hybrid — to new hires. Traditional DB plans have fared the worst. The number of Fortune 500 companies sponsoring an open traditional DB plan fell from 50% in 1998 to 5% in 2015. Half the employers in this analysis that sponsored a DB plan (open, closed or frozen) for their salaried workforce adopted a hybrid plan during the analysis period. Fifty percent of employers that established a hybrid plan, either before or after 1998, still offered the benefit to new hires in 2015.

Recent years have witnessed a sharp increase in pension freezes. In many cases, sponsors of previously closed DB plans decided to freeze benefits for current participants to further reduce pension costs and risk. Despite the sharp decline in pensions, however, some employers have hung in there, most often those in certain sectors and those whose pension obligations are small relative to firm value.

Employers have used various approaches to transition workers from a DB plan to a DC-only environment. Some kept the primary DB plan open for existing participants, while others stopped all accruals. Most employers contributed more to DC plans, to at least partially make up for the loss. In some cases, employees who were once pension eligible received higher contributions than new hires.

These changes represent a large-scale redistribution of retirement resources over the last 17 years. Employers have been paring back their spending, as well as spreading their retirement dollars more evenly throughout workers’ careers. Account-based plans shift more responsibility to employees and generally result in less predictable retirement patterns. Traditional DB plans offer employers greater control over workforce retirement patterns and generally offer retirees greater income security.

As more workers delay retirement, at least partly due to the loss of income guarantees in retirement, the ramifications of the shift in retirement offerings will continue.12 While account-based plans offer many advantages to employers and employees, the shift may have negative effects on career advancement for younger workers, workforce productivity and retirement security.


Endnotes

1. See Willis Towers Watson, “Defined Contribution Plan Volatility: Timing Is Everything,” Towers Watson Insider, September 2015.

2. This analysis focuses on the employers’ largest salaried plan offered to newly hired workers. If a company sponsors different plans for hourly, salaried and bargained workers, the analysis considers only the plan for salaried workers. If a plan has different salaried segments, we look at the primary plan offered to the salaried workforce (typically the one that covers management).

3. Note that many traditional DB plans also offer lump sum distributions at retirement or termination of employment.

4. If benefits linked to pay are frozen but those linked to service continue to accrue (or vice versa), we define the plan as frozen. If the plan is frozen for some workers (not just new hires) but active for others, the analysis defines it as frozen.

5. These results reflect only the most recent change to the retirement plan. For example, if an employer closed a plan and later froze it, the results capture the freeze.

6. See “Median years of tenure with current employer for employed wage and salary workers by industry, selected years, 2004-14,” Table 5, Economic News Release, Bureau of Labor Statistics.

7. Of the companies that partially froze their DB plans, all but one were traditional DB plans before the change.

8. If an employer implemented one transition approach and later changed it, these results capture the latest approach.

9. See “Employer Commitment to Retirement Plans in the United States,” Towers Watson, December 2009.

10.The vast majority used this implementation approach before the PPA was passed in 2006.

11. Allocations are shown for industries with more than 10 observations.

12. See Billie Jean Miller and Steve Nyce, “Which Employees Are Delaying Retirement and Why?” Towers Watson Insider, September 2014.