Over the last 15 years, many large employers have shifted from traditional defined benefit (DB) plans to defined contribution (DC) and account-based (hybrid) DB plans. The shift has been fueled by several factors: a desire to reduce retirement costs (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, and a belief that such a shift reduces the sponsor’s financial risk.

When DC plans become the primary retirement vehicle, responsibility and risk shift from employers to employees, who must manage their own contribution levels, withdrawals, investments and retirement distributions. For employers, the move carries other risks, such as counter-cyclical workforce trends that may necessitate increased severance pay, raise benefit costs and result in less mobility within an organization.

Towers Watson has analyzed retirement plans offered to newly hired employees since 1998 among companies in the 2013 Fortune 500. This analysis takes a historical look at the plans offered by these large employers as well as the ways employers have transitioned workers from a traditional DB plan environment into the account-based retirement world of today.

Highlights of the analysis include the following:

  • By year-end 2013, only 24% of Fortune 500 companies offered any type of DB plan to new hires, down from 60% for the same selection of employers back in 1998. So far in 2014, seven additional employers no longer offer DB plans to new hires.1
  • Half the pension sponsors in this analysis have adopted a hybrid plan and 57% were still offering it to new hires at the end of 2013.
  • 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 continue offering pension plans to new hires.
  • While the end of pension accruals represents a substantial loss for employees, most employers then contribute more to the DC plan to at least partially make up for it.

The evolution of today’s Fortune 500 retirement plans: 1998 – 2013

Tracking the same group of Fortune 500 employers over the 15-year period shows a significant decline in traditional DB offerings. Between 1998 and 2013, the percentage of employers offering a traditional DB plan to newly hired employees declined from roughly half (251 companies) to 7% (Figure 1).

Figure 1. Fortune 500 retirement plan sponsorship trends, 1998 – 2013*
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Notes: Sponsorship shown as type of plan offered to salaried new hires at year-end. Trend data are shown for the 2013 Fortune 500 companies and capture changes to their retirement plans from 1998 through 2013.

*Sums do not equal 500 because a small number of 2013 Fortune 500 companies did not exist in earlier years.
Source: Towers Watson analysis of 2013 Fortune 500

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 the benefit accruals increases as a participant nears retirement. As such, traditional DB plans are advantageous to long-tenured employees. In addition to enabling employees to maintain a reasonable standard of living into retirement, these plans were intended to encourage workers to remain with the employer. Over time, many employers shifted their focus to providing a more uniform level of retirement-directed capital accumulation for all, often opting to provide more portable, account-based retirement programs such as DC and hybrid DB plans.

Hybrid DB plans define the 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 accrual by age, service or a combination of the two). When hybrid plan participants leave their employers, they usually take their account balances with them. As hybrids are DB plans, participants must have as the primary option the right to an annuity.2

In 1998, 60% of the 2013 Fortune 500 offered some form of DB plan to newly hired workers, while 40% offered only a DC plan. While overall DB plan sponsorship was significant back then, it varied by industry (as discussed later in this analysis). For example, even 15 years ago, retail and high-tech companies tended not to offer pensions. 

The DC-only sponsorship rate (40%) is partly attributable to changes in the Fortune 500, as more employers joining the list over the years have never sponsored a DB plan. More than half (278) of the employers in this analysis were in the Fortune 500 back in 1998, and 25% of them offered only DC plans at that time. Traditional DB plan sponsors have been more likely to remain on the list: 26 of the 34 traditional DB plan sponsors in the 2013 Fortune 500 also made the list back in 1998.

Of the 24% of Fortune 500 employers still offering a DB plan to new hires in 2013, nearly two-thirds offered cash balance plans (the most common type of hybrid DB design) (Figure 2). The second largest DB offering was a traditional final average pay plan — used by 25% of current DB plan sponsors.

Figure 2. Retirement plan types offered in 2013
Figure 2. Retirement plan types offered in 2013

N=500

Source: Towers Watson analysis of 2013 Fortune 500

Employers followed different paths to their current retirement programs. Figure 3 depicts the most recent retirement plan action taken by 2013 Fortune 500 companies.

