Hunting the Elusive Benefit Package

The endangered benefit plans nears extinction

Back Article Mar 1, 2012 By Rich Ehisen

While much of the local and national talk around pension reform is directed at public employees, the biggest current changes are occurring in the private sector.

That evolution is particularly sharp for defined benefit plans, those that offer retirees a set income post-employment. The traditional pension that many Americans once considered a birthright has declined for decades. U.S. Department of Labor figures show defined benefit plans peaked in 1980 and covered about 38 percent of all private sector U.S. workers before falling to about 20 percent of the nongovernment workforce by 2008.

“There has definitely been a retraction in the offering of defined benefit plans, both nationally and in this region,” says Allen Knott, vice president of sales for the Sacramento office of the Principal Financial Group. “For the few out there, we’re seeing either a hard or soft freeze, with the ultimate goal of terminating the plan.”

The move toward extinction has accelerated in recent years. Research by global consulting firm Towers Watson indicates that only 13 of the nation’s Fortune 100 companies offered new employees a defined benefit pension plan in 2011, down from 58 in 2000. A CFO Research survey conducted in the fall of 2011 for consulting firm Mercer indicates that of 192 large U.S. companies with defined benefit plans, 68 percent had frozen them within the past five years. Of those, 47 percent had implemented a soft freeze, closing plans to new workers while continuing accruals for current employees; 21 percent had enacted a hard freeze by ending all accruals.

Only a handful of private-sector employers in the Sacramento Region still offer defined benefit pensions, with varying degrees of stability. The McClatchy Co., for instance, which counts the Sacramento Bee among its 30 daily newspapers, froze its pension plan in 2009 after enduring significant financial losses in the wake of its multi-billion dollar purchase of the Knight-Ridder Inc. media chain.

The state’s economic slowdown has also impacted the Sacramento Municipal Utility District, which has restructured pensions for its nonunionized professional workers, participants in the California Public Employee Retirement System. Although required to contribute 7 percent of their income toward retirement, Chief Workforce Officer Gary King says SMUD has traditionally covered that cost for its professional-class employees. But, King says, those workers are now paying 1.5 percent of contribution, and could eventually be required to pay the full amount if a pension reform proposal from Gov. Jerry Brown becomes law.

“The market will determine if there are any further increases in employee pension costs,” King says. Gov. Jerry Brown has also proposed legislation to make anyone participating in the California Public Employee Retirement System pay their full pension percentage.

In contrast, the nonprofit Sutter Health organization continues to offer its 45,000 employees a defined benefit pension. Doing so does not come cheap. Sutter has pumped approximately $1 billion into its pension fund over the past four years, including $400 million this January. In a statement, Sutter Health President and CEO Pat Fry called funding the system “a top priority.”

Sutter Health CFO Bob Reed says the organization’s pension plan funding is indicative of its overall business philosophy. “A lot of companies are focused primarily on short-term goals,” he says. “But we take a very long view of our business. We think we have a terrific plan that is a great benefit for our employees, and by keeping it funded now we don’t ever fall behind the eight ball.”

Standard & Poor’s Financial Services has also taken note of Sutter’s pension stability, citing it among the reasons for upgrading the organization to an AA- credit rating in January. Even so, local financial experts don’t anticipate other regional employers duplicating Sutter’s efforts soon.

“Private-sector defined benefit plans are a thing of the past,” says Scott Hanson, founding principal of Sacramento financial advisory firm Hanson McClain. “I can’t think of one that has started in the last decade.”

The reason for that is simple, says Jeff Chang, a partner in Chang Ruthenberg & Long, a Folsom legal firm specializing in employee benefits law. “With a defined benefit pension plan, all the risk for keeping it funded falls on the employer, and most of the big employers have been getting killed over the last few years,” he says, noting Sutter’s bottom line is in decidedly better health than McClatchy’s.

With traditional pensions withering, self-directed defined contribution plans — predominantly the 401(k) — have become the employers’ standard offering. But those have also not been immune to the volatility of the national economy. According to the Pension Rights Center, from 2008 to 2010 hundreds of companies nationwide reduced or suspended matching funds they had been offering workers who invested into their 401(k).

Research by global consulting firm Towers Watson indicates that only 13 of the nation’s Fortune 100 companies offered new employees a defined benefit pension plan in 2011, down from 58 in 2000.

That also might be changing again. A 2011 Towers Watson survey of 260 companies that stopped their 401(k) match since 2008 shows 75 percent have restored the match in recent months. Of those, 74 percent have done so at the same rate as before the interruption, while 23 percent returned with a lower match. Just 3 percent increased their offering.

Locally, Principal’s Knott says he is seeing a “general reconsideration of the employer match, but they are not as generous as they used to be.” He also notes that some companies are making such matches discretionary.

“More companies are now giving themselves the option to give or not give the match at the end of the year, based on their cash flow,” Knott says, adding that some employers are “stretching” their match, or offering 50 cents for every employee dollar contributed up to 6 percent rather than the more common dollar-for-dollar match up to 3 percent.

Pat Islip, managing partner of Islip + Co. CPAs in Sacramento, says he believes rising health care costs and the economy’s slower-than-hoped uptick make him doubt matches will ever fully return.

“I see this year pretty much as a hold with no employer match,” he says. “When you look at total compensation, are employers more likely to do a 401(k) match or are they going to keep covering health insurance increases of 17 percent over the previous year?”

Jeff Chang notes employers are becoming more conscious of their 401(k) plan costs. That will likely increase under new U.S. Department of Labor rules that go into effect April 1, requiring plan providers to fully disclose all of the fees they charge employers. Additional rules taking effect in May require employers to ensure participating employees have that information too.

In theory, that will allow employers to shop around for the most affordable plans. Another rule that went into effect last December should also help: Plan administrators now may offer investment advice to those participating in a 401(k) plan as long as they don’t profit from the investments they recommend.

Even with favorable new rules and at least some return of the employer match, financial observers say it is unclear whether workers who stopped contributing to their 401(k), or who never started in the first place, will do so now.

“Many of my clients struggle to understand their choices,” says Dianna Laney, a certified financial planner and retirement counselor who owns Laney Financial Services in Sacramento. “Most 401(k) plans have done a great job of selling the idea of matching funds, but as matching funds go away, people don’t see the immediate benefit anymore.”

Age can also be a factor, Islip says.

“Younger workers don’t care about the 401(k),” he says, noting that many younger workers don’t make enough money to feel they can contribute. “They don’t care about the match. They don’t see value in it.”

But there is value for employers in getting more lower-wage workers into the plan, says Chang, because 401(k) plans are subject to “testing rules” that require the average deferrals and contributions of a company’s highly compensated employees to be within a certain range of its non-highly compensated employees. Plans with ratios askew can force employers to make bigger matching contributions to lower-wage workers or refund money to high-wage earners.

Knott says scenarios like that have prompted growing interest in automatic employee enrollments, which require workers to opt out of the company 401(k) plan, often on an annual basis, as a hedge against those repercussions.

Other options are also gaining traction around the region. Some are old ideas, such as multiple-employer plans, while others are newer, including the Employee Stock Option Plan. Regardless of which tack they take, with costs rising all the time — and rules changing every year — employers are sure to continue looking for ways to maximize their retirement planning.

“This recovery has been different than previous economic recoveries,” Chang says. “Businesses are being very careful about getting overextended again.”

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