For the past 20 years, there has been a clear trend in retirement benefits offered by companies. Investment risk has steadily shifted from the employer to the employee. Decades ago, most employers that offered benefits did so via defined benefit or pension plan. These plans guaranteed a certain income stream to retirees. Defined benefit plans provided employees with security, which helped fuel loyalty.
But as demographic changes and medical advances increased post-employment lifespans, these plans became prohibitively expensive for many companies to offer. Since the payments continued for life, the longer people lived the more expensive the plans became for companies.
At the same time, employees increased their appetite for risk, driven by the lure of high returns generated by the equity markets. Deregulation also created opportunities for new retirement investment types.
Should You Offer a Pension Plan?
Enter stage right: the defined contribution plan.
With a defined contribution plan, employees direct a portion of their wages into an investment account. In many cases the employer also contributes a specific amount into the account. These proceeds are then invested. When it comes time for the employee to access the funds for retirement, their reward is limited to whatever is in the account. The employer has no further obligations.
Defined benefit plans have all but disappeared among private sector employers. But given the volatile performance of the stock market over the past decade, the grave uncertainty that exists over the Social Security and Medicare programs, and the shell shock from the Great Recession, high-potential employees and top candidates are now asking for defined benefit plans to make a comeback.
According to a recent survey by Towers Watson, 60 percent of recently-hired employees at companies that offer defined benefit plans indicate that having a pension plan was a key factor in choosing their employer. This is more than double the 27 percent that felt that way in 2009. Offering a defined benefit plan is clearly a powerful tool for recruiting.
The same study also indicates that offering a pension plan helps with retention rates. Seventy-two percent of employees at companies with a pension plan state that it is a key reason for staying. When asked about defined contribution plans like 401(k)s, only two out of 10 employees indicated it was a factor in choosing their current job with less than three out of 10 indicated it is a reason for staying.
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