After decades as a dormant, little-understood employee benefit, retirement plans are having a profound impact on businesses nationwide. The Pension Protection Act of 2006 (PPA) and the
continued escalation of the so-called global
war for talent has accelerated the need for
companies to review how their retirement
plan dovetails with their business plan.
“The PPA provides clarity around the
rules for defined-benefit and defined-contribution plans, and that has created many
new opportunities for companies,” says
Christine Tozzi, Retirement Practice Leader
with Watson Wyatt Worldwide. “In the last
18 months, most employers have made certain that their retirement plans have financial characteristics that manage risk, and
benefit designs that help them attract, retain and motivate workers as well as enhancing their ability to retire employees at
the right time for the business.”
Smart Business spoke with Tozzi about
how CEOs can maximize the business
value of employee retirement plans.
What are the current trends around retirement plan design?
Most CEOs are familiar with two types of
pension plans: defined-benefit (traditional
pension) plans and defined-contribution
plans such as 401(k) plans.
A defined-benefit plan typically promises
the participant a specified monthly benefit
at retirement. The plan sponsor funds the
program in a tax-advantaged trust and is
ultimately responsible for the investment
outcomes of plan assets. In a defined-contribution plan, the employee, the employer,
or both contribute to the employee’s account. The ultimate value of the account
will vary, based on the performance of the
investment vehicles used for the funds.
One trend is a continued shift toward
defined-contribution plans. Additionally,
there have been many plan design changes
to the traditional 401(k) that reflect opportunities from the new pension law. For
example, companies install automatic enrollment features in their 401(k) plans.
These plans increase employee participation by providing a default decision to participate in the plan, with a positive election
needed to withdraw from the plan, which,
in turn, encourages them to save more.
The second trend is that companies that
sponsor pension plans are making changes
to investment strategy and program design
to capitalize on new approaches for minimizing financial risks. Risks such as interest rate, inflation, investment return and
longevity can be mitigated with the right
investment strategy and design. This explains the movement toward hybrid pension plans, a type of defined-benefit plan
that offers various blends of defined-benefit and defined-contribution characteristics. They can ultimately offer substantially
decreased financial risks to the company.
How can CEOs align retirement plans to the
If your business model relies on experienced employees, your retirement plan
should pay greater dollars for tenure.
Certain types of pension plans are effective
in attracting mid-career workers and retaining older workers. If, on the other hand,
the business model supports employment
stays of five years or fewer, you should consider more of a portable hybrid defined-benefit plan or a defined-contribution benefit to attract those types of workers.
How can CEOs obtain ROI from pension
Labor is frequently a company’s largest
expense. Retirement plans can act as
‘levers’ in controlling the flow of people
into and out of your company. Having a
well-designed retirement plan will not only
help attract and retain workers, but will
also create more predictable retirement
patterns among the company’s work force.
Studies show that installing a combination plan that offers a 401(k) coupled with
a core-level pension can provide more predictable retirement patterns and increase
the efficiency of providing retirement benefits. There are also links between retirement benefits and worker productivity.
Also consider investing in education that
improves employees’ retirement plan management skills so they actually can retire
when the time comes.
How can management help employees manage their retirement plans?
- Communication and education are the
best ways to help employees become effective managers of their own retirement
- Provide targeted retirement plan statements to employees.
- Provide modeling tools so employees
can track the performance of their retirement funds and forecast the amount of
money available for retirement.
- Make advisory services available to
employees that assist with asset allocation
and projected retirement incomes from
- Educate employees about updated life
expectancies and projected changes in
Medicare and Social Security.
CHRISTINE TOZZI is Retirement Practice Leader with Watson
Wyatt Worldwide. Reach her at [email protected]
or (415) 733-4346.