Author: Jerry Geisel

Aided by strong investment results, employees’ 401(k) average account balances hit a record $75,900 at the end of the third quarter of 2012, according to an analysis released Nov. 8.

For the three month period ending Sept. 30, employees’ average account balances jumped 4.2 percent from the prior quarter, and 18 percent compared with the end of the third quarter of 2011 when account balances averaged $64,300, according to Fidelity Investments.

Strong investment results accounted for 78 percent of the third quarter account balance increase, and 22 percent was attributable to participant action, such as boosting contributions, Fidelity said.

In fact, 4.6 percent of plan participants increased their deferral rate during the third quarter, compared with 2.8 percent who decreased it.

The Fidelity analysis, which is based on 12 million 401(k) plan accounts in more than 20,000 employer plans, shows how the accounts have recovered from the Great Recession of 2008-2009, when account balances were battered by the plunge in the equities market.

At $75,900, the average account balance at the end of the 2012 third quarter is up by more than 64 percent compared with end of the first quarter of 2009 — considered the bottom of the last economic downturn — when the average account balance was $46,200.

Jerry Geisel writes for Business Insurance, a sister publication of Workforce Management. Comment below or email editors@workforce.com.

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American Airlines Inc. froze its four massively underfunded pension plans Nov. 1, an action that put to an end a long-running saga over the plans’ future.

That saga began nearly a year ago when American’s parent, Fort Worth, Texas-based AMR Corp., filed for Chapter 11 bankruptcy reorganization.

In January, American said it would seek bankruptcy court approval to terminate the plans, which have about 130,000 participants.

“American’s pension plans are very expensive; we spend more on them than our competitors spend on their retirement plans. We simply do not see a way we can secure the company’s future without terminating our defined benefit plans,” the airline said January in a statement.

The airline’s intended action ran into strong resistance from the Pension Benefit Guaranty Corp., which would have had to pick up billions of dollars in benefits that the company promised to the plans’ participants but did not fund.

“Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have declined to provide even the most basic information to decide that,” PBGC Director Josh Gotbaum said at the time.

In the face of that pressure, American in March reversed course and said it intended to freeze the plans and would beef up 401(k) plan contributions.

Through that decision, the PBGC, which reported a record $26 billion deficit in fiscal 2011, was spared what would have been its biggest loss in its 38-year history. According to PBGC estimates, the four American Airlines plans have about $8.3 billion in assets and $18.5 billion in promised benefits.

If the plans that cover pilots, flight attendants, transport workers and other nonunion employees had folded, the PBGC would have been liable for about $17 billion in benefits, resulting in an $8.7 billion loss.

That would have eclipsed the previous PBGC record loss, $7.4 billion in its 2005 takeover of five United Airlines’ pension plans.

The freezing of American’s plans will have no impact on its retirees who will continue to receive promised benefits. However, active participants no longer will accrue benefits. Less than half of plan participants were accruing benefits, an American Airlines spokesman said. American, though, will make an automatic 401(k) plan contribution for pilots equal to 11 percent of their pay, and will match other employees’ contributions, up to 5.5 percent of compensation.

The PBGC’s Gotbaum described the freeze as a “mixed result” for American’s pension plan participants. “Today marks a mixed result for the people of American Airlines. We of course are pleased that they will get to keep the pension benefits they have already earned, but it is unfortunate that going forward their retirement benefits will not provide the same level of security as a traditional pension,” he said in a statement Nov. 1.

American Airlines’ pension freeze means that except for a pension plan covering non-pilot employees once sponsored by Continental Airlines—later acquired by UAL Corp.—all major airlines’ pension plans have been frozen or taken over, at a cost of billions of dollars, by the PBGC.

Jerry Geisel writes for Business Insurance, a sister publication of Workforce Management. Comment below or email editors@workforce.com.

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Kimberly-Clark Corp. is offering about 10,000 former employees who are eligible for but not yet receiving monthly pension benefits the opportunity to convert their future annuity to a lump-sum benefit.

The Dallas-based company said Oct. 24 that the vested benefit obligation associated with the former employees is about $570 million, equal to 15 percent of the company’s benefit obligation for the pension plan.

Participants will have until Nov. 21 to make the election. The lump sum payments will be funded from plan assets and will be made by the end of 2012.

Roughly a dozen other big well-known employers have made annuity-to-lump-sum benefit conversion offers in recent months, including Equifax Inc., Ford Motor Co., General Motors Co., NCR Corp. and The New York Times Co.

When pension plan participants take lump-sum benefits and are no longer covered by the plan, their former employers do not have to worry about how interest rate fluctuations and investment results could affect how much they will have to contribute to their pension plans to fund future annuity payments.

