DB pensions continue march toward extinction

The number of large companies offering traditional defined benefit (DB) pension plans continues to decline, as they steadily march toward extinction.

Towers Watson now counts just 17 of the Fortune 100 companies still offering DB plans, down from 20 in 2009 and exactly half the total of five years ago.

Many companies have replaced them with hybrid plans, such as cash balance plans, which are partly like a DB plan and somewhat like a 401(k). In fact, for the third straight year, the number of companies offering hybrids held steady at 24 among the top-100 companies.

The consultancy points out that hybrid plans reduce cost and funded status volatility for employers while providing more visible benefits for employees than traditional DB plans. In addition, participants in cash balance plans continued to see their pension accounts grow during the financial crisis.

But, clearly the trend continues toward defined contribution plans, which don't obligate companies to pay out any money in the future. According to Towers Watson, 58 companies in the Fortune 100 currently offer only a DC plan to new hires, compared with 55 companies at the end of last year and 51 at the end of 2008.

The consultancy also pointed out that three companies announced this year that they will switch from a hybrid plan to a DC-only plan and three companies are converting from a traditional DB to a hybrid plan.

 "The movement toward account-based plans appears to be steady and strong, as companies shift away from traditional pensions," said Kevin Wagner, senior retirement consultant at Towers Watson. "And while most of the shifting has been toward 401(k) plans, we are seeing employer interest in cash balance plans too, as the provisions of the Pension Protection Act, which creates a more friendly environment for these plans, begin to take effect."

Down the road, however, it makes most sense for companies to simply take the DC route. This would remove the uncertainty of future obligations for non-current employees.

This is a very critical and controversial decision that state and local governments will need to make over the next few years at the same time they make huge budget cuts to fund their growing ranks of retirees.

Of course, this makes it more imperative that Congress assures that Social Security is solvent, a discussion they have not had in years.