Reevaluating Corporate Pension Plans
Jan 24, 2019
By AMA Staff
With 77 million baby boomers headed for retirement, nearly every facet of corporate pension plans will be subject to analysis and change. The decline in defined benefit plans and the rise in defined contribution plans—combined with increasing longevity—is creating growing risk among employees regarding their retirement benefits.
As retirement benefits are redesigned for today’s retirees, it’s unclear whether employer programs can support long-term financial security, notes an analysis by The Conference Board. The report is based on presentations and discussions by senior HR executives attending a special Pensions and Retirement Conference held by The Conference Board.
“The changing definition of retirement raises controversial questions, especially from a societal point of view,” notes the report, which focuses on some of the difficult questions being asked today and offers controversial as well as conventional viewpoints. “What is the responsibility of the corporation to provide a safe and secure retirement for its employees? The evolving social contract between employees and employers has resulted in many issues that plan sponsors, policymakers, and academics need to resolve. We are asking employees—who should be seen as consumers, not investors—to take on significant risks that they haven’t a clue on how to manage.”
The Pension and Retirement Dilemma
Legislation, including the Pension Protection Act of 2006, liberalized requirements for defined contribution plans. Many experts disagree over whether the new rules for defined benefit plans will help stabilize the system or encourage more companies to curtail their plans. Executives attending the conference pointed out that as more companies discontinue their defined benefit plans, they’ll need to change their overall retirement programs so they work more effectively for employees.
The risk is twofold. The first concern: employees will outlive their retirement income and will experience a significant decline in their standard of living as they move from the accumulation phase. This is entirely possible, as many people underestimate their life expectancy and overestimate how much money they can draw from savings. Employees are facing new responsibilities for managing retirement assets, distribution options, and the payout period, and many are unable to manage the process effectively.
The other danger is that employees are investing more than they should in equities, due in part to the limited options for their defined contribution monies, inflation, and market volatility. Even though many employers are using target fund dates, some experts believe that these funds—which have been endorsed by the Department of Labor and the Employee Benefits Security Administration for default investment options—are generally too risky for the average employee. The report helps readers understand key points of controversy.
Redefining Retirement: Mitigating Risk
Today’s aging baby boomers are the best educated, healthiest, and longest-living group to ever enter retirement. When surveyed, 7 out of 10 people in this population report that they want to continue working in retirement, according to Anna Rappaport, senior fellow on pensions and retirement for The Conference Board, and an author of the report. Given these new parameters, new definitions and innovative employment options must be created for this phase of life. Rappaport calls it the “third age,” which is the period between full-time work and total retirement. “Policymakers, employers, and individuals need to rethink how retirement fits into the way people live their lives,” says Rappaport.
One option is phased retirement, when an employee moves from full-time to part-time employment before retiring. Phased retirement has gotten a great deal of traction, with 48% of current retirees transitioning into retirement through part-time work, but mostly on their own. More people are expected to incorporate this work style in the future. In a poll taken during a recent Conference Board webcast, 59 of 69 respondents said they are likely to have a phased retirement program within three years.
Another option to make retirement more secure is to create solutions that provide lifetime income, such as inexpensive and flexible annuities. Offering employees in-plan opportunities to purchase income annuities with their defined contribution assets can also provide lifetime income. Programs that allow a rollover into IRAs with institutional annuity rate purchases are another way to accomplish this.
While annuities are not chosen by most individuals, the report highlights the importance of lifetime income. Questions remain, however, about what policy options should be considered and whether there should be legal requirements for the employee or the employer to purchase a lifetime income benefit. Right now, “it’s unrealistic to require a mandated annuity beyond Social Security,” notes the report.
“Automatic enrollment should be included in new retirement plan designs so that defined contribution plans can work without active employee participation,” says Toddi Gutner, coauthor of the report. Participation rates jump from 53% to 81% with automatic enrollment. “Employers need to change their plans so they work better for employees who don’t take action. It is imperative that employees embrace the financial education that companies offer so they can learn how to fully use their benefits. But perhaps just as important is to determine how much savings is enough and to save that amount.”
Source: Can Continuing Changes in Pension Management Provide a Secure Retirement, Executive Action No. 257, The Conference Board
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