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Retirement Plan Design: Past, Present and Future
Executive Summary
The last 10 years have seen a shift in the U.S. retirement system. Some large employers have switched from defined benefit (DB) plans, which are managed by the employer, to defined contribution (DC) plans, in which employees typically manage their own contributions, investments and retirement income, and bear the associated risks.
Watson Wyatt surveyed large plan sponsors to explore trends in employers’ retirement plan strategies and to provide insight into their decisions, motivations and plans for the future. Retirement Plan Design: Past, Present and Future illustrates how many plan sponsors have adapted to meet the need for more portable and, in general, lower-risk and lower-cost retirement savings vehicles while staying committed to a DB approach.
Key Findings
- A major shift in plan types — from final average pay DB plans to DC and hybrid DB plans — has occurred over the last 10 years.
- The majority of plan sponsors that maintain DB plans today have made a formal decision to stay committed to them.
- Companies without a DB plan for new hires contribute about 1.4 percent of pay more to DC plans than companies with a DB plan. However, the value of these contributions is still less than the value of a typical DB plan.
- The vast majority of companies that have frozen or closed DB plans have not yet moved toward plan termination.
- The primary reasons for closing or freezing a DB plan are cost and volatility; the main reasons for converting to a hybrid plan are employee satisfaction and retention.
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