There is little doubt that company pension plans are going the way of the horse-and-buggy or the duck-billed platypus. In recent years, companies have only been to happy to shift the retirement planning responsibilities to its workforce, mostly in the form of defined contribution plans like 401k's.

But with 77 million baby boomers nearing retirement, the corporate pension plans that still exist will be increasingly subjected to analysis and change. Specifically, the decline in defined benefit plans and the rise in defined contribution plans – combined with increasing longevity – is creating growing risk among employees regarding their retirement benefits.
That's the conclusion of a major study on corporate retirement benefits trends from the Conference Board.

Says the report: "The changing definition of retirement raises controversial questions, especially from a societal point of view. "What is the responsibility of the corporation to provide a safe and secure retirement for its employees? The evolving social contract between employees and employers has resulted in many issues that plan sponsors, policymakers and academics need to resolve. We are asking employees – who should be seen as consumers, not investors – to take on significant risks that they haven’t a clue on how to manage."

The Board report says that company decision makers face a dilemma over retirement benefits, and risk losing good employees if they fail to take action. Legislation, including the Pension Protection Act of 2006, liberalized requirements for defined contribution plans. The Conference Board says that any experts disagree over whether the new rules for defined benefit plans will help stabilize the system or encourage more companies to curtail their plans. Executives told report researchers that as more companies discontinue their defined benefit plans, they’ll need to change their overall retirement programs so they work more effectively for employees.

The risk, the report adds, is twofold. The first concern: employees will outlive their retirement income and will experience a significant decline in their standard of living as they move from the accumulation phase. This is entirely possible, as many people are underestimating their life expectancy and overestimating how much money they can draw from savings. Employees are facing new responsibilities for managing retirement assets, distribution options and the payout period, and many are unable to manage the process effectively.

The other danger is that employees are investing more than they should in equities, due in part to the limited options for their defined contribution monies, inflation and market volatility. Even though many employers are using target fund dates, some experts believe that these funds – which have been endorsed by the Department of Labor and the Employee Benefits Security Administration for default investment options – are generally too risky for the average employee.

The report also notes that today's workforce is the healthiest and most energetic ever. And they want to hang around for a while. When surveyed, 7 out of 10 people in the report that they want to continue working in retirement, according to Anna Rappaport, senior fellow on pensions and retirement for The Conference Board, and an author of the report. Given these new parameters, new definitions and innovative employment options must be created for this phase of life.
Rappaport calls it the "third age," which is the period between full- time work and total retirement. "Policymakers, employers and individuals need to rethink how retirement fits into the way people live their lives," says Rappaport.

One option, Rappaport adds, is phased retirement, when an employee moves from full-time to part-time employment before retiring. She points out that phased retirement has gotten a great deal of traction, with 48 percent of current retirees transitioning into retirement through part-time work, but mostly on their own. More people are expected to incorporate this work style in the future. In a poll taken during a recent Conference Board webcast, 59 of 69 respondents said they are likely to have a phased retirement program within three years.

Another option to make retirement more secure is to create solutions that provide lifetime income, such as inexpensive and flexible annuities. Offering employees in-plan opportunities to purchase income annuities with their defined contribution assets can also provide lifetime income. Programs that allow a rollover into IRAs with institutional annuity rate purchases are another way to accomplish this.

While annuities are not chosen by most individuals, the report highlights the importance of lifetime income. Questions remain, however, about what policy options should be considered and whether there should be legal requirements for the employee or the employer to purchase a lifetime income benefit. Right now, "it’s unrealistic to require a mandated annuity beyond Social Security," notes the report.

"Automatic enrollment should be included in new retirement plan designs so that defined contribution plans can work without active employee participation," says Toddi Gutner, co-author of the report.

Participation rates jump from 53 percent to 81 percent with automatic enrollment. "Employers need to change their plans so they work better for employees who don’t take action. It is imperative that employees embrace the financial education that companies offer so they can learn how to fully use their benefits. But perhaps just as important is to determine how much savings is enough and to save that amount."

Employees, aging and retirement planning are problems that won't be going away soon for corporate America. As the Conference Board points out, corporate responsibility for employees and their retirement savings is high - and the stakes for the companies themselves even higher.
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William Dorn

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