EBRI Issue Brief

Retirement Income Adequacy After PPA and FAS 158: Part One—Plan Sponsors’ Reactions

Jul 10, 2007 32  pages

Summary

EBRI/Mercer survey of retirement plan sponsors: In the spring of 2007, EBRI and Mercer Human Resource Consulting surveyed defined benefit (pension) sponsors to gauge their recent activity as well as planned modifications with respect to both defined benefit and defined contribution (401(k)-type) plan design and investment behavior within the defined benefit plans. The survey also was able to determine what, if any, increases in employer contributions to defined contribution plans were provided in conjunction with the defined benefit modifications.

Past two years—A third changed their pensions: Just over 35 percent of the respondents had made at least one change to their plan in the last two years. The most frequent responses were to close the plan to new hires (25.3 percent) or freeze the defined benefit plan for all members (12.9 percent).

Next two years—Another third looking to change their pensions: Looking forward to planned changes, just over 33 percent of respondents that had not already changed their defined benefit plan in the last two years indicated they were likely to make a change in the next two years. Again, the most common change was to close the plan to new hires (19.0 percent); those planning to freeze the defined benefit plan for all participants rose to 14.2 percent.

Many sponsors that cut pension benefits are increasing defined contribution benefits: For those pension plan sponsors that closed their defined benefit plan to new hires in the last two years, 78 percent reported they would increase employer contributions to the defined contribution plan. For those that plan to close their pension in the next two years, 80.9 percent reported they would increase employer contributions to their defined contribution plan.

Automatic enrollment tied to pension changes: Among defined benefit pension sponsors that have closed their plan to new hires in the last two years or are planning to do so in the next two years, a relatively large percentage have already adopted automatic enrollment in their 401(k) plan, and a considerable percentage of those that have not are currently considering it:

   --> Of those sponsors that have already closed the pension plan to new hires, 59 percent have adopted automatic enrollment features in the 401(k) plan, as opposed to 42 percent of those that have not.

   --> Of those sponsors that will close the plan to new hires in the next two years, 61 percent have adopted automatic enrollment features, compared with 39 percent for those that do not plan to close the plan in the next two years.

Benefits strategy, new pension law and accounting rules are affecting pension plans: The EBRI/Mercer survey shows that the driving forces behind these retirement plan changes are implementation of an overall business strategy to restructure employee benefits, followed by a new law (the Pension Protection Act of 2006, or PPA) that has increased pension funding costs and/or major new and pending accounting rules by the Financial Accounting Standards Board (FASB).

Retirement income projections must account for PPA/FASB reactions: Any analysis of the retirement income adequacy of future retirees must factor in the extraordinary plan changes among defined benefit sponsors in the last few years, as well as their likely reaction to PPA and FASB rules—especially the widespread phenomenon of employers providing new or additional contributions to a defined contribution plan in an attempt to at least partially indemnify workers for the reduction in future pension benefits.