Employers have been moving away from traditional defined benefit (DB) plans for some time now, often shifting to a defined contribution (DC) plan-only environment. The number of Fortune 200 companies providing only a DC plan to newly hired salaried workers jumped from 30% in 1998 to 72% in 2013 — much the same as for the Fortune 100 companies.1

In 2011, Towers Watson looked at Fortune 100 companies that had frozen or closed their qualified pensions to see what happened to their nonqualified retirement benefits.2 The study found that, by and large, executives in the 2011 Fortune 100 companies received much the same treatment as other employees: Most companies switched from DB to DC nonqualified retirement benefits for newly hired executives and used the same transition approaches for both executive and qualified DB plans.  

This update aims to ascertain how 2013 Fortune 200 companies transitioned executives after changing their underlying broad-based retirement programs. We also expanded the analysis to include companies that converted their traditional DB plans to hybrid plans. Since hybrid plans combine elements of both DB and DC designs, we wanted to find out whether opting for a hybrid approach resulted in a different outcome with respect to executive retirement benefits.

Not surprisingly, the 2013 Fortune 200 followed the same pattern as the 2011 Fortune 100:

  • Most of the Fortune 200 companies that closed or froze their qualified DB plans now provide DC-style retirement benefits to executives in the form of restoration plans.3
  • While most of these employers still provide some form of employer-paid executive retirement plans, in most cases the plans are less generous than they were before the qualified programs were changed. The majority of companies now offer restoration plans in lieu of supplemental executive retirement plans (SERPs).
  • Employers continue to offer executives elective deferral opportunities regardless of changes in the broad-based programs.
  • Most companies that closed or froze their plans had similar transition approaches for both executive and broad-based plans.
  • Companies that switched from traditional pensions to hybrid plans followed a somewhat different transition approach with regard to SERPs than the other groups analyzed. The prevalence of SERPs declined by slightly more than one-third in the hybrid conversion group versus nearly two-thirds in the group that adopted a DC-only approach.

The following analysis takes a before-and-after look at retirement benefits for executives in 105 of the 114 companies in the 2013 Fortune 200 that froze or closed a DB plan, or converted their traditional pensions to hybrid plans after 1998.4 The analysis focuses on formal employer arrangements and not on individual executive employment agreements.

Types of executive retirement plans

Executive retirement plans are intended to help companies attract, retain and retire plan participants. These supplemental benefits are typically provided through restoration plans and SERPs. Restoration plans “restore” benefits that cannot be paid due to statutory limits on qualified plans, while SERPs typically offer enhanced benefits compared with the qualified plan. SERPs and restoration designs may be structured as either DB or DC benefits.

There are generally three types of executive designs, the first two of which can be in the form of either a restoration plan or a SERP:

  • DB formulas that specify the benefit to be paid at retirement and include traditional annuity-based final average pay plans and account-based cash balance plans
  • DC formulas, where employers allocate a specified dollar amount — often stated as a matching amount — to individual employee accounts
  • Elective deferral arrangements, which allow employees to defer a portion of their compensation — salary, bonus and/or sometimes long-term incentives (employers do not contribute to these arrangements)

When moving to a DC-only environment, companies rethink executive plans

Since 1998, 82 companies in the 2013 Fortune 200 have frozen or closed their qualified DB plans and now offer only DC plans to newly hired workers. Many of these companies continue to accrue pensions for workers who were already in the DB plans while others have stopped all accruals. These changes have been accompanied by comparable transformations in their executive retirement offerings.

Of the 76 companies in this analysis,5 34 closed their qualified pension plans and 42 froze them. Before closing or freezing their qualified plans, 73 of these companies had employer-paid executive retirement plans (Figure 1). After the sponsor froze or closed the qualified plan, that number dropped to 67. Given continuing scrutiny of executive compensation and a perceived disconnect between pay and performance in some quarters, these employers might have decided to link executive compensation and benefits more directly to company performance — for example, by providing more long-term incentives in lieu of retirement benefits. Six of the nine organizations that do not contribute to their executive DB or DC plans provide elective deferral opportunities for their executives.

Figure 1. After closing or freezing qualified plan, executive benefits shift from DB to DC
After closing or freezing qualified plan, executive benefits shift from DB to DC
N=76

Source: Towers Watson analysis of 2013 Fortune 200

Mirroring the shift away from qualified DB plans to DC plans, only eight of these organizations provide an executive DB plan today, and 59 provide an executive DC plan as the main executive retirement plan vehicle. 

