Watson Wyatt urges Congress to act.

With new analysis showing the largest U.S. companies continued to shift from traditional pensions to 401(k) plans in 2005, Watson Wyatt Worldwide has urged Congress to act on long-standing funding and regulatory issues affecting pensions. At the same time, the firm's experts say employers should get a true reading of their plans' cost structure and of related workforce management issues before making plan changes.

"As Congress considers a major rewrite of pension laws and the marketplace sorts out the best way to handle employee retirement programs, the defined benefit system finds itself at a very critical stage," said Sylvester J. Schieber, director of U.S. benefits consulting at Watson Wyatt, in an announcement. "Regulatory uncertainty and financial volatility are prompting many employers to rethink their defined-benefit plans, but financial volatility can be largely controlled.

"Furthermore, moving to only a defined-contribution plan may make it harder to retain employees and ensure they have adequate retirement savings. Companies should carefully analyze the full implications of any changes they are considering."

In its analysis of retirement plans at Fortune 100 companies, Watson Wyatt found that 37 percent offered a traditional pension plan to new hires in 2005, compared with 42 percent in 2004 and 50 percent three years ago. In 1985, nearly nine out of 10 Fortune 100 companies offered a traditional defined-benefit plan. The 2005 analysis includes all companies that have announced pension changes to date.

The Watson Wyatt analysis also found that employers are moving away from hybrid pension plans, generally cash balance and pension equity plans. Until 2002, hybrid plan adoption was rising, but legislative and regulatory challenges have stymied their growth. Hybrids are defined-benefit plans in which employees' benefits are expressed in terms of current lump sum values, instead of as annuities after retirement. They combine aspects of defined-benefit and defined-contribution, but are technically defined-benefit plans.

Kevin Wagner, the practice director for growth in Watson Wyatt's retirement practice, urges employers to monitor a variety of potential pension-related developments as they reconsider their retirement plans. "With legislative and regulatory decisions, marketplace comparisons and demographic changes in the workforce up in the air, companies may want to use the next few months to think through their options as they wait to see what the new landscape looks like," he said.

Distribution of Retirement Plans Among Fortune 100 Companies

      Traditional    Hybrid         Defined-Contrib/
      Pension Plan*  Pension Plan*  401(k) only

1985  89%             1%            10%
1998  68%            22%            10%
2002  50%            33%            17%
2004  42%            33%            25%
2005  37%            27%            36%

*Most of these firms also have a 401(k)
Source: Watson Wyatt