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8:00pm EDT May 26, 2007

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 business plan?

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 plans?

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 funds.

  • 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 investments.

  • 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 christine.tozzi@watsonwyatt.com or (415) 733-4346.