In addition to the shifting structure of executive retirement programs, there has also been a major transformation in the type of arrangements being offered. A majority of these companies now provide executive benefits through restoration plans rather than SERPs (Figure 2).

Figure 2. Restoration plans versus SERPs before and after freezing or closing qualified DB plan
Restoration plans versus SERPs before and after freezing or closing qualified DB plan
N=73

*Refer to Figures 3 and 8 for details on companies that sponsor both a SERP and a restoration plan.
Source: Towers Watson analysis of 2013 Fortune 200

When the 71 qualified DB plans were still open, 44 companies sponsored both executive DB and DC plans, but DB SERPs provided most of the benefit. The executive DC plans primarily provided restoration benefits on 401(k) plan matching contributions.6 Since changing their qualified plans, 55 companies now offer only an executive restoration DC plan based on the revised, generally enhanced, broad-based DC program. Thus, the majority of executive benefit value now resides in DC restoration plans. After closing or freezing the qualified DB plan, the number of companies sponsoring a DB or DC SERP for newly hired executives dropped from 38 to 12.

Transition approaches

Executive DB environment before the qualified DB plan change

The executive DB landscape before the qualified DB plan was frozen or closed is shown in Figure 3. Although DB restoration plans were prevalent, more than half the companies that provided a DB executive plan also provided an enhanced SERP benefit.

Figure 3. DB restoration and DB SERPs before freezing or closing qualified DB plan
DB restoration and DB SERPs before freezing or closing qualified DB plan
*One company provided only a DC SERP and one company provided only a DC restoration plan prior to the qualified DB plan change.

Source: Towers Watson analysis of 2013 Fortune 200

The following sections explore how companies transitioned their executives relative to the broad-based population after closing or freezing their plans.

Changes in DB restoration plans

Changes in executive DB restoration plans generally mirrored changes in the underlying qualified plans. Of the 34 companies that closed their qualified DB plans, 33 had also sponsored a DB restoration plan, and all but one closed that plan, too (Figure 4a).

Figure 4a. Changes in executive DB restoration plans after closing qualified plan
 Changes in executive DB restoration plans after closing the qualified plan
N=33

Note: One company closed its DB plan for the qualified population but kept the underlying restoration plan open for executives. This makes it a stand-alone DB SERP because there is no longer a qualified DB plan connected to the executive DB plan.
Source: Towers Watson analysis of 2013 Fortune 200

Of the 42 companies that froze their qualified DB plans, 34 had sponsored DB restoration plans, and all but four also fully froze or terminated them (Figure 4b).

Figure 4b. Changes in executive DB restoration plans after freezing qualified plan
Changes in executive DB restoration plans after freezing the qualified plan
N=34

Source: Towers Watson analysis of 2013 Fortune 200

In DB restoration plans that were closed to new hires, there was little change to the underlying benefit formula. Of the 37 DB restoration plans in which some executives continued to accrue benefits (those closed or only partially frozen), 29 employers kept the original benefit formula, seven reduced ongoing accruals and one redefined earnings in a way that generally increased future benefits.

Because restoration plans are based on the qualified plan formula, these changes were made at the same time the qualified pension was frozen or closed.

Changes in DB supplemental executive retirement plans

The pattern of changes in DB SERPs varied, with 31% of employers (11 of 36) taking a different transition approach for SERPs than they did for DB qualified and restoration plans. That is, six companies closed their qualified plans but either froze or maintained their DB SERPs, and five companies froze their qualified plans but kept their DB SERPs either fully or partially open.

Fifteen of the 34 companies that closed their qualified DB plans had also maintained DB SERPs.

After closing the qualified plans, 11 of those companies closed or froze the DB SERPs, while four chose to keep them open (Figure 5a).

Figure 5a. Changes in DB SERPs after closing qualified plan
Changes in DB SERPs after closing qualified plan
N=15

Source: Towers Watson analysis of 2013 Fortune 200

Roughly 25% of the companies that froze their qualified DB plans decided to keep their DB SERPs open for both current and newly hired executives (Figure 5b). Twenty-one of the 42 companies that froze their qualified DB plans had also maintained SERPs. After the change to the qualified DB plans, two companies kept their DB SERPs open for current executives, three kept them open for all executives and one company terminated its plan. Of the remaining 15 companies that froze their DB SERPs, one replaced the plan with a DC SERP.