Figure 3. Most recent changes to retirement programs since 1998
Towers Watson Media

N=500

Source: Towers Watson analysis of 2013 Fortune 500

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. 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 accruing for participants but no one else can join the plan. Since 1998, 21% of 2013 Fortune 500 employers have frozen their DB plans,3 and 15% have closed the plans to new hires. Fourteen percent of employers converted their traditional DB plan to a hybrid plan and were still offering these plans in 2013. Two percent of employers terminated their DB plans, meaning benefits were frozen and then later settled via annuity purchases and/or lump sum payments. Nearly half — 48% — of these employers have not changed their retirement plan structure since 1998, with the vast majority of this group (38%) having been DC only throughout this period. Only 10% of these Fortune 500 employers retained the same DB structure from 1998 to year-end 2013.

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 plan sponsors to arrive at 2013 offerings for new hires
Towers Watson Media

Source: Towers Watson analysis of 2013 Fortune 500

Approximately 84% of sponsors of traditional DB plans in 1998 changed the retirement benefit for new hires. Forty-four percent froze or closed their plan and transitioned to a DC-only environment for new hires, and 40% converted the traditional DB plan to a hybrid DB plan.

Of the employers offering hybrid plans at the beginning of 1998, 44% still offered them to new hires in 2013. Of the employers that have converted their traditional DB plans to hybrids since 1998, 63% still offered them to new hires in 2013. Slightly less than half of all DB plan sponsors in the Fortune 500 have sponsored hybrid pensions at some point since 1998.

The shift away from DB plans seems less sweeping when hybrid sponsors are considered. At year-end 2013, 57% of all Fortune 500 employers that had established hybrid plans at some point in time (or half of all DB plan sponsors) still offered them to new hires.

Retirement plan design trends by industry

While the shift to a DC-only environment has been widespread, some sectors seem more inclined than others to make the switch or to have never offered a DB plan. Figure 5 depicts retirement plan types offered to new hires in the 2013 Fortune 500 by industry sector at the beginning and end of the analysis period.

Figure 5. Plans offered to new hires by industry (sorted by open DB plan prevalence) in 1998 versus 2013
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Source: Towers Watson analysis of 2013 Fortune 500

Most Fortune 500 employers in the utilities and insurance sectors still offer DB plans to new hires. Utilities are typically heavily unionized and have chosen to keep their retirement structure consistent between their union and nonunion workforces, and the sector tends to have lower turnover than other sectors.4 Moreover, many jobs at utilities companies are physically demanding, and DB plans encourage/allow workers to retire at an appropriate time.

The insurance sector includes mutual insurance companies and these employers face different external pressures and may have different retirement program objectives than those in other industries. Additionally, due to their training and the nature of their work, employees in the insurance sector may be more inclined to understand and appreciate DB plans relative to workers in other sectors.

The high-tech, services and retail sectors have historically had low DB plan sponsorship rates, and DC plans are probably a better fit for their business needs (e.g., their relatively high turnover makes portability more important).

Economic conditions and workforce demographics affect plan design trends. Between 1998 and 2013, the most striking changes have been in the automobiles and transportation, food and beverage, manufacturing, finance and communications industries, which had a significant uptick in DC-only sponsorship: +51% in finance and manufacturing and nearly +80% in the automobiles sector, with communications and food and beverage falling in between. With the exception of food and beverage, these sectors have a very high concentration of frozen pension plans. Employers in the food and beverage sector have been much more likely to close their DB plans to new hires in recent years.

DB plan sponsorship by relative plan size

There is a relationship between plan size (relative to the value of the organization) and pension changes. Figure 6 shows current pension size, as measured by comparing a company’s projected benefit obligation (PBO) to its market capitalization, by the most recent change to the DB plan.

Figure 6. Average plan size by last action taken by DB plan sponsors
Figure 6. Average plan size by last action taken by DB plan sponsors

N=267

Note: Results are shown for companies where financial data were readily available.
Source: Towers Watson analysis of 2013 Fortune 500

As shown in Figure 6, on a median basis, open DB plans are slightly less than half the relative size of frozen and closed plans. The difference is even more pronounced when measured by average plan size, mostly because employers with outsize plans are more inclined to close their DB plans to new hires.

Figure 7 depicts plan sponsorship in 2013 for all DB plan sponsors in the Fortune 500 — whether plans are open, closed or frozen — broken out by size. All employers with extremely large plan obligations (more than 100% of the firm’s value) have switched to a DC-only environment.

