Erosion of Defined Benefit Plans Continuing

Private sector companies are continuing to replace defined benefit retirement plans with defined contribution plans—at a time when the federal government offers its employees both—although the rate of change is slowing somewhat and several industries stand out in resisting the trend.

That was the conclusion of a study by the TowersWatson HR consulting firm, which said that for example only 24 percent of Fortune 500 companies offer any type of defined benefit plan to new hires, down from 60 percent 15 years ago. In a defined benefit plan, the employee is paid a lifetime annuity based on a formula of service and salary, comparable to what the CSRS and FERS civil service elements provide; defined contribution plans such as 401(k)s are comparable to the TSP.

The trend seems to be leveling off, the study said, since only five companies made such a switch in 2013, the lowest such number in a decade.

“With DC plans steadily becoming the primary retirement vehicle for millions of workers, more responsibility and risk is being shifted to employees,” said a TowersWatson official.

Of companies that no longer provide defined benefits to new employees, it added, more than half “grandfathered” existing employees so that they remain covered.

In addition, 66 percent of insurance companies and 59 percent of utilities still offer a defined benefit plan. In the former case, one reason is that the companies are often not publicly traded and thus don’t face pressure from shareholders to maximize short-term profits; in the latter, it’s because utilities typically face little if no competition and can pass costs along to their consumers.