Defined Benefits Plan: The Demise of the Company Pension

The defined benefits plan has been the age-old company pension, the shining star in America's employee benefits systems, but it is going out of style. In 1985, 80% of American employees could look forward to defined benefits in retirement. By 2008, that percentage had shrunk to 20%. The decline comes despite research from Towers Watson showing that defined benefits are instrumental in attracting new employees.

The Old Company Pension: The Defined Benefits Plan

The traditional company pension is called a “defined benefits plan.” Both employee and employer contribute en masse to a corporate pool. At retirement, a uniform formula calculates an annuity based on years of employment, pay history, age at retirement, and other factors. The result is a set of defined benefits.

This type of pension has prevailed for decades as one of the crowning glories of corporate employee benefits systems, but it is spinning on an axis of entropy. In 1985, 112,000 such plans were alive and well across America's employee benefits systems. Eighty-nine of the Fortune 100 offered them to employees as if they were a bona fide right.

Demise of Defined Benefits Plans

In 1985, 80% of full-time employees participated in employee benefits systems that guaranteed lifetime pensions through defined benefits plans. By 2008, only 20% of full-time employees were covered by such a plan, according to the Bureau of Labor Statistics. In that year, 2008, 67% of full-time employees participated in retirement plans that require the employees themselves to manage their assets to assure lifetime income, i.e., defined contribution plans.

Another way of looking at this decline: In 1975, about 35% of workers could look forward to getting those monthly checks in retirement as defined benefits. Today, that's down to about 25%.

Yet, Employee Benefits Systems Attract New Employees with the Traditional Pension

For those employers who still operate plans for defined benefits, the company pension is giving them an added advantage when it comes to attracting and retaining new employees, according to a survey of U.S. workers conducted by global professional services company Towers Watson concerning their employee benefits systems.

The survey of more than 3,000 employees, conducted in May and June of 2010, found that 60% of new employees at employers with defined benefits plans cited the company pension as an important reason they chose to work for their current employer, a sharp increase from just 27% in 2009. Conversely, only 20% of new employees with only a defined contribution plan for retirement said it played a role in their decision to work for their employer, up from 16% in 2009.

Workers would prefer to go back to the earlier era of employee benefits systems.

Topic: The Defined Benefits Plan

Subtopics: Defined Benefits • Demise of Defined Benefits • More Demise • Underfunding • ERISA