No swing from DB but US corporates face financial and demographic crunch
US employers are not rushing to terminate defined benefit (DB) plans. At least that was the message expressed at a recent pensions and retirement conference organised by The Conference Board. The event was an interesting venue at which to catch corporate America's sentiment in this field since it was attended by senior human resource executives. "Their feelings are very mixed and there is a lot of uncertainty," explains Anna Rappaport, senior fellow on pensions and retirement for The Conference Board. "Many of the companies are very committed to keeping traditional plans, but they are looking to devise a variety of strategies to control their volatility and to satisfy their employees' new needs even if they switch to defined contribution plans," says Rappaport, summarising the conference's debate. US corporate pension plans are under re-evaluation because of the changing regulatory environment, the turbulent financial markets and also the impending demographic crisis, with 77m baby boomers headed for retirement, and a shortage of new professional talent to replace them. A new trend to address the latter problem is the introduction of phased retirement programmes for those aged over 50. In a poll taken during a webcast conducted by The Conference Board, 59 of 69 respondents said they are likely to have a phased retirement programme within three years, that will allow an employee to move from a full-time to part-time position before they retire. "This strategy is a win-win for both the employee and employer," claims Rappaport. "Individuals have flexibility to continue working and generating income while the company can fill talent gaps. However, legal uncertainty remains around the re-hiring of retirees, what determines a bonafide termination, and when someone is an employee versus a contractor." For example, the Pension Protection Act of 2006 allows pensions from DB plans to be paid after age 62 to people who still work, but it still does not clear up unanswered questions about re-hiring retirees. DC plans are already able to provide distributions after age 59½ to employees who continue working. A case history discussed at the conference was Bon Secours, a not-for-profit health system with four hospitals in the Richmond, Virginia, area, one in three of whose employees is over 50, and almost half of whom fall into the baby boomer demographic. The system offers a 401(k) retirement savings plan and a money-purchase DC plan to its full- and part-time employees. Members may also invest in life-cycle funds and those over 50 can make catch-up contributions. The phased retirement programme allows employees age over 65 to work from a minimum of 16 hours per week up to 24, and to receive a full pension and health, dental, vision benefits as well as paid leave. Furthermore, any employee caring for dependents - children, grandchildren and parents or relatives - can move from full to part-time to on-call status and back into most job categories without penalty, continuing to receive all benefits at just 16 hours per week. No surprise then that Bon Secours has been recognised by the American Association of Retired Persons as its ‘Best Employer for Workers over 50' each year since 2005, when the phased retirement programme was introduced. A second hot issue is the increasing health care costs that leave a gaping hole in today's retirement security benefits, according to Joan Boughton, senior vice president of benefits consulting for Fidelity, who also attended conference. An average couple who retires in 2007 at age 65 is estimated to need $215,000 (€140,000) in the bank to fund future health care costs over and above what Medicare (the public system) will pay, according to Fidelity Consulting. But the estimated current average account balance is only $128,000. Solutions suggested by Fidelity include new plan designs that cover savings but to roll in provision to provide more money for health care, encouraging employees to make a trade-off between less disposable income today in order to save for medical costs in retirement, and encouraging them to choose less comprehensive medical plans, such as consumer directed high deductible plans with health savings and reimbursement accounts. Third, the discussion is open about how to make retirement more secure for DC plans members. "Offering employees in-plan opportunities to purchase income annuities with their DC assets can provide lifetime income," says Rappaport. "Programmes that allow a roll over into Individual Retirement Accounts with institutional annuity rate purchases are another way to accomplish this. Other options that incorporate annuities into different products, such as bundling annuities with long-term care insurance or having low cost annuities based on Treasury Inflation Protected Securities available to consumers and plans, may also be a reasonable solution." Last, most retirement experts and plans' sponsors agreed that DC schemes must become more and more simple and automatic, with features such as automatic enrolment, auto-increases of contributions, auto-rebalance of asset allocations, and default investment options that include life-cycle or target-date funds.