Without doubt, defined contribution plans, such as 401(k) plans, are still much in demand. But subtle signs are emerging that traditional defined benefit retirement plans are not only still here, but they are actually attracting renewed interest, albeit in alternative forms.
Anyone who is doing retirement income planning needs to stay tuned to the changing environment.
The uptick in sales of immediate annuities, as detected in recent statistics from LIMRA International, Windsor, Conn., is one indication of consumer interest in having a DB-type income stream. Year to date, sales are up 3% according to LIMRA, and they are also up over last year. (Here is a related article by LIMRA’s Joe Montminy.)
That’s not a huge jump, but it’s worth watching, given that immediate annuities are often considered to be the individual version of DB plans.
Another indication came earlier this year in a survey by MetLife, New York City. Employees who were polled seem to be much more interested in annuitized retirement benefits than their employers are, the survey found. In fact, 50% of surveyed employees said they want retirement income products, but only 21% of employers said they are looking for products that will help employees convert retirement savings into income. (See our article on this here .)
The lagging interest of employers detected in that survey may be a sign that the two-decades-old tendency of businesses to leave DB plans is still alive and well. It may also be a signal that some corporations don’t want to focus on helping employees who have retired, preferring instead to concentrate their precious resources on helping current employees meet their obligations
However, a newer survey put out by Prudential Financial, Inc., Newark, N.J., suggests something different may be afoot. It found that many corporate finance officers want DC plans to be more like DB plans. Among other things, about two-thirds of the 140 CFOs who were polled would like to see DC plans include features such as guaranteed income during retirement. (See our article on this here.)
It could be that the two surveys sampled different employer groups or maybe they asked significantly different questions. Or it could be that the newer survey has picked up a change in thinking about DB plans that is only now surfacing. Or it may have touched a nerve regarding receptivity to DB plan alternatives, not DB plans themselves.
Another sign of change is the decision, by a handful of retirement plan providers, to provide retirement plans that employees can use to create “personal pensions” that walk and talk very much like the old DB plans. Such plans have been available for only a couple of years, so reports on their market penetration are still sketchy. But that they exist at all is one more development to keep in mind.
The interest in DB-type plans is evident even in the non-qualified deferred compensation plan market. Such plans use insurance products to promise a fixed income for corporate executives and other highly compensated employees following retirement. They are popular in the executive suite because they assure that benefits will not be endangered by the employer’s cash flow demands.
In a recent article, NU Senior Editor Warren Hersch notes that the NQ deferred comp market is drying up, in large part due to recession-related factors. Even so, he quotes Albert Schiff as saying that, among the most senior execs, “defined benefit-like supplemental executive retirement plans” are enjoying an upswing, particularly arrangements that tie compensation to tenure. Schiff is chief executive officer of NYLEX Benefits, a Stamford, Conn.-based arm of New York Life. (Read the Hersch article here.)
Again, that’s an indication of interest, not proof of an all-out trend.
Yet another indicator can be found in the new law affecting retirement plans which came into being under the Pension Protection Act of 2006. This law added Section 414(x) to the Internal Revenue Code.
What is Section 414(x)? It will let employers offer DB pension plans and DC plans on a combined basis. (Here is a bulletin on IRS Notice 2009-71 for details.) According to the IRS, this will reduce the administrative burdens and costs of maintaining separate plans. (See an article on this by NU Senior Editor Allison Bell.) For purposes of discussion here, that seems to be a recognition of the obvious–that the federal government does expect to see DB plans continue into the future.
Still, it’s not all roses out there in DB- and DC-plans.
The U.S. Department of Labor recently proposed a regulation to impose fines on sponsors of multiemployer DB plans under financial stress if they fail to act to correct their problems. (See our article on this here.) That’s a signal of the level of concern that continues to surround DB plans.
Furthermore, the Government Accountability Office has issued a lengthy report pointing out the many challenges and issues that DB and DC plans continue to face. Following are a few of the key points, as excerpted from a summary by NU Washington Bureau Chief Arthur Postal. (Postal’s entire article is available here.)
–Those covered by DC plans risk making inadequate contributions or earning poor investment returns, while workers with traditional DB plans risk future benefit losses due to a lack of portability if they change jobs.
–Mandating that employers provide retirement benefits or workers to participate and contribute to a pension plan –ensures that most, if not all, workers will have some level of retirement income beyond Social Security, but such mandates also can pose burdens for some workers and employers.
–Because DC approaches today are still voluntary, some workers will continue to lack coverage or contribute too little.
–Requiring workers and employers to contribute to any type of pension plan–as under a government mandate–would divert funds from other uses, including employers’ business expenses and workers’ competing demands for basic necessities.
In the mid-1990s and again in the mid-2000s, all the talk was about how DC plans were taking over the retirement plan marketplace. However, it appears that the pendulum may be swinging back a bit. Or, it may be that the pendulum is swinging in a tangential direction, into a new world of product design and planning that reflects approaches from both the DC and the DB world.
Retirement income planners may want to factor that into their own thinking and plan designs for clients.
After all, the current recession has been long and deep, and the massive baby boom generation is a stone’s throw away from retirement. Survey after survey shows that boomers are increasingly concerned about having a guaranteed retirement income they cannot outlive and they are acutely aware that their traditional DC plan may not fit the bill. Many will therefore be very receptive to hearing about the DB plan lookalikes that are emerging and how they can wrap around Social Security.
Retirement planning discussions, and pre-retirement planning discussions, will likely take on a whole new character. Could be quite productive for all concerned.
[ To comment on this topic, write to the editor. ]
-Linda Koco, Managing Editor, Products and Managing Editor, e-Publications
National Underwriter Life & Health