Traditional Pensions Hit Record Low

Workers at companies that once had pensions get a bigger 401(k) match.

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The number of large companies offering traditional pension plans hit a record low this year. Only 13 Fortune 100 companies sponsor a traditional pension plan open to newly hired workers, down from 17 in 2010 and 89 in 1985, according to a study by Towers Watson.

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Traditional pension plans that promise workers guaranteed payments for life have been almost completely replaced by 401(k) plans that employees must manage themselves. In 1989, just 10 Fortune 100 companies offered a 401(k) or similar type of retirement account as their sole retirement plan. Now 70 Fortune 100 companies provide only a 401(k) to new employees. Another 17 Fortune 100 employers offer a hybrid pension plan that typically offers a lump-sum account balance upon retirement rather than lifetime annuity payments.

“The shift to defined contribution plans as the primary retirement vehicle transfers the responsibility and risk for capital accumulation for retirement from employers to employees, who are left to manage their own contribution levels, withdrawals and loans, investments, and retirement distributions,” according to the Towers Watson report.

[See 6 Little-Known 401(k) Perks.]

Some of the decline in traditional pension plans can be attributed to turnover in the Fortune 100 list. Six companies are new to the 2011 list. However, when only the companies on this year’s list are analyzed the dramatic shift from pensions to 401(k)s is still evident. Some 64 of today’s Fortune 100 companies offered a traditional pension in 1998. Now just 13 continue to provide this retirement benefit. And 28 of these employers had only a 401(k) in 1998, a number that has climbed to 70 today. Over the same time period the number of hybrid pension plans more than doubled from 8 to 17. Between January and May 2011, seven Fortune 100 companies stopped offering defined-benefit plans to new hires and switched to only offering a 401(k).

The decline of traditional pension plans is often felt most acutely by people who began their careers thinking they would receive a guaranteed retirement payout, only to stop accruing benefits mid-career. Twenty-two companies on this year's Fortune 100 list have frozen a pension plan since 1998. Workers in frozen pension plans will get the retirement benefit they have already earned, but will not continue to accrue higher payments based on continued work or have their highest earning years at their end of their career factored into the payment. In some cases participants who met certain age or service requirements were allowed to continue accruing benefits in the pension plan, while those who didn’t make the cutoff were switched over to the retirement plan offered to new hires. Another 20 employers closed the pension plan to new hires, but allowed all existing employees to continue to accrue benefits in the plan. And 14 companies converted their traditional pension to a hybrid pension plan. When companies switched to the hybrid plan, five companies allowed existing workers to stay with the traditional plan, four firms gave employees a choice between the two plans, and 5 employers moved all workers into the hybrid plan.

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However, there is one benefit to working for a company that has a frozen pension plan. Employers that once provided a pension, but no longer do, tend to provide larger 401(k) contributions than companies that never offered a traditional pension plan. “The difference in allocation amounts between employers that always had a defined contribution plan and those that once had a pension is attributed to companies' eliminating their defined benefits and then boosting the match, adding a non-elective contribution, or both,” according to the Towers Watson report. A newly hired 35-year-old employee earning $50,000 would receive an average employer 401(k) contribution of 7.67 percent of pay at a Fortune 100 company that once had a pension plan, assuming he makes the necessary contributions to receive the full employer match, Towers Watson found. If the same worker got a job at a Fortune 100 company that never had a pension plan he could only get employer 401(k) contributions worth an average of 4.77 percent of pay.

Twitter: @aiming2retire

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