For some large companies, a defined benefits plan is a cost-effective way to provide additional rewards to some of their most valuable workers while allowing the employer to retire employees in an orderly manner, according to a new paper released by Towers Watson.
In its "Perspective" paper, Towers Watson outlined how various employees would fare based on participation in a DB plan versus a defined contribution plan and assessed whether the workforce planning advantage of DB plans justify the cost and risk of plan sponsorships.
Towers Watson used its proprietary FiT Age model to compare the benefits provided by DB and DC plans that have similar long-term average costs.
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The analysis showed that from a long-term perspective, there is generally not a material difference between the retirement resources available to employees who participate in a DB program and those available to employees participating in a DC program.
However, because many DB plans backload the benefits relative to DC plans, long-time employees may get more value under a DB structure. Under the plans evaluated, the DB plan sponsor would find that about 25 percent to 35 percent more value would accrue to employees who continue working for the employer until retirement.
From the perspective of the employer, DB plans allow them to induce retirements through the retirement eligibility requirements, i.e. age 55 and ten years of service, which are not available in DC plans. Consequently employers that need to encourage early retirements may find the DB structure valuable.
"A typical employer's staffing needs decline during recessionary times and increase during boom times. Thus, the potential delay in retirement for the DC-only employees occurs at the worst time for the employer—when fewer employees are needed—and the acceleration in retirement that may occur in boom times occurs when finding replacement employees is the most difficult," the paper conclude.
"When such issues arise, employers that sponsor DB plans are better able to respond because of the plans' unique ability to deliver significant amounts of tax-favored retirement benefits through temporary incentive programs.
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