Figure 7. Retirement plan status at year-end 2013, based on relative plan size
Towers Watson Media

N=267

Note: Results are shown for companies where financial data were readily available.
Source: Towers Watson analysis of 2013 Fortune 500

Open DB plans are more likely to also be relatively smaller pensions. Most employers whose DB plans were between 5% and 9.9% of their firm value still offered open DB plans to new hires in 2013. These employers’ relatively low pension risk might have affected their decision to keep their plans open. On the other hand, only 26% of plans whose obligations were less than 5% of the company’s market capitalization still offered a pension to new hires in 2013. Many employers in the finance sector have small plans relative to firm value, but finance has one of the highest growth rates in DC-only sponsorship, perhaps due to external pressures to control costs.

In addition to relative size, plan sponsorship trends also vary based on 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 8 depicts the relationship between a plan’s funding deficits/surplus and plan status. Plans with significant deficits are more likely to be closed or frozen than those with surpluses, whose sponsors appear to be finding ways to manage costs and maintain benefits.

Figure 8. Retirement plan status at year-end 2013, based on funding deficits/surplus over market capitalization
Figure 8. Retirement plan status at year-end 2013, based on funding deficits/surplus over market capitalization

Source: Towers Watson analysis of 2013 Fortune 500

Transitioning workers from DB plans to DC plans

Most employers take one of three broad approaches to transitioning to a DC-only environment. The first is to close the DB plan to new hires, meaning all participants as of a certain date continue accruing benefits, either at the same or a reduced level. The second approach is a partial freeze, in which only participants who meet certain age and/or service requirements continue accruing benefits in the DB plan. All other participants are switched to the retirement plan offered to new hires. The third approach is a complete freeze, where the sponsor stops all DB accruals and moves all participants to the retirement program offered to new hires.

Of the employers that adopted a DC-only approach since 1998, 42% closed the DB plan to new hires, 7% partially froze the DB plan,5 and the remaining 51% froze the plan completely.6

As shown in Figure 9, employers varied the details within the three broad transition approaches. The most frequent approach (39%) was freezing the plan completely and enhancing benefits in the DC plan for all workers. The next most common tactic (35%) was keeping the DB plan open for current participants and increasing DC benefits for newly hired workers. Seven percent of employers froze the DB plan completely, enhanced DC benefits for everyone and gave former DB plan participants a larger DC benefit than new hires.

Figure 9. Transition approaches in moving from DB to DC-only environment
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N=169

Note: Results are shown where transition data were available.
Source: Towers Watson analysis of 2013 Fortune 500

Changes made by Fortune 500 companies to DC plans after eliminating the DB formula

Almost all employers that closed the DB plan to new hires increased DC benefits for them. As shown in Figure 10, the most prevalent approach (59%) was to add a non-elective contribution to the DC plan, meaning the employer contributes whether or not the employee does (similar to cash balance plan pay credits). Eleven percent of employers that kept their DB plans open for existing participants increased the match for newly hired workers. An additional 11% of employers increased the match for newly hired employees and also added a non-elective component to their plan design.

Figure 10. Changes to DC plans in companies that closed their DB plans to new hires
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N=71

Note: Results are shown where transition data were available.
Source: Towers Watson analysis of 2013 Fortune 500

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 DB plans to new hires. Figure 11 shows total DC employer contributions provided to 35-year-old employees earning $50,000/year for two groups: continuing DB plan participants with five years of service and new hires.

Figure 11. DC employer contributions at companies that closed their DB plans to new hires (% of pay)
Towers Watson Media

N=69

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 made the contributions necessary to receive the maximum matching contribution.
Source: Towers Watson analysis of 2013 Fortune 500

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-elective contributions for new hires (which generally do not fully replace the pension loss). Traditional DB plan sponsors were more likely than hybrid plan sponsors to keep the DB plan going for some or all participants (as shown later). Both plan types increased their DC benefit by adding a nonmatching contribution.

We next analyze changes to the DC plan when the sponsor partially froze the DB plan, meaning some workers remained pension-eligible while others were moved into the DC-only program offered to newly hired workers. As shown in Figure 12, the most prevalent action (38%) was to add a non-elective contribution for former DB plan participants and new hires. The second most popular transition strategy was to increase the employer match in the DC plan (31%). 

