Shift away from DB expected to accelerate
By Paula Aven Gladych
The shift away from defined benefit to defined contribution may be accelerating.
Nearly 60 percent of companies questioned have either frozen accruals for all participants or closed their defined benefit plans to new entrants and many more are likely to do the same within the next two years, a survey of senior corporate financial executives by Prudential Financial Inc. and CFO Research Services has found.
The survey found many of those queried would like to enhance their defined contribution plans to improve operating flexibility and help employees better fund their retirements.
“The current economic environment, changing world of pensions, and ever-increasing cost of healthcare all continue to present challenges to companies providing employer-paid benefits,” said James Gemus, senior vice president for group life and voluntary benefits, Prudential Group Insurance. “Employers are finding solutions like developing new investment strategies and offering voluntary benefits employees choose and pay for themselves.”
The survey of 181 companies was conducted in February. More than 80 percent of those surveyed had revenues of more than $1 billion.
While only 6 percent of those surveyed say their companies have already transferred their defined benefit plan risk to a third-party insurer, about 40 percent say they will consider doing so within the next two years.
As defined benefit plans become less commonplace, defined contribution plans need to be enhanced to ensure employees have enough money to sustain a comfortable retirement, said Margaret McDonald, senior vice president and actuary for pension risk transfer for Prudential Retirement.
“Most executives think a significant portion of their employees will have to work longer because they don’t have enough money to retire. Adding guaranteed income options to defined contribution plans can go a long way to ease employees’ fear about the volatile investment environment,” she added.
The survey found that more than 60 percent of executives believe employees enrolled in defined contribution plans will make better investment decisions if they are invested in an option that includes a guaranteed income feature. Many of the executives say their companies are at least somewhat likely to offer guaranteed lifetime income products over the next two years.
Other survey findings include:
- Nearly three-quarters agree the use of voluntary benefits is a cost-effective way to increase employee satisfaction with benefits. This finding represents a substantial increase over 2012, when 56 percent of the respondents agreed. Voluntary benefits include offerings such as life, disability, critical illness, and accident insurance.
- More than a quarter say their companies have already shifted a large portion of the costs for health care coverage to employees, and another 34 percent say their companies are very likely to do so within the next two years.