SURVEY SAYS: Moving from a DB to DC Plan

Last week, I asked NewsDash readers, “Have you ever participated in a DB plan, and how did a move from a DB to a defined contribution (DC) affect you? Were you the plan sponsor or working with the plan sponsor to implement the DB to DC change? And if so, do you have any tips to share?”

The majority of respondents (63.9%) work in a plan sponsor role, 8.3% are advisers/consultants, and 27.8% work in a TPA/recordkeeper/investment manager role.

Nearly one-quarter of responding readers (24.3%) indicated they are not now and have never been a participant in a defined benefit (DB) pension plan. Slightly more than 10% are in plans that are still active. Nearly 19% said they are or have been in a DB plan that is closed to new participants, but still accruing benefits, 24.3% are or have been in a that is now frozen, 21.6% in a plan that is now terminated. No responding readers are or have been participants in a DB plan that has been transferred to an insurance company.

Among those in a DB plan that is no longer active, 57.7% reported their employers added or enhanced a defined contribution (DC) plan when it changed the DB, 23.1% said their employers added a DC plan, and 19.2% said their employers did neither.

As a participant, nearly half (48.1%) of responding readers felt the move away from DB towards DC diminished their retirement benefit, 7.4% indicated they felt it was an equal trade-off, and 14.8% said they felt it was a good opportunity for them to save more for their retirement income. Nearly three in 10 (29.6%) didn’t have any of these feelings.

Forty percent of respondents were the plan sponsor or worked with the plan sponsor to implement the DB to DC change, and 60% were not.

In comments, a few people left tips for plan sponsors moving from a DB to a DC—and the top tip was to communicate well. Most readers acknowledged that the move usually means a decrease in benefits, and one lucky reader expressed, “I love my DB plan. I hope they keep it active for the next 8 years until I retire!” Editor’s Choice is a tie between, “DB plans? Yeah, right…next you’ll be telling us that elves and dragons actually existed!” and “Please no more lime green backgrounds on these surveys. It hurts the eyes!” Noted.

Verbatim 

Communicate, communicate, communicate, in writing, in meetings, and individually where appropriate. Let the plan participants know at each step what is going on, why it is happening, and how it affects them. Enhance or start a DC plan when the DB plan is terminated (or when it is frozen if that step is taken first). Bring in people to help participants with the decisions they must make at termination: lump sum, frozen future monthly benefit from an insurance company, etc. We brought in our 401(k) financial adviser and representatives of banks with which the Company had relationships. Do not bring in people with whom the Company does not have prior relationships - you do not want a hard sell, you want education and information (and, of course, there will always be a soft sell). Provide contact information to plan participants where they can get answers at any time.

Active employees could elect to stay in the pension when we closed our pension. Having an accurate modeling tool available was essential. Communication, follow up, and road trips to distant locations helped make our choice period successful. For those who didn't make a proactive choice, the default was to stay in the pension. That was a defensive move on our part, and I don't regret it, particularly when the market crashed a couple years after our pension was closed to new entrants.

The company had both a Cash Balance plan and a 401k plan at the time it froze the Cash Balance plan. They started a profit sharing contribution to the 401k plan when they froze the CB plan. The profit sharing contribution has never been more that 2% which is significantly less than what was being contributed to the CB plan.

If the goal is to provide income during retirement years, then the DC plan will always perform worse than the DB plan.

As a mid-size employer, the costs to fund and administer the DB plan became exorbitant. The company had no choice but to freeze and eventually terminate the plan. As participants we received pennies on the dollar when the terminated assets were rolled into our DC plans.

My DB was terminated when our company was bought out and our offices were closed. Being laid off and my departure from DB plans happening at the same time solidified for me that I was the best person to take care of my future career and subsequent retirement.

Please no more lime green backgrounds on these surveys. It hurts the eyes!

No tips, just wish I had been in a pension plan somewhere along the line to now have a benefit - SS is NOT enough.

I actually have done this twice, at AT&T in 1998 and at Rockwell Collins in 2003. The differences were startling as AT&T did not enhance the DC, Rockwell Collins made a significant enhancement. Now Rockwell Collins has frozen the enhancement. In all three situations, the communications was the key to smooth employee relations. The move at AT&T was horrible as the benefit was substantially reduced with a change to cash balance and management refused to acknowledge that issue. Rockwell Collins made it clear that the enhancement provided a similar benefit for the vast majority and it was accepted as an equivalent. Communication with senior management about the actuarial future is also key. Besides discount rates, discuss the effects of demographics, mortality changes, etc. at length or have the pain & suffering of surprised management and difficult quarterly disclosures.

Verbatim (cont.) 

Most participants experienced a substantial reduction in their retirement benefits when the DB plan was frozen, especially older longer service employees, given that the DC enhancement was nowhere near to making up the lost accrual. The surprising thing was the minimal reaction of employees. Most employees appear to be focused on health and life management benefits, then 401(k) and the DB plan a very distant third.

My plan froze the DB benefit and provided an extra 1% match to the 401k plan. Not an equal trade-off

DB plans? Yeah, right...next you'll be telling us that elves and dragons actually existed!

Don't take a lump sum and roll it over! If you do, you're giving up the best features of the DB plan - lifetime benefits and professional investment of assets.

There's an old saying that comes to mind "too soon old - too late smart" and there's the fable of the ant and grasshopper as well. Without a DB base, seems likely that too many will be either or both.

It happened to me early in my career. I was disappointed, but didn't lose a lot because I changed jobs. However, my husband lost a lot when his plan ended. His benefit is so much lower than it could have been. As such, he is retiring soon, but I'll have to keep working. THAT is disappointing!

I love my DB plan. I hope they keep it active for the next 8 years until I retire!

We gave participants a choice to remain in the DB or freeze their DB benefit and move to an enhanced DC Plan. We provided written communications as well as an online modeler to help with making the choice. We had good active participation (+60%). Be sure your default election is in line with your overall strategy.

In my particular case, the DB was frozen after acquisition and then turned over to the PBGC after bankruptcy. The DC that was put in its place did not have a company match, whereas the DB was totally funded by the company. This was a losing situation. I am now ready to retire and my DB is less than what was projected due to market fluctuations and the plan being under-funded in the end. I'm currently in a DC which has a company match and I'm very grateful for what this company has done. I'm also the administrator of the DC plan and I don't know what they are going to do when I retire in 2 months. I'm taking my money with me:)