Figure 12. Changes to DC plans in companies that partially froze their DB plans Towers Watson Media

N=13

Note: Results are shown where transition data were available.
Source: Towers Watson analysis of 2013 Fortune 500

One employer provided the same benefit to both new hires and former DB plan participants, but the new hires received the additional value through a DC match while the former DB participants received it through a non-elective contribution.

Figure 13 quantifies DC benefits as a percentage of pay for employers that partially froze their DB plans. The total employer contribution for former DB plan participants and new hires was 2.7% of compensation higher than the contribution for DB plan-eligible workers. For these employers, on average, the additional benefit for former DB plan participants and new hires was distributed fairly evenly between the match and nonmatch. All but one of the employers that partially froze their DB plans had provided traditional DB plans before moving to a DC-only environment for new hires and formerly pension-eligible workers.

Figure 13. DC employer contributions at companies that partially froze their DB plans
(% of pay)
Towers Watson Media

N=13

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: Towers Watson analysis of 2013 Fortune 500

We next analyze what happened to DC plans when the sponsor moved all employees to a DC-only program (Figure 14).

Figure 14. Changes to DC plans in companies that fully froze their DB plans
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N=85

Note: Results are shown where transition data were available.
Source: Towers Watson analysis of 2013 Fortune 500

Employers took many different approaches after a full pension freeze. The changes are similar to those for the other two transition groups, with the majority (68%) of employers either adding a non-elective contribution to the DC plan, increasing the current match or some combination of the two. In 14% of companies that completely froze their DB plans, former DB plan participants received larger DC contributions than those who had never had a pension.

Figure 15 shows average total DC employer contributions for former DB plan participants and new hires, as well as what the DC plan used to yield before the DB plan was fully frozen.

Figure 15. DC employer contributions from companies that fully froze their DB plans (% of pay)
Towers Watson Media

N=82

Note: Results are shown where transition data were available.
Source: Towers Watson analysis of 2013 Fortune 500

In the transition from the original DC plan to the enhanced DC plan, former DB plan participants gained an average of roughly 2.7% of pay, roughly in line with the other groups. The difference between new hires and former DB plan participants was 0.3% of pay, most of which was in the form of a non-elective contribution. As stated earlier, hybrid plan sponsors seem more inclined to freeze the DB plan completely compared with sponsors of traditional DB plans. Of DB plan sponsors that moved to a DC-only arrangement, 61% of those with hybrid plans fully froze their plans versus 44% of those with traditional DB plans. When hybrid sponsors freeze their plans completely, however, they generally offer a stronger matching benefit than their traditional DB plan counterparts (about a 1% differential today).

Transitioning workers from traditional DB plans to hybrid plans

Some employers chose to convert their traditional DB plans to hybrid plans. In 2013, roughly 70% of active pension sponsors in the Fortune 500 offered hybrid pensions to new hires (or 17% of all Fortune 500 companies), and around 80% of them (67 of 84) converted traditional DB plans to hybrid plans between 1998 and 2013. Figure 16 depicts the timing of these conversions.

Figure 16. Hybrid conversions, 1998 – 2013
Towers Watson Media

N=67

Note: Results are shown only for hybrid plans still active in 2013.
Source: Towers Watson analysis of 2013 Fortune 500

Before 2004, employers were converting traditional pensions to hybrids at a steady pace — more than half 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 during 2013) used various methods to transition workers into the new hybrid plan. Nineteen percent of employers kept current workers in traditional DB plans and enrolled new hires in the hybrid plans. Twenty-six percent allowed employees to choose between the traditional pension plan and the hybrid plan. Six percent kept workers who met specific age and/or service criteria in the traditional plan and shifted other workers into the hybrid plan.

Roughly one-third of these active hybrid sponsors froze traditional accruals and moved all workers to hybrid plans. Among this group, 60% used an A+B approach, where A represents the frozen traditional pension benefit and B represents the accruing hybrid balance. The other 40% froze the traditional DB plan and converted the pension accruals into opening account balances.7 The remaining employers offered employees the greater of the traditional or the hybrid benefit.

