The death knell has been sounding for the defined-benefit pension plan for years. Less clear was how companies would go about it: Would they cut you a check and pat you on the back? Make a deposit into your 401(k)? Buy you an annuity?
Experts say the recent freezing of pension plans by corporate giants Verizon and IBM has set the path that many companies now will take: Current employees accrue no more benefits, future employees get none, and companies instead contribute more generously to employees' 401(k) accounts.
"If IBM and Verizon can do it, everybody is going to say, 'Why not me?'" said Karen Ferguson, director of the Pension Rights Center in Washington, which advocates for workers' pension rights. "The implications for everybody else are amazing. It's going to be a race to the bottom if it doesn't stop."
The number of corporate pension plans has fallen by more than two-thirds since their peak in 1985, as global competition and an evolving relationship between employers and employees have prompted new companies to eschew pensions, some healthy companies to freeze their plans, and troubled companies to dump theirs on the federal insurer, the Pension Benefit Guaranty Corp.
In December, the PBGC issued its first comprehensive study of frozen pension plans.
The study found that 9.4 percent of company plans had halted participants' benefit accruals as of 2003, the most recent year for which complete data were available. That represented only 2.5 percent of pension-plan participants, because most of the frozen plans were small.
"While anecdotal evidence suggests that the number of frozen pension plans has increased since 2003, reports of a mass exodus from the defined-benefit pension system appear to be overstated," said Bradley Belt, PBGC executive director.
However, that was before Verizon's announcement in December and IBM's in early January. The fact that two healthy, prominent companies - both are among the 30 Dow Jones industrials - froze their pensions with little backlash couldn't have gone unnoticed in corporate boardrooms.
"More and more companies are discovering that defined-benefit plans are not well-suited to their business realities, their future and the nature of their work force management," said James Klein, president of the American Benefits Council in Washington, an employers group. "We've had a lot of companies terminating for quite some time, and freezing activity has gathered steam as well."
Companies favor freezing a pension over eliminating it altogether, because in the near term it can be much cheaper, particularly if the plan is underfunded.
"A freezing gives you more immediate financial relief," said Alan Glickstein, a retirement expert in the Dallas office of Watson Wyatt Worldwide, a benefits consulting firm. "You don't see many terminations, because the plans are not as well-funded as they were a few years ago."
To eliminate an underfunded pension, a company would have to inject millions of dollars into the plan to make the assets match the estimated future obligations. Freezing allows companies to deal with an underfunded pension over a longer time. With a frozen pension, the company continues to pay insurance premiums to the PBGC and must meet minimum funding standards.