Continuing a long-standing trend, the number of Fortune 100 companies offering new salaried employees only a defined contribution (DC) plan rose in 2013. Less than a third of these companies offer any defined benefit (DB) plan to newly hired salaried workers, and only seven still offer a traditional DB plan to new hires.
Over the past decade, most employers have shifted from traditional DB plans to either account-based DB plans or DC plans. The shift has been motivated by several factors, including employers’ desire to reduce overall retirement costs (perhaps due to higher compensation and benefit costs elsewhere, especially health care), perceptions that workers prefer account-based plans, market trends and a desire to reduce financial risk.1
Fortune 100 plan sponsorship over time
Towers Watson has been tracking retirement plan offerings from Fortune 100 companies for many years.2 Since 1998, employers have been steadily steering away from traditional DB plans. At the end of 1998, 90 Fortune 100 companies offered some sort of defined benefit, either a traditional or hybrid plan (an account-based pension, typically cash balance). Today only 30 companies on the Fortune 100 list offer a DB plan to new salaried hires (Figure 1).
Figure 1a. Fortune 100 retirement plan sponsorship, 1985 – 2013
Figure 1b. Fortune 100 retirement plan sponsorship, 1985 – 2013
Note: Sponsorship shown as plan type offered to salaried new hires at year-end is based on the following year’s Fortune 100 list. For example, 2012 data are based on the 2013 Fortune 100 and include plans offered at year-end 2012. The 2011 data are based on the 2012 list and so on. The “Today” column in Figure 1a reflects plan changes that took effect between January 1, 2013, and June 30, 2013.
Source: Towers Watson
Offering DC benefits only has become the prevailing practice. In 1998, 90 Fortune 100 companies offered both DC and DB plans to new salaried hires, whereas only 30 companies in the current Fortune 100 offer both plan types. The decline in traditional DB offerings is striking.
Under a typical traditional DB plan, retirees receive a monthly income defined by a formula tied to pay and years of service. Benefit accruals are usually back-loaded, meaning their value increases faster as participants near retirement. As such, traditional DB plans were intended to help employers maintain a stable productive workforce as well as to help employees enjoy a financially secure retirement. Over time, the prevalent employer focus changed to contributing a more uniform level of retirement-directed capital accumulation for all workers.
In hybrid plans, the benefit is defined as an account balance (a lump sum) rather than an annuity. Benefits typically accrue more evenly over a worker’s career (though hybrid designs can vary accruals by age, service or a combination of the two). When hybrid plan participants leave their employer, they may often take their lump sum account balance with them (either right away or at some point in the future). Hybrid plan participants have the option of converting their account balances into life annuities, but most do not. Indeed, many traditional DB plans now offer lump sum distributions at retirement, which are often the most popular option.
In 1985, 89 Fortune 100 companies offered a traditional DB plan to newly hired salaried employees. Almost 30 years later, the pattern has completely flipped. Among today’s Fortune 100, 93 companies offer only account-based retirement plans to new salaried hires.
The evolution of today’s Fortune 100 plans: 1998 – 2013
Some of the changes in the reported retirement offerings arise from annual turnover in the Fortune 100 list, reflecting mergers, spin-offs, new or rapidly growing businesses, and bankruptcies. Historically, seven to eight companies are new to the Fortune 100 list in any given year, and three companies are new to the 2013 Fortune 100. To control for annual list turnover, we analyze the evolution of retirement offerings since 1998 among those companies in the 2013 Fortune 100 (Figure 2).
Figure 2a. Sponsorship trends for 2013 Fortune 100 companies, 1998 – 2013
Figure 2b. Sponsorship trends for 2013 Fortune 100 companies, 1998 – 2013
Note: Sponsorship shown as plan type offered to salaried new hires at year-end. In Figure 2a, the “Today” column reflects plan changes that took effect between January 1, 2013, and June 30, 2013. Trend data are shown for the 2013 Fortune 100 companies and capture changes to retirement plans since 1998.
Source: Towers Watson
More sponsors of active DB plans joined the Fortune 100 this year, replacing companies offering only a DC plan to new salaried hires. All three companies new to this year’s Fortune 100 are DB plan sponsors. Only one DB plan sponsor fell off the list; thus, list turnover resulted in a net gain of two open DB plans.
Tracking the same Fortune 100 companies over time (i.e., comparing Figure 2 to Figure 1) softens the arc of the trend away from DB plans somewhat, with both the decline in DB plans and the rise in DC-only approaches slightly less pronounced.
Our earlier analyses found that new list members were less likely to have ever offered a DB plan. For example, 29 of the companies in today’s Fortune 100 offered only a DC plan to new hires back in 1998, while 10 companies in the 1999 Fortune 100 sponsored only a DC plan.
This difference is mostly attributable to shifts in the sector makeup of the Fortune 100 over the last 20 to 30 years. For example, 30 years ago, most Fortune 100 companies were in manufacturing, and that sector typically offered traditional pension plans to new salaried hires. Over time, however, these manufacturing companies have been replaced by high-tech companies, most of which never offered DB retirement plans.
Back in 1998, 29 of 2013 Fortune 100 companies offered only a DC plan to new hires versus 70 of those same companies today. Between year-end 2012 and June 2013, two more companies stopped offering DB plans (one traditional DB plan and one hybrid plan) to new salaried hires, opting for a DC-only approach instead. Over the same period, one company converted its traditional DB plan formula to a hybrid formula.
Of the 30 Fortune 100 companies that offer a DB plan to new hires today, almost three-quarters of them offer a cash balance plan, as shown in Figure 3. At 6%, final average pay plans — a traditional design — are the second most prevalent offering.
Figure 3. Plan types offered by Fortune 100 companies today
Source: Towers Watson
Companies followed different paths to their current retirement programs. Figure 4 depicts the most recent plan action by current Fortune 100 companies (Figures 2a and 2b serve as points of comparison).
Figure 4. Most recent change to retirement program since 1998
Source: Towers Watson
When a DB plan is frozen, 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. Benefits might stop accruing for all participants younger than 50 or those with 15 or fewer years of service.
After a pension plan has been closed, benefits continue to accrue for participants but no one else can join the plan. Since 1998, 22 companies froze their pension plans (six closed their plan to new hires earlier and then froze accruals later), while 18 closed them. One company terminated its plan, meaning that all benefits were frozen and then settled via annuity purchases and/or lump sum payments. Meanwhile, 21 other companies converted their traditional DB plan to a hybrid plan. Almost 10% of companies have made no changes to their plans since 1998.
The shift away from traditional DB pension plans continues, as companies adopt account-based DB plans or move to a DC-only environment. Seventy of today’s Fortune 100 companies provide only DC plans to new hires. Looking at the evolution of 2013 Fortune 100 companies since 1998, only seven of them offer a traditional DB plan to new hires today compared with 66 in 1998 (thus controlling for list turnover). Only 11 companies on the 1985 Fortune 100 list did not offer a traditional DB plan.
So far in 2013, two companies have stopped offering DB plans to new (salaried) hires, shifting to an all-DC retirement environment, while one company converted its traditional DB plan to a hybrid plan.
These changes — both recent and over time — signal a large-scale redistribution of corporate resources for retirement. Employers are spreading their retirement dollars more evenly across the workforce, rather than concentrating benefits on older and longer-tenured workers. Traditional DB plans offer employers greater control over workforce retirement patterns. Account-based plans give employees more responsibility for retirement saving and planning, and retirement timing depends more heavily on economic and other factors than on the retirement timeline encouraged by the plan.