The decline in availability of defined benefit retirement plans is continuing but the extinction of such plans is not imminent, according to a study by the TowersWatson consulting firm.
The availability of such plans in the federal government—through CSRS and FERS—and the decline of such plans elsewhere has become a key point of debate as political leaders put federal benefits under scrutiny in the current budget debates.
The major factor contributing to the decline of such plans in the private sector is the desire of plan sponsor to reduce the risk to their plans. Due to investment losses, many such plans are underfunded, and rather than seeking higher investment returns on existing assets—which involves riskier investments—most are seeking to reduce risk and put their funds in better balance with their eventual obligations.
Of 300 major companies responding to a survey that have defined benefit plans, a third already are closed to new hires, effectively creating a two-tier retirement coverage scheme for their employees—more severe than the two-tier federal employment system in which CSRS is more generous than FERS but in which FERS does provide a defined benefit that, along with Social Security and employer contributions to the TSP, is designed to roughly replicate the value of a CSRS benefit.
In addition, a third of the companies with existing plans expect to modify their benefit formula to reduce cost or risk and a fifth of companies with frozen plans are actively seeking to end them.
The main pressure in the private sector working against defined benefit plans is their potential drain on a company’s capital, which involves a tradeoff that prevents that money from being used in other ways. That traditionally has not been a consideration in the federal government, but increased sensitivity to federal deficits is effectively creating much the same tradeoff concerns.