In a thought-provoking paper covered in The Wall Street Journal, Wharton professor Adam Cobb reviews why larger companies abandoned DB plans and how it has affected them and their workforces. We all know that companies moved to DC plans to shift risks and costs to employees, but behind that movement was the concentration of ownership of companies with fewer shareholders who pushed companies to abandon their DB plans to improve the short-term results, perhaps at the expense of long-term gains.
From 1998 to 2013, the percentage of Fortune 500 companies offering DB plans dropped from 60% to 24%, according to Towers Watson. And from 1982 to 2006, the percentage of those companies with more dispersed ownership — defined as having no shareholder with more than 5% ownership — also declined, from 26.4% to 5.5%.
During that same period, the power of employees, especially unions, has waned. The most dramatic case is when a big PE firm buys a company and looks for ways to boost earnings quickly.
The result, according to the paper, is lower loyalty among employees, who are free to move and take their 401(k) account balances with them. And with fewer DB plans being replaced by DC plans that might not have replaced enough income, older workers keep working, increasing health care and absentee costs while forcing younger workers to move on because there is less opportunity.
Though mutual funds tend to stay away from corporate governance, it’s ironic that as their share of corporate America grew, money that might have gone into DB plans flowed to them through 401(k) plans. A coincidence?
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