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American Companies Change Pension Plans

Tue, 12/10/2002 - 1:00am — Karen Stevenson
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Many Americans count on employer pension programs to fund their expenses in retirement, but there are changes in the wind that will have a huge impact on how much they can expect to receive. Many, probably most, companies are looking for ways to contain costs and improve income, and the cost of supporting retirees is certainly an area to consider. As the percentage of Americans who are retired increases in proportion to the number who are still working, companies will almost certainly continue to seek ways to reduce their obligation to the burgeoning retiree group.

One way that companies cope with increasing pension costs is to change the type of pension they offer. For instance, many companies that have offered defined benefit plans in the past are trying to switch their plans to cash balance plans. An article in USA Today reports that companies saved $100 million a year by making this switch, but critics, like the AARP, say that this savings is coming out of the pockets of older workers, and that this type of change in pension plans generally hurts older employees with a long tenure at a single company. The movement to cash balance pensions halted temporarily due to a lack of clarity in the application of age discrimination rules to such a change, but the Treasury Department and the IRS issued proposed regulations to address the application of the pension plan age discrimination rules to cash balance plans, paving the way for more changes of this type once the regulations are finalized.

Another type of switch in pension plans is a change from a defined benefit plan to a defined contribution plan, like a 401(k) plan. Statistics in AARP's Beyond 50, A Report to the Nation on Economic Security indicate that the percentage of defined benefit plans has dropped dramatically in the last 10 years, while the number of defined contribution plans has increased. This is a significant change for the covered employees, since in a defined benefit plan the company is responsible for making investments and guaranteeing the amount that will be available in retirement. In a defined contribution plan, the company promises nothing for the future, and the employee can presumably lose everything if his investments fare poorly.

Anyone who hopes to retire some day should probably keep their eyes on these developments.

Many Americans count on employer pension programs to fund their expenses in retirement, but there are changes in the wind that will have a huge impact on how much they can expect to receive. Many, probably most, companies are looking for ways to contain costs and improve income, and the cost of supporting retirees is certainly an area to consider. As the percentage of Americans who are retired increases in proportion to the number who are still working, companies will almost certainly continue to seek ways to reduce their obligation to the burgeoning retiree group.

One way that companies cope with increasing pension costs is to change the type of pension they offer. For instance, many companies that have offered defined benefit plans in the past are trying to switch their plans to cash balance plans. An article in USA Today reports that companies saved $100 million a year by making this switch, but critics, like the AARP, say that this savings is coming out of the pockets of older workers, and that this type of change in pension plans generally hurts older employees with a long tenure at a single company. The movement to cash balance pensions halted temporarily due to a lack of clarity in the application of age discrimination rules to such a change, but the Treasury Department and the IRS issued proposed regulations to address the application of the pension plan age discrimination rules to cash balance plans, paving the way for more changes of this type once the regulations are finalized.

Another type of switch in pension plans is a change from a defined benefit plan to a defined contribution plan, like a 401(k) plan. Statistics in AARP's Beyond 50, A Report to the Nation on Economic Security indicate that the percentage of defined benefit plans has dropped dramatically in the last 10 years, while the number of defined contribution plans has increased. This is a significant change for the covered employees, since in a defined benefit plan the company is responsible for making investments and guaranteeing the amount that will be available in retirement. In a defined contribution plan, the company promises nothing for the future, and the employee can presumably lose everything if his investments fare poorly.

Anyone who hopes to retire some day should probably keep their eyes on these developments.