Figure 5b. Changes in DB SERPs after freezing qualified plan
Changes in DB SERPs after freezing qualified plan
N=21

Source: Towers Watson analysis of 2013 Fortune 200

As with restoration plans, companies that closed their DB SERPs to new hires generally did not change the underlying formula — only one company changed its DB SERP benefit.

Twelve companies changed their DB SERPs before changing their qualified plans, 11 changed both plans at the same time, and six companies changed their SERPs after changing the qualified plans.

Executive DB environment after the qualified DB plan change

About half the organizations continue to sponsor DB plans for current executives (both DB restoration plans and DB SERPs) as part of the transition process. However, only a small minority of companies still provide executive DB plans to newly hired executives. DB restoration plans require an underlying qualified plan, and only eight companies decided to keep their DB SERPs open for new executives. So of the 71 companies with DB executive plans before their qualified plans were closed or frozen, only eight (11%) maintain a DB approach for newly hired executives today. Of these eight, seven sponsors kept their DB SERPs open to new and current executives, while one kept its DB restoration plan open for new executives.

The decline in ongoing DB SERPs has not been offset by an increase in DC SERPs (Figure 5c). Only two of the 76 companies in the analysis added a DC SERP after the qualified plan change: One replaced the DB SERP with a DC SERP, and one replaced its DB restoration plan with a DC SERP.

Figure 5c. SERP type before and after closing or freezing qualified plan
SERP type before and after closing or freezing qualified plan<
N=76

Source: Towers Watson analysis of 2013 Fortune 200

Impact of changes on executive DC plans

Employers that eliminate DB pension accruals typically compensate by contributing more to the DC plan, and the same seems to hold true for restoration plans. Most organizations that eliminated their DB restoration plans replaced them with DC restoration plans that mirrored the enhancements to the underlying qualified DC plans. As noted above, however, only a few employers replaced their DB SERPs with DC SERPs.

Before freezing or closing the qualified DB plans, 46 of the 76 companies provided executives with an executive DC arrangement to which the employer contributed (Figure 6).

Figure 6. DC restoration plans versus DC SERPs before freezing or closing qualified DB plan
DC restoration plans versus DC SERPs before freezing or closing qualified DB plan
N=76

Source: Towers Watson analysis of 2013 Fortune 200

Figures 7a and 7b illustrate the changes companies made to their executive DC programs in conjunction with closing or freezing their qualified DB plans. Nearly two-thirds of all companies that closed (30 of 34) or froze (32 of 42) their plans now have DC restoration plans, either through changing the existing program or by establishing a new one. Only two companies added a DC SERP that did not replicate provisions of the underlying DC program, and seven companies made no changes to their qualified or executive DC programs after the DB plan closure or freeze. Eleven companies do not sponsor executive DC plans (10 had never sponsored one).

Figure 7a. Changes in executive DC plans after closing qualified DB plan
Changes in executive DC plans after closing qualified DB plan
N=34

Source: Towers Watson analysis of 2013 Fortune 200

Figure 7b. Changes in executive DC plans after freezing qualified DB plan
Changes in executive DC plans after freezing qualified DB plan
N=42

Source: Towers Watson analysis of 2013 Fortune 200

After freezing or closing the qualified DB plan, the vast majority of sponsors that provide benefits for new executives do so in the DC space. Figure 8 depicts executive DC offerings for newly hired executives in companies that froze or closed their qualified DB plans. Fifty-five companies provide only a DC restoration benefit, and seven offer a DC restoration plan coupled with a SERP. Of the 11 companies that do not offer an executive DC plan, two still provide a DB SERP.

Figure 8. DC restoration plans and DC SERPs after freezing/closing qualified DB plan
DC restoration plans and DC SERPs after freezing/closing qualified DB plan
N=76

Source: Towers Watson analysis of 2013 Fortune 200

Impact of changes on elective deferral opportunities

Shareholder resistance to retirement income guarantees has prompted greater interest in elective deferral arrangements, both new programs and expansions of existing arrangements. Of the 76 companies in the analysis, 67 now sponsor an executive elective deferral arrangement. Changes to qualified programs did not materially affect elective deferral sponsorship; in fact, there were three additional elective deferral opportunities after the changes.

