With this as a backdrop, DB plans could play a key role in employee retention. For employers in industries where it is difficult to find workers, restarting a frozen DB plan could help retain experienced employees while also helping to reduce retirement related worries which could impact productivity. This could also help enable a more orderly and predictable workforce transition, which would have a secondary benefit of providing young talent opportunities for advancement as older, experienced workers leave the workforce in a more predictable pattern.
Can Sponsors Afford This?
Many sponsors who froze their DB plans have provided their employees with enhanced DC benefits and, given those DC benefits are likely well established as a core employee benefit, we feel it is unlikely that employers would reduce DC benefits to fund a DB accrual. This begs the question as to how plan sponsors might pay for a restarted DB benefit. Sponsors who benefited from last year’s rapid funded status rise may be in a unique position to capitalize on surplus assets, which could be used in part or in whole to fund new benefit accruals, as well as cover certain administrative expenses.
Sponsors may also want to consider cost savings that could arise from higher employee retention rates that might arise with restarting the DB plan. The cost to hire a new and executive hire is estimated to be $4,700 and $28,300 respectively, and many employers estimate the true cost of hiring to be three to four times the position’s salary.9 If the DB plan can help to retain a portion of the workforce who may be at risk of leaving, DB plan accruals could potentially be funded through savings generated from lower hiring costs and avoiding the productivity loss that arises from unplanned turnover.
DB Plans: A Time Tested Retirement Income Plan?
Our 2023 MFS Global Retirement Survey found that retirement confidence is on the decline with 58% of respondents indicating they would need to work longer than planned and 32% indicating they would not be able to retire at all. Furthermore, the survey showed 75% of respondents ranked “receiving a predictable stream of income payments throughout retirement” as one of the top three elements they want to see in a retirement portfolio.10
There has been a great deal of effort in the retirement industry to develop products that incorporate guaranteed income features, such as annuities, to be offered within defined contribution plans. However, uptake of these solutions has been relatively low, as they tend to be difficult for participants to understand and present administration and governance challenges. Accordingly, many sponsors are hesitant to be first movers.
For sponsors who are thinking about retirement income options in the DC plan, the answer may be staring them in the face with their frozen or closed DB plans. Defined benefit plans are a time-tested way to provide lifetime income, while pooling longevity and investment risk for participants.
What Kind of DB plan?
Plan sponsors have many options today with regards to the type of DB plan offered to employees. Traditional DB plans tended to have final average pay formulas, where benefit accruals increased in value as participants neared retirement. Other designs, such as cash balance and variable benefit plans have evolved, which offer employers alternatives to deliver DB benefits that can avoid the steep cost increases that come with traditional final average pay formulas.