Press Releases

New Analysis Shows Largest U.S. Companies Continued
Shift to 401(k) Plans in 2005

WASHINGTON, May 3, 2006 – With its new analysis showing the largest U.S. companies continued to shift from traditional pensions to 401(k) plans in 2005, Watson Wyatt Worldwide urges Congress to act on long-standing funding and regulatory issues affecting pensions.  At the same time, the firm’s experts say employers should get a true reading of their plans’ cost structure and of related workforce management issues before making plan changes.

“As Congress considers a major rewrite of pension laws and the marketplace sorts out the best way to handle employee retirement programs, the defined benefit system finds itself at a very critical stage,” said Sylvester J. Schieber, director of U.S. benefits consulting at Watson Wyatt, a global human capital consulting firm.  “Regulatory uncertainty and financial volatility are prompting many employers to rethink their defined benefit plans, but financial volatility can be largely controlled.  Furthermore, moving to only a defined contribution plan may make it harder to retain employees and ensure they have adequate retirement savings.  Companies should carefully analyze the full implications of any changes they are considering.  Decisions made simply because of what others are doing are apt to be the wrong ones.”  

In its analysis of retirement plans at FORTUNE 100 companies, Watson Wyatt found that 37 percent offered a traditional pension plan to new hires in 2005, compared with 42 percent in 2004 and 50 percent three years ago.  In 1985, nearly nine out of 10 FORTUNE 100 companies offered a traditional defined benefit plan.  Meanwhile, the percentage of companies offering workers only a 401(k) or other type of defined contribution plan increased from 25 percent in 2004 to 36 percent in 2005.  Three years ago, only 17 percent offered just a defined contribution plan.  The 2005 analysis includes all companies that have announced pension changes to date.

Distribution of Retirement Plans Among FORTUNE 100 Companies

Although the companies included in the FORTUNE list change every year, the overall trends hold true even if only the companies that have remained on the list are analyzed.  Thirty-four of the companies on the FORTUNE 100 list in 1986 are on the list this year.  Of those firms, 26 percent offer only a defined contribution plan today, most having frozen or closed their defined benefit plans.  Another 24 percent offer a hybrid plan, and 50 percent offer a traditional pension plan.  Eighty-three of the firms on the list in 2003 are on this year’s list.  Of them, 37 percent now sponsor only a defined contribution plan, 24 percent a hybrid plan and 39 percent a traditional plan.

The Watson Wyatt analysis also found that employers are moving away from hybrid pension plans, generally cash balance and pension equity plans.  Only 27 percent had a hybrid plan in 2005, compared with 33 percent in 2004.  Until 2002, hybrid plan adoption was on the rise, but legislative and regulatory challenges have stymied their growth.  Hybrids are defined benefit plans in which employees’ benefits are expressed in terms of current lump sum values, instead of as annuities after retirement.  They combine aspects of defined benefit and defined contribution plans, but are technically defined benefit plans.

“It’s unfortunate that some employers are dropping their hybrid pension plans,” Schieber said.  “Hybrids can be a win-win, offering employers a way to avoid the financial volatility of traditional defined benefit plans while ensuring that employers, not employees, retain the investment risk. Unless Congress takes some definitive action on pension reform legislation, employers may ultimately conclude that they have little choice other than to abandon these plans in favor of only a 401(k) plan, even if that is not the right decision for their company and workforce.” 

Kevin Wagner, the practice director for growth in Watson Wyatt’s retirement practice, noted that employers should monitor a variety of potential pension-related developments as they reconsider their retirement plans.  “With legislative and regulatory decisions, marketplace comparisons and demographic changes in the workforce up in the air, companies may want to use the next few months to think through their options as they wait to see what the new landscape looks like,” he said.

  Read more about aspects plan sponsors should consider before making changes.

About Watson Wyatt Worldwide

Watson Wyatt (NYSE: WW) is a leading global human capital and financial management consulting firm.  The firm specializes in employee benefits, human capital strategies, technology solutions, investment consulting, and insurance and financial services.  Watson Wyatt has 6,000 associates in 30 countries and is located on the Web at www.watsonwyatt.com.

Contact

Ed Emerman, 609/452-5967, eemerman@eaglepr.com
Emily Rieger, 703/258-7634, emily.rieger@watsonwyatt.com