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Executive Benefits in the Wake of Pension Plan Freezes

What happens to executive retirement benefits when employers close or freeze their defined benefit pension plans? What if that plan is a hybrid/cash balance? And what does that mean for advisors?

Consultant Towers Watson recently conducted an analysis of how Fortune 200 companies in 2013 transitioned executives after changing their underlying broad-based retirement programs, and found that most of the Fortune 200 companies that closed or froze their qualified DB plans now provide DC-style retirement benefits to executives in the form of restoration plans. However, the analysis also found that while most of these employers still provide some form of employer-paid executive retirement plans, in most cases the plans are less generous than they were before the qualified programs were changed. The majority of companies now offer restoration plans in lieu of supplemental executive retirement plans (SERPs).

Transition Approaches

The report notes that most companies that closed or froze their plans had similar transition approaches for both executive and broad-based plans, although it found that companies that switched from traditional pensions to hybrid plans followed a somewhat different transition approach with regard to SERPs than the other groups analyzed. The prevalence of SERPs declined by slightly more than one-third in the hybrid conversion group, versus nearly two-thirds in the group that adopted a DC-only approach.

Towers Watson notes that employers that eliminate DB pension accruals typically compensate by contributing more to the DC plan, and found the same trend in place for restoration plans. Specifically, most organizations that eliminated their DB restoration plans replaced them with DC restoration plans that mirrored the enhancements to the underlying qualified DC plans, though only a few employers replaced their DB SERPs with DC SERPs.

The analysis found that changes to executive programs were less drastic after hybrid plan conversions than they were after DC-only conversions. Of the 29 companies analyzed, most continued to maintain nonqualified DB plans after the hybrid conversion, though there was a minor shift from offering both executive DB and DC plans to offering only an executive DB plan. After their hybrid conversions, four companies eliminated the DC executive program, leaving only the DB plan, while three added a DC program to the existing executive DB plan.