An account balance world

In 2013, 93% of Fortune 500 employers offered newly hired employees only account-based retirement plans (Figure 17).

Figure 17. Traditional DB pensions versus account-based plans, 1998 – 2013 Towers Watson Media

N=500

Source: Towers Watson analysis of 2013 Fortune 500

We next analyze the percentage of pay employers allocated to their account-based plans annually. Figure 18 shows total 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 18. Total annual allocations to account-based retirement plans for new hires (% of pay)
Towers Watson Media

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 made the contributions necessary to receive the maximum matching contribution and exclude the 34 traditional DB plan sponsors.
Source: Towers Watson analysis of 2013 Fortune 500

On average, a newly hired employee received retirement benefits worth 9.3% of pay at a company with a hybrid plan versus 5.7% of pay at a DC-only company. Among DC-only companies, employer contributions varied significantly, from an average 4.7% at companies that were always DC only to 6.7% at those that once sponsored a pension.

The different contributions shown in Figure 19 between employers that were always DC only and those that used to have active DB plans arise from companies eliminating their DB plans and then boosting the match, adding a non-elective contribution or both, as discussed earlier in the analysis.

Figure 19. Total annual contributions to account-based retirement plans for new hires (% of pay)
Towers Watson Media

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 made the contributions necessary to receive the maximum matching contribution and exclude 34 traditional DB plan sponsors.
Source: Towers Watson analysis of 2013 Fortune 500

More shifts away from DB plans so far in 2014

So far in 2014, a handful of employers have announced changes. Three of the 34 sponsors of traditional DB plans in 2013 have since closed their DB plans to new hires and now offer only DC plans. One froze accruals for current participants, while two closed the DB plans to new entrants but continue to accrue benefits for pension-eligible employees.

Additionally, four hybrid plan sponsors (of 84 in 2013) closed their plans to new hires in 2014. Three employers froze pension accruals for all participants, while one is continuing accruals for current plan participants.

Given these changes, the percentage of Fortune 500 employers offering any type of DB plan to new hires has fallen from 24% in 2013 to 22% so far this year.

There have been other significant changes among sponsors that had already closed their DB plans to new hires. Eight of these employers decided to freeze accruals for remaining DB plan participants in 2014. Two employers started the termination process with the goal of settling their frozen pension obligations.

Conclusion

Since 1998, the retirement environment at Fortune 500 companies has changed dramatically. Back in 1998, 60% of employers in the 2013 Fortune 500 offered some form of DB plan to newly hired workers. By 2013, only 24% offered DB plans — traditional or hybrid — to new hires. Traditional DB plans have fared the worst. The number of Fortune 500 companies offering traditional DB plans to new hires fell from 51% in 1998 to 7% in 2013. Half the employers in this analysis that sponsored DB plans (open, closed or frozen) maintained hybrid plans during the analysis period. Fifty-seven percent of employers that established hybrid plans, either before or after 1998, still offered the benefit to new hires in 2013.

Despite the sharp decline, however, some employers have hung onto their DB plans, most commonly companies in certain sectors and those whose pension obligations are small relative to the value of their firms.

Employers have used various approaches to transition workers from a DB plan to a DC-only environment. Some keep the DB plan open for existing participants, while others stop all accruals. Although the loss of future pension accruals is substantial, most employers contribute more to employees’ DC plans to at least partially make up for the loss.

So far in 2014, the march away from DB plans has continued, as seven employers that offered DB pensions in 2013 have moved to a DC-only structure for new hires.

Changes in the retirement environment over the last 15 years signal a large-scale redistribution of corporate resources for retirement benefits. Employers have been paring back their spending, as well as spreading their retirement dollars more evenly across the workforce. Traditional DB plans offered employers greater control over workforce retirement patterns. Account-based plans shift more responsibility to employees and generally result in less regular retirement patterns.


Endnotes

1. All retirement plans covered in this analysis represent offerings for newly hired salaried workers.

2. Note that many traditional DB plans also offer lump sum distributions at retirement.

3. If an employer closed a plan and later froze it, the results capture the freeze. Among companies that froze their DB plans for some or all workers, 28% had closed it first.

5. All but one of these partially frozen DB plans had been traditional DB plans prior to the change.

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

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