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This paper was prepared for the National Tax Association Annual Conference, November 16-18, 2005, in Miami, FL. Without implicating them, I would like to thank Joe Piacintini, Mike Orszag, Jonathan Gardner, Richard Luss, Michael Slover, Nancy Campbell, Janemarie Mulvey and Dan Carpenter.
The opinions and conclusions stated here are the author's and should not be construed to be those of Watson Wyatt Worldwide or any of its other associates.
Introduction
Many organizations today face a critical decision: Should they terminate their defined benefit (DB) pension plan? Recent trends in US private pensions are undeniable. Over the last 25 years, DB plans - once the centerpiece of the retirement portfolio - have lost considerable ground to defined contribution (DC) plans, which have become the primary vehicle for saving for retirement. Some analysts and experts claim that traditional DB plans are a dying breed (if not already dead). Detractors typically contend that DB plans are too complicated and too risky for plan sponsors, and are underappreciated by employees.
DB plans have been disappearing mostly from smaller firms - more than two-thirds of firms in the Fortune 1000 currently sponsor a DB pension plan. But after the 'perfect storm' of falling equity prices and interest rates, many large and long-standing plan sponsors have either terminated their DB plan or frozen the plan to new hires - or are thinking about it. Terminating or freezing a plan enables the sponsor to offload the financial and regulatory risks and burdens posed by these programs, which have become increasingly onerous. But are these sponsors considering how such decisions will affect their workers' commitment and productivity - and ultimately the organization's success?
Watson Wyatt set out to learn how employees felt about their DB and DC plans. Watson Wyatt's Retirement Attitude Survey (WWRAS) asked over 8,000 employees at firms with a DB plan, a DC plan or both about their satisfaction with various plan features, their understanding of their benefits and how these plans affect their workforce decisions. While most workers value both types of plans very highly, employees covered by a DB plan tend to be significantly more satisfied with their retirement program than those without, according to the survey. This has important implications for plan sponsors, as greater plan appreciation...