A new analysis explains that, while each situation is unique, most employers tend to take one of three broad approaches in moving to a DC-only environment. The report can serve as a roadmap for advisors looking to help with that transition.
The first approach is to close the DB plan to new hires, meaning all participants as of a certain date continue accruing benefits, either at the same or a reduced level, according to a Towers Watson analysis of Fortune 500 employers.
The second approach is a partial freeze, in which only participants who meet certain age and/or service requirements continue accruing benefits in the DB plan, with all other participants switched to the retirement plan offered to new hires.
The third approach is a complete freeze, where the sponsor stops all DB accruals and moves all participants to the retirement program offered to new hires.
Towers Watson notes that, of the employers that adopted a DC-only approach since 1998:
- 42% closed the DB plan to new hires;
- 7% partially froze the DB plan; and
- 51% froze the plan completely.
The report explains that employers varied the details within the three broad transition approaches.
The most frequent approach (39%) was freezing the plan completely and enhancing benefits in the DC plan for all workers, while the next most common tactic (35%) was keeping the DB plan open for current participants and increasing DC benefits for newly hired workers.
Seven percent of employers froze the DB plan completely, enhanced DC benefits for everyone and gave former DB plan participants a larger DC benefit than new hires.
