Why Would A Modern Company Offer A Pension Plan?
Local companies are following trend to freeze pensions
To companies, pensions are volatile, time-sucking, money-losing drains on the bottom line; and to young, new employees they're a complicated, paternalistic symbol of the way retirement was handled by old-line companies during their fathers' and grandfathers' generations.
Today's company treasurers and finance directors are numbers conscious, performance driven, cost managers. According to John P. McMorrow, an attorney in Mirick O'Connell's business and corporate law group in Worcester, they're looking around and asking, "Do any of my competitors offer these sorts of (pension) plans?"
And what they're finding is, no. No they don't.
Too Little Too Late?
Companies are freezing their pension plans, as Waters Corp. in Milford did recently, or ditching them altogether, in order to remain competitive. According to McMorrow, that's a move many companies could've made 30 years ago, but they just weren't paying attention.
Over the past 10 years, there's been a "seismic shift" from companies offering pension plans to companies offering 401(k) retirement plans, according to Watson Wyatt Worldwide, a financial management consulting firm. But Watson found that the number of companies freezing their pension plans, as Waters did, dropped from 7 percent in 2006 to 4 percent in 2007.
Pensions, so-called "defined benefits" plans, are unpredictable for company money managers. Interest rates fall, and a company's pension liability goes up. Interest rates rise, and the company's pension liability goes down. "It's all about filling that gap, and they just don't have control over it," McMorrow said.
On the other hand, 401(k), or "defined contribution" plans, shift all the unpredictability and responsibility to employees, and modern employees have been more than willing to accept those risks in return for being able to watch, manage and withdraw their own money. What employers get, McMorrow said, is more predictability for budgeting purposes, more control over company liabilities, and more opportunity to pay executives the big bucks.
The Hanover Insurance Group in Worcester always offered a pension plan, but made the switch in 2004 to a 401(k) plan for just those reasons.
According to Watson, companies that froze or dropped their pension plans in the past "were in financial distress. During the past three to four years, however, freezes have spread across industries, including many in good financial health."
BJ's Wholesale Club of Natick began life in 1984 as part of the Zayre department store chain, but struck out on its own and went public in 1997. "We don't offer a pension plan, but we do offer a 401(k)," said Cathy Maloney, the company's vice president of investor relations. "Somewhere along the way, the company may have offered a pension plan, but I don't think BJ's has had one since it became its own entity."
"Why would you do it?" McMorrow asked of pension plans. "The concept is to reward long-time employment and loyalty...the dynamic in the workplace has changed; portability is much more important" to employees, even though a pension is a better deal.
"In a pension plan, the company guarantees you X dollars on retirement...it's a better mechanism to provide retirement benefits than a 401(k) plan, but somebody entering the workforce now isn't interested in a pension plan," McMorrow said. "It's hard to understand, you can't watch your money grow, and a 401(k), you take your money with you. In a pension plan, you cease to accumulate benefits when you leave. A 401(k) is better suited to the modern workplace."
Caught in the middle are those loyal, middle-aged employees. If a pension is frozen, they get the money they're owed to that point, but there's virtually no way a 401(k) can promise as much money in retirement as those employees would've made with a pension.
Many companies wind up carrying both plans. The College of the Holy Cross does. William Conley, the school's director of administrative services, explained that the college offers its hourly employees a defined benefit plan that aims to provide retirees with between 65 and 70 percent of their wage in retirement.
The school offers its salary employees, faculty and administrators, a 403(b) plan, essentially a 401(k) plan for tax-exempt nonprofit organizations, with a 10-12 percent match.
"We want to make sure our hourly employees are in the 65-70 percent of salary range in retirement, and all the risk is taken out of it," Conley said.
Holy Cross can afford to be paternalistic. But Conley said there's no way for-profit corporations can fund their pensions into the future.
"They're actually more costly" than defined contribution plans, Conley said. "And they're not going to be able to sustain them. That expense on your balance sheet keeps increasing every year. It comes from the days when companies were paternalistic toward their employees and wanted to make sure they were taken care of in retirement."
Companies that offered pension plans told employees, "If you were loyal to the company, you were going to get this at retirement," McMorrow said. Today, "a younger person is told there is a partnership here. You contribute, we contribute."
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