The percentage of Fortune 500 companies freezing their defined-benefit pension plans is at an all-time high. According to the Wall Street Journal, the percentage of frozen plans has increased to 39%, compared to 21% in 2009. (For more, see America’s Frozen Pension Dilemma.)

Not that long ago, defined-benefit pension plans were a major selling point used by corporations to reel in the most talented prospects on the market. In fact, figures released by the Bureau of Labor Statistics in 2014 revealed that 67% of all workers participated in a traditional defined-benefit plan. But those days are coming to an end as many companies have resorted to freezing the plans to seek relief from the growing deficits that are wreaking havoc on their balance sheets. These amount to approximately $425 billion, according to The Coming Pensions Crisis, a March 2016 report from Citigroup (which also found that "unfunded or underfunded government pension liabilities" for 10 OECD countries is a massive $78 trillion).

The Current State of Defined-Benefit Pension Plans

Other statistical bad news: As of January 2016, the total deficit of the 100 largest corporate pension plans was a whopping $326 billion, consulting firm Milliman told the Wall Street Journal. The culprits: the financial crisis of 2008, plummeting stock prices and sub-par interest rates, the article adds. And while many of these corporations were optimistic about the future of their defined-benefit plans and hoped to quickly revert back to the pre-crisis days when the accounts were in surplus, the stock returns simply haven’t materialized. 

The Shift Towards Defined-Contribution Plans

Each year, an increasing number of Fortune 500 companies are ditching defined-benefit pension plans for defined-contribution plans. To illustrate, 401 of the Fortune 500 companies offered defined-contribution plans in 2015, compared to only 333 in 2009, notes the Wall Street Journal. This means that employees are having to rely on their earnings to fund their retirement accounts. And new employees aren’t even given the option; defined-contribution plans that they must manage on their own are the only option. 

But what about companies with defined-benefit pension plans that aren’t in such bad shape? These companies may still be leaning towards defined-contribution plans. The reasoning: “A bevy of regulations governing the defined-benefit plans, higher costs for employees that are living longer and increasing fees charged by regulators have made the plans less attractive for corporations,” Alan Glickstein, a senior retirement consultant  at Willis Towers Watson, told the Wall Street Journal.

Is There Any Recourse for Employees?

What should you do if you get the news at your company? The first step is to speak with your employer to determine if the freeze is temporary or permanent. If your company is doing away with its defined-benefit pension plan altogether, you will be offered a lump-sum payout or an annuity equal to the earnings you’ve accrued thus far. If the freeze is temporary, you will need to wait to see if the plan is eventually unfrozen or whether it is terminated. Many companies replace their plans with some form of defined-contribution plan for future earnings. Whatever happens, it’s up to you to responsibly manage the proceeds from your old plan, so consult with a financial advisor to determine how to move forward. 

Is Your Defined-Benefit Plan at Risk?

If you’re currently enrolled in a defined-benefit pension plan, don’t get too comfortable. “In the coming months your employer – as part of an effort to ‘de-risk’ the plan – is likely going to offer you a lump-sum payout, an annuity or freeze the plan,” MarketWatch suggests. (Also check out 7 Signs Your Pension Fund Is in Trouble.)

Furthermore, a survey conducted by Towers Watson and Institutional Investor Forums revealed that 75% of employer respondents have already implemented or are planning to take formal actions to de-risk their defined-benefit pension plan in order to take advantage of improved equity performance and rising interest rates, the article adds.

The Bottom Line

Defined-benefit pension plans are no longer a viable option for many Fortune 500 companies due to the rising administrative costs and massive fund deficits. Others may just decide to stop offering them because it's one more way to control costs. Employees need to be prepared for this to happen and plan for other ways of saving for retirement. See also How Safe Is Your Pension?, Why Defined Benefit Plans Are Being Phased Out and The Demise of the Defined Benefit Plan.

 

 

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