Articles | February 28, 2024

A Return to Retirement Income Plans?

Alaska debates reopening its defined benefit retirement plan to new public employees. The United Auto Workers (UAW) and automakers negotiate a significant increase to individual retirement plan accounts. IBM announces a transition from matching 401(k) contributions to a hybrid defined benefit plan design. These are some of the headline-making recent events that counter the narrative that the defined benefit retirement plan is dead. (Read about them in the box at the end of this article.)

What is causing this shift and what lessons can stakeholders in other retirement programs learn?

First and foremost, it’s all about meaningful retirement income and lifetime financial security!

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This article covers four factors that are central to this topic, based on the experience of early adopters, that will help drive decision-making for plan sponsors that don’t offer a pension and are interested in considering introducing a retirement income plan:

  1. Talent
  2. Risk management
  3. Timing
  4. Experience

These factors emerged from our conversations with plan sponsors and other key stakeholders in all areas of the workforce.

A simple mandate

Ultimately, retirement programs (whether enabled through labor negotiations, employer benefits, state legislators or any other framework) have a simple mandate: provide meaningful retirement income as part of a lifetime of financial security.

Somehow, much of our retirement system has forgotten that basic premise.

However, the individual participants surely know what they want from the system. For example, the Employee Benefit Research Institute’s 2023 Retirement Confidence Survey found 64 percent of workers expect a defined benefit or traditional pension plan to be a source of retirement income. Moreover, those individuals’ voices are now being heard, as The Wall Street Journal noted in the article “Bring Back Corporate Pension Plans. Seriously.”

Individuals know they need income in retirement and that retirement programs can be the most effective method for providing that income. Employer-sponsored, union-negotiated, or state-mandated programs can play an outsized role in the lifetime financial security of individuals. Workers know this. Early adopters of defined contribution and enhanced retirement programs are also aware and motivated by this basic need.

In fact, as a plan sponsor, you might also know this.

Factor #1: Talent

Having the right people doing the right jobs is critical. Labor shortages amplify the importance of designing and communicating a strong retirement program that actually helps prepare the workforce for retirement.

Levels of recruitment, retention and managing expected retirements within the labor force are important considerations. Industry, geography, and the specificity of skilled labor are all relevant.

Factor #2: Risk management

Returning to a defined benefit program does not necessarily mean a return to the risks and costs of previous plan designs and programs. Similarly, risk can be mitigated when launching a defined benefit program for the first time.

New plan designs for generating lifetime income, such as variable annuity pension plans and, to a lesser extent, cash balance plans, can be designed to provide a lifetime of guaranteed income in a way that is much more sensitive to the financial risks associated with defined benefit plans. Modern plan designs and investment policies can allow plan sponsors to be intentional about which risks are borne by the plan (and which are spread across the individual participants), and how to manage those risks.

Factor #3: Timing

It may not be practical for a given organization to transition from 401(k) contributions straight into a variable annuity pension plan. However, that is not a reason to abandon the idea.

Change can be gradual: The initial step might be finding ways within the 401(k) plan to enhance the contribution as well as introduce guaranteed income options within the plan.

On the flip side, not all plan changes need to be forever. If changing to a variable annuity pension plan is the right solution for the short and mid-term, then go for it. In the long-term, plan designs will naturally evolve to match the needs of the workers and key stakeholders. Don’t let the fear of the future muddy what’s right for the present.

Factor #4: Experience

What once was, will be: It is much easier to introduce any type of defined benefit plan design (e.g., cash balance and variable annuity) if the sponsor already has a previous (even frozen) defined benefit plan in place. The governance, administration and operations of a preexisting arrangement will ease a transition back into a new defined benefit plan design.

This can be a significant advantage for a legacy organization competing for talent against a younger organization (which may never have previously invested in this architecture).

It’s important for plan sponsors that are interested in introducing a defined benefit plan for the first time to work with advisers and providers that have the experience necessary to ensure a smooth launch.

Guaranteed retirement income contributes to financial security

Workers know that to achieve a lifetime of financial security, they benefit from being part of a retirement program that guarantees retirement income. The conversations affecting new public employees in Alaska, members of the UAW and employees of IBM are all the same: how to ensure the retirement program attracts the optimal workforce within the right framework for those organizations.

What we started to see emerge in 2023 is a return to these basic concepts about financial security. We expect that across all areas of the workforce, more announcements will emerge about retirement programs being enhanced to provide retirement income within a lifetime of financial security.

As you contemplate what retirement framework is right for your organization’s needs, consider the four factors covered here.

If you decide to change your retirement program, be sure to clearly communicate to the affected individuals both the change and how it can help them. It is critical for the workforce to understand the change, particularly when changes are being made to help their lifetime financial security. (After all, this is exactly why the change was made!)

Interested in learning more about how a retirement income plan could benefit your organization and your people?

Let’s have a conversation.

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News About Growing Interest in Pension Plans

To increase recruitment and retention, a bipartisan coalition of Alaska state senators introduced a bill in March 2023 that would provide a new pension plan for state workers, which they passed in February 2024. The state moved from a pension plan to a defined contribution plan in 2006, a change the lawmakers believe is a factor in the state’s current worker shortage. Read more in an Associated Press story and see the plan presented to the Senate Finance Committee.

As part of a deal to end targeted strikes, in October 2023, the UAW and automakers Ford Motor, General Motors, and Stellantis agreed to large increases in 401(k) plan benefits and for retirees receiving pensions. The UAW had sought to restore the pension plan, which was closed to new participants in 2007. Instead, the automakers agreed to increase their 401(k) contributions by nearly 4 points, from 6.4 percent of pay to 10 percent. Retirees receiving a pension will get a $5 credit per month for each year of service, according to Plansponsor’s story on the agreement.

In November 2023, IBM surprised private sector employers by announcing its intention to change from a 401(k) plan to a hybrid defined benefit plan. The new plan will give participants a guaranteed rate of return. Many media companies covered this news, including CNBC.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.