Press Releases

New Analysis of FORTUNE 1000 Firms Shows Continued Shift to 401(k)s

WASHINGTON, June 27, 2006 – With the pension reform bill at a critical point in Congress, a new analysis by Watson Wyatt Worldwide shows that a significant number of the nation’s largest companies are reconsidering their commitment to providing traditional pensions to millions of U.S. workers. As a result, Watson Wyatt, a global human capital consulting firm, is calling on lawmakers to take advantage of this historic opportunity to rework the current pension laws to help companies continue to sponsor such plans.

“The traditional pension system, which has served Americans well for decades, continues to play a valuable role in ensuring employees can retire when they and their employers want them to,” said Sylvester J. Schieber, director of U.S. benefits at Watson Wyatt. “Congress has an opportunity to create an environment in which employers will be able to sponsor pensions and make sure employees have adequate retirement income. If it fails to take advantage of that opportunity, both employers and employees will suffer.”

A Watson Wyatt analysis of FORTUNE 1000 companies, many of which sponsor more than one pension plan, shows an increase in pension plan freezes and terminations.  As of April 2006, 113 companies have at least one frozen or terminated defined benefit plan or have announced plans to freeze or terminate a plan, compared with 71 in 2004. An analysis Watson Wyatt released in May showed similar trends when just the largest 100 firms were analyzed.  When plans are frozen, current plan participants receive no additional benefits from either additional tenure or increases in compensation. When plans are terminated, participants are either given an annuity or a lump sum payment. If sponsors cannot afford to pay all benefits owed, the Pension Benefit Guaranty Corporation takes over the plan.

Pension Plan Sponsorship Among FORTUNE 1000 Firms

FORTUNE List	Number of defined benefit plan sponsors	Number of plan sponsors with frozen or terminated plan
2005	627	113
2004	627	71
2003	633	45
2002	624	39
2001	638	34

The number of companies that closed a plan to new hires or announced such an intention has increased from 25 to 49 since 2004. Schieber said those statistics are particularly discouraging, as they indicate a trend with long-term implications for future generations of workers. 

Overall, 162 companies had at least one plan that was frozen, terminated or closed to new hires as of April or announced plans to take such action in the future, compared with 96 in 2004.

Regardless of Congress’ decisions on pension reform, employers should keep in mind the potential ramifications of switching from a defined benefit to a defined contribution-only system, such as a 401(k) plan. Moving to such a system may make it harder to retain employees and ensure they have adequate retirement savings.

Many employees are not taking advantage of their 401(k) plans or saving enough, and their retirement payouts will be heavily influenced by the state of financial markets.  For instance, an employee with a balanced portfolio who retired in 1999, before the dot-com bust, would have been able to replace 61 percent of his income in retirement, but a co-worker with an identical portfolio who retired just three years later would have been able to replace only 36 percent of his income. As a result, many employees will not be able to retire when they want to, or when their employer wants them to, creating workforce management issues that employers may not face with defined benefit plans. 

“As Congress considers pension reform, it should be careful not to pass laws that would make it even harder for companies to maintain their traditional pensions,” Schieber said. “Employers are clearly struggling with decisions regarding retirement plans, in large part because of decades of legal and regulatory uncertainty. It would be extremely unfortunate — for employees and employers — if new laws pushed companies in the wrong direction.” 

Read suggestions on issues that plan sponsors should consider when assessing retirement plans.

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