Don't give up on defined-benefit system

Jun 21, 2007 @ 3:17 pm

By Sara Hansard

The U.S. should be encouraging both defined-benefit and defined-contribution plans, the head of a group that represents major employers said today at a retirement conference.

“We have wasted a lot of time in this country debating over which types of plans – defined-benefit plans or defined-contribution plans – are better,” said James Klein, president of the Washington-based American Benefits Council, which represents major companies that sponsor retirement and health benefit plans.

Mr. Klein spoke at the 2007 Retirement Security Conference sponsored by AARP, which represents seniors, and the Business Roundtable, an association representing chief executives of leading U.S. companies.

Both groups are based in Washington.

“It’s not that one is better than the other,” Mr. Klein said.

The “ideal situation” would be for employees to have both defined-benefit plans, which provide guaranteed levels of employer-funded benefits, and defined-contribution plans, which give employees the opportunity to save on a tax-favored basis for their retirement, he said.

Despite the decline of defined-benefit plans, which had dropped to 29,000 plans by 2005 from 115,000 in 1985, “We should not give up entirely on the defined-benefit system,” Mr. Klein said.

Millions of people are still covered by defined-benefit plans and will be for decades to come, he said.

Innovations such as Armonk, N.Y.-based International Business Machines Corp.’s move to allow employees to convert some or all of their 401(k) holdings to annuities at group rates, which are less expensive than buying annuities on an individual basis, should be encouraged, Mr. Klein said.

He also applauded moves by the mutual fund industry to make pay-outs to retirees based on the shareholder’s life expectancy, which is recalculated annually.

Automatic enrollment plans are clearly making headway since enactment of the Pension Protection Act of 2006, which made it easier for companies to adopt them.

Dow Chemical Co. of Midland, Mich., with 23,000 U.S. employees in its pension system, is beefing up its 401(k) plan, and it will begin automatically enrolling newly-hired employees in the plan next year, said Janet Boyd, director of government relations in the company’s federal affairs office in Washington.

The company will start to provide 100% matching contributions for all employees that contribute 2% of their salaries to their 401(k)s and a 50% contribution for the next 4%, using life cycle-funds managed by Barclays Global Investors of San Francisco as default investments for people who do not choose their own investments, Ms. Boyd said.

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