Human Resources: Employers Enhancing 401(k)s To Compensate for Retirement Plan Changes

WASHINGTON, D.C., March 12, 2008 – Many companies that shift from
traditional defined benefit (DB) pension plans to defined contribution (DC)
plans, such as 401(k)s, are enhancing contributions to their DC plans,
according to a recent survey by Watson Wyatt Worldwide, a leading global
consulting firm. However, the overall retirement value delivered by
employers that provide only DC plans is generally less than what is
provided by companies with a combined DB and DC approach.

The survey of 300 large employers found that 40 percent have replaced their
DB plan with a DC plan as their main retirement vehicle for new hires in
the past 10 years. More than three-quarters of these companies made
enhancements to their DC plan after freezing or closing their DB plan, with
the majority (52 percent) introducing or increasing a non-matching
contribution.

“With the change in markets and the increasingly diverse workforce,
retirement plans have also been in flux,” said Alan Glickstein, senior
retirement consultant at Watson Wyatt. “Most employers that have changed
retirement designs have also enhanced their 401(k)s. The question is
whether this will provide enough security for employees to retire when
their employers think they will.”

Virtually all surveyed companies (97 percent), regardless of their current
DB status, contribute to their employees’ DC plans. Companies provide two
types of contributions: matching contributions, which are contingent upon
the amount an employee contributes to the plan, and/or non-matching
contributions, which are made regardless of whether the employee
contributes to the plan.

Companies that offer new hires only a DC plan contribute, on average, a
maximum of 5.82 percent of pay, including matching and non-matching
contributions, to employees’ DC plans. Employers that offer new hires both
a DB and a DC plan contribute an average of 4.41 percent of employees’ pay
to their DC accounts. While employers that have shifted from DB plans to DC
plans contribute an additional 1.4 percent of pay to employees’ DC plans,
these additional contributions replace only a portion of the benefit
provided by a DB plan, typically valued at 5.5 percent of pay, according to
Watson Wyatt’s COMPARISON, a comprehensive benefits database.

Although a number of companies have moved to a DC-only environment, the
majority of companies studied still offer DB plans to their new, salaried
employees — and most of these companies (59 percent) are committed to
offering them in the future.

One way that companies have been able to stay committed to a DB approach
while shifting to an account-balance plan design is by converting their
traditional plan to a hybrid plan. Nearly one-fourth (24 percent) of
surveyed companies adopted a hybrid plan during the last 10 years. Hybrid
conversions accelerated in the late 1990s but declined in the early 2000s
because of increased uncertainty in the legal and regulatory environment.

“With recent regulatory and legal changes, hybrid plans will only continue
to grow in popularity,” said Kevin Wagner, senior retirement consultant at
Watson Wyatt. “As companies search for portable, cost-efficient and secure
vehicles to deliver retirement benefits that fit a changing workforce,
hybrid plans have become an increasingly attractive option.”

Copies of the survey report, Retirement Plan Design: Past, Present and
Future, are available at http://www.watsonwyatt.com/retirementplandesign.

About Watson Wyatt Worldwide

Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the
world’s leading organizations on people and financial issues. The firm’s
global services include: managing the cost and effectiveness of employee
benefit programs; developing attraction, retention and reward strategies;
advising pension plan sponsors and other institutions on optimal investment
strategies; providing strategic and financial advice to insurance and
financial services companies; and delivering related technology,
outsourcing and data services. Watson Wyatt has 7,000 associates in 32
countries and is located on the Web at www.watsonwyatt.com.

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