Executive Retirement Benefits Switched from DB to DC Too

Towers Watson looked at Fortune 200 companies that froze or closed their qualified DBs and found most companies switched from DB to defined contribution (DC) nonqualified retirement benefits for newly hired executives and used the same transition approaches for both executive and qualified DB plans. Most of the Fortune 200 companies that closed or froze their qualified DB plans now provide DC-style retirement benefits to executives in the form of restoration plans.

According to Towers Watson, since 1998, 82 companies included in the 2013 Fortune 200 list have frozen or closed their qualified DB plans and now offer only DC plans to newly hired workers. Many of these companies continue to accrue pensions for workers who were already in the DB plans, while others have stopped all accruals. These changes have been accompanied by comparable transformations in the companies’ executive retirement offerings.

Of the 76 companies in the Towers Watson analysis, 34 closed their qualified pension plans and 42 froze them. Before closing or freezing their qualified plans, 73 of these companies had employer-paid executive retirement plans. After the sponsor froze or closed the qualified plan, that number dropped to 67. Six of the nine organizations that do not contribute to their executive DB or DC plans provide elective deferral opportunities for their executives.

Mirroring the shift away from qualified DB plans to DC plans, only eight of these organizations provide an executive DB plan today, and 59 provide an executive DC plan as the main executive retirement plan vehicle.

In addition to the shifting structure of executive retirement programs, there has also been a major transformation in the types of arrangements being offered. A majority of these companies now provide executive benefits through restoration plans rather than supplemental executive retirement plans (SERPs).

When the 71 qualified DB plans were still open, 44 companies sponsored both executive DB and DC plans, but DB SERPs provided most of the realized benefits. The executive DC plans primarily provided restoration benefits on 401(k) plan matching contributions, Towers Watson says. Since changing their qualified plans, 55 companies now offer only an executive restoration DC plan based on the revised, generally enhanced, broad-based DC program. Thus, the majority of executive benefit value now resides in DC restoration plans. After the closing or freezing their qualified DB plans, the number of companies sponsoring a DB or DC SERP for newly hired executives dropped from 38 to 12.

Employers that eliminate DB pension accruals typically compensate by contributing more to the DC plan, Towers Watson notes, and the same seems to hold true for restoration plans. Most organizations that eliminated their DB restoration plans replaced them with DC restoration plans that mirrored the enhancements to the underlying qualified DC plans. Before freezing or closing the qualified DB plans, 46 of the 76 companies provided executives with an executive DC arrangement to which the employer contributed.

Nearly two-thirds of all companies that closed (30 of 34) or froze (32 of 42) their plans now have DC restoration plans, either through changing the existing program or by establishing a new one. Only two companies added a DC SERP that did not replicate provisions of the underlying DC program, and seven companies made no changes to their qualified or executive DC programs after the DB plan closure or freeze. Eleven companies do not sponsor executive DC plans (10 had never sponsored one).

After freezing or closing the qualified DB plan, the vast majority of sponsors that provide benefits for new executives do so in the DC space. Fifty-five companies provide only a DC restoration benefit, and seven offer a DC restoration plan coupled with a SERP. Of the 11 companies that do not offer an executive DC plan, two still provide a DB SERP.

Towers Watson’s article about its findings is here.