Hybrid plan conversions

Since 1998, 32 Fortune 200 companies converted their traditional DB plans to hybrid plans and still offered the hybrid design to new hires in 2013. While fundamentally DB plans — the employer bears the financial risk for the promised benefit — hybrid plans share characteristics of both DB and DC plans. The vast majority are cash balance plans in which individual participants are typically allocated a percentage of their pay annually, which grows with interest credits. In a cash balance plan, the interest credit basis is predefined and the employer guarantees the benefit. Although individual accounts are tracked, benefits are paid from a commingled pool of assets maintained in a separate pension trust and invested by the company.

Changes to executive programs were less drastic after hybrid plan conversions than they were after DC-only conversions. Of the 29 companies analyzed in this section,7 most continued to maintain nonqualified DB plans after the hybrid conversion (Figure 9). There was a minor shift, however, from offering both executive DB and DC plans to offering only an executive DB plan. After their hybrid conversions, four companies eliminated the DC executive program, leaving only the DB plan, while three added a DC program to the existing executive DB plan.

Figure 9. Executive benefits after qualified hybrid conversion
Executive benefits after qualified hybrid conversion
N=29

Source: Towers Watson analysis of 2013 Fortune 200

Nearly two-thirds of those that initiated a hybrid conversion continued to sponsor a DB SERP (Figure 10).

Figure 10. Restoration plans versus SERPs before and after hybrid conversions
Restoration plans versus SERPs before and after hybrid conversions
N=29

Source: Towers Watson analysis of 2013 Fortune 200

After its hybrid conversion, one company closed its DB restoration plan, leaving only an executive DC restoration plan, while another company replaced its DC plan with a DB SERP. Three companies closed their DB SERPs and now sponsor only DB restoration plans.

Summary

Many Fortune 200 companies have frozen or closed their qualified DB plans and shifted to DC-only programs, and the pattern has been much the same for executive benefits. Before these Fortune 200 companies changed their broad-based retirement programs, most of them had provided a DB restoration pension and/or a DB SERP to executives. After eliminating qualified DB pension accruals, almost all of them also eliminated executive DB plan accruals (both restoration and SERPs), and most replaced them with DC restoration plans. Nine Fortune 200 companies did not contribute to executive retirement benefits — compared with only three before the qualified plans were closed or frozen. Companies continued to sponsor elective deferral arrangements, which now appear to cover a broader group of executives.

Companies that converted to hybrid plans continued to sponsor executive DB plans, although some eliminated their DB SERPs in conjunction with the change.

Ongoing executive retirement program trends for newly hired executives

This analysis of executive retirement programs sponsored by Fortune 200 companies is consistent with the pattern documented in the Survey of Executive Retirement Benefits Practices — Benefits Data Source, which addresses the Fortune 1000. That report also finds an overall decline in the sponsorship of executive DB programs, as well as fewer SERPs being offered through executive DC programs. Moreover, survey data clearly indicate that organizations sponsoring only DC plans are less likely to provide any executive retirement plan (restoration or SERP).


Endnotes

1. In 2013, less than a third of Fortune 100 companies offered any DB plan to newly hired salaried workers, and only seven offered a traditional DB plan to new hires. See “Retirement Plans Offered by 2013 Fortune 100,” Towers Watson Insider, November 2013.

3. A restoration plan is a nonqualified plan that restores benefits lost under qualified plan limitations imposed by the Internal Revenue Code (IRC). These 2014 indexed limits include the IRC section 401(a)(17) annual compensation limit ($260,000), section 415 limits ($52,000 on annual contributions to DC plans and $210,000 in annuity benefits from DB plans), and annual limits on 401(k) deferrals ($17,500; increased to $23,000 for employees age 50 and older). The IRS adjusts these limits each year for increases in the Consumer Price Index pursuant to adjustment procedures that are similar to those used to adjust benefit amounts under Social Security. Restoration plans can be designed to supplement either DB or DC plans.

4. Only 105 companies had sufficient data available for the analysis.

5. Six companies that froze or closed their qualified DB plans were excluded from this analysis due to insufficient data.

6. After closing or freezing their qualified DB plans, most of these companies enhanced their 401(k) plans to offset the removal of the DB plans, at least to some degree.

7. We excluded three companies that converted to a hybrid pension after 1998 due to insufficient information.