July 19, 2007

Employers Continue to Ditch DB Plans

But as plans close, sponsors boost contributions to workers' 401(k) plans

More and more pension plan sponsors are either closing their defined benefit pension plans to new hires or have frozen it to all participants because of the costs associated with new rules under the Pension Protection Act (PPA) and pending accounting rule changes under FAS 158, a new survey conducted by the Employee Benefit Research Institute (EBRI) and Mercer Human Resource Consulting has found.

Even as these sponsors are shutting the door on DB plans, however, they are increasing contributions to workers' defined contribution or 401(k) plans, the survey reveals.

In the last two years, a little more than 35% of 162 plan sponsors polled said they had made at least one change to their DB plan, the survey says. The most frequent responses (25.3%) said they had closed the plan to new hires, while 12.9% said they had frozen the plan for all members.

Just over 33% of the respondents that hadn't changed their DB plan in the last two years said they were likely to do so in the next two years, the survey says. The most common plan was to close the DB plan to new hires (19.0%), with 14.2% saying they planned to freeze their DB plans to all members.

Among the plan sponsors who closed their DB plans to new hires in the last two years, 78% said they would increase employer contributions to their 401(k) plan. For those who plan to close their DB plan in the next two years, 80.5% said they also would boost contributions to their 401(k)s.

The survey also found that 59% of sponsors who have closed their DB plan have adopted automatic enrollment in their 401(k) plans, while 42% have not. Of those sponsors who will close their plans to new hires in the next two years, 61% have adopted auto enrollment, compared to 39% who do not plan to close their plan in the next two years.

The EBRI also addressed how employee health and rettirement benefits impact the federal budget. For the next fiscal year (2008) all employee benefits-related tax expenditures ($328 billion) will account for 34.1% of the $961 billion tax expenditures in the President's budget, EBRI states. (The concept of tax expenditures is a measure of federal tax revenue "lost" to the Treasury under preferential provisions in the tax code.) Tax-favored employment-based health insurance benefits will account for the largest tax expenditure in the budget ($160 billion, or 16.7% of the total amount), EBRI says. Employment-based retirement plans will make up $92 billion, or 9.6%, of the total amount and 28.2% of all employee benefits-related tax expenditures, it concludes.

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