In addition, when participants take lump sums and move out of a pension plan, employers can reduce certain fixed costs, such as the payment of sharply rising premiums to the Pension Benefit Guaranty Corp.

For more information on lump-sum offers and other pension de-risking strategies, go to Business Insurance‘s solution arc on what companies need to know about reducing pension risk.

Jerry Geisel writes for Business Insurance, a sister publication of Workforce Management. Comment below or email editors@workforce.com.

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The percentage of the largest U.S. employers that offer a defined benefit pension plan to new salaried employees continues to fall, according to new research.

As of June 30, 30 percent of Fortune 100 companies offered a defined benefit plan to new salaried employees, according to New York-based Towers Watson & Co. That’s down from 33 percent at the end of 2011, 37 percent in 2010 and 43 percent in 2009.

As recently as 1998, defined benefit plans were the norm among the nation’s largest employers, when 90 percent of Fortune 100 companies offered the plans to new salaried employees.

Since then, large employers have moved away from the plans. “Large employers have been reassessing their retirement offerings for some time. … The shift is motivated by several factors, including employers’ desire to reduce overall retirement costs — perhaps due to higher compensation and benefit costs elsewhere, especially health care — perceptions that workers prefer more portable plans, market trends, and the belief that such a shift reduces financial risk,” Towers Watson said in an article posted Oct. 2 in The Insider, a company publication.

In addition, as more companies have moved away from defined benefit plans, the competitive pressure on employers to continue to offer the plans has declined, said Alan Glickstein, a Towers Watson senior retirement consultant in Dallas.

The move away from defined benefit plans has been especially pronounced for traditional plans, in which the benefit is typically based on employees’ years of service and employees’ salary during their last years of employment.

Just 11 Fortune 100 companies offered a traditional defined benefit plan to new salaried employees as of June 30, down from 14 in 2011, 17 in 2010 and 19 in 2009.

By contrast, during the 1980s, defined benefit plans were the norm among Fortune 100 companies. In 1985, for example, nearly 90 percent of Fortune 100 companies offered a traditional defined benefit plan to new employees.

The prevalence of hybrid plans, typically cash balance plans, also has sharply declined. As of June 30, 19 Fortune 100 companies offered hybrid plans to new salaried employees. That’s unchanged from 2011, but almost 50 percent less compared with 2004, when 35 Fortune 100 companies offered the plans. While hybrid plans have defined benefit and defined contribution plan elements, legally they are defined benefit plans.

While a handful of big employers, including Dow Chemical Co. and The Coca-Cola Co., have set up new cash balance plans in recent years, new formations have been more than offset by other Fortune 100 companies, including Bank of America Corp., SunTrust Banks Inc. and Wells Fargo & Co., which began to phase out their cash balance plans.

As employers have moved away from defined benefit plans, the overwhelming majority of Fortune 100 companies now offer only a defined contribution plan to new salaried employees, according to Towers Watson.

As of June 30, 70 percent of the Fortune 100 offered only defined contribution plans, up from 67 percent in 2011, 63 percent in 2010 and 57 percent in 2009. By contrast, as recently as 1998, just 10 percent of Fortune 100 companies offered only defined contribution plans.

Equifax Inc. disclosed Oct. 1 that it will offer the opportunity to convert future annuities to either a lump-sum benefit or a reduced annuity that would begin in December to about 3,500 former employees who are eligible for but not yet receiving monthly pension benefits.

The offer is being extended to those individuals who terminated employment prior to Jan. 1, 2012, but have not yet started to receive benefits.

The benefit liability associated with that group represents about 20 percent of Equifax’s total pension plan liabilities, which were about $630 million as of Dec. 31, 2011, the Atlanta-based company said in a filing with the U.S. Securities and Exchange Commission.

Eligible participants will have from Oct. 8 to Nov. 16 to make elections, which are voluntary.

The payments will be funded with plan assets.

Other employers that have made annuity-to-lump-sum benefit conversion offers in recent weeks include Visteon Corp. and The New York Times Co.

Jerry Geisel writes for Business Insurance, a sister publication of Workforce Management. Comment below or email editors@workforce.com.

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Archer Daniels Midland Co. has disclosed that it will offer between 7,000 and 7,500 former employees who are eligible for but not yet receiving monthly pension benefits the opportunity to convert their future annuities to a lump-sum benefit.

The program, which will be funded with pension plan assets, “could reduce its global pension benefit obligation by approximately $140 million” to $210 million and improve its pension underfunding by about $35 million to $55 million, the Decatur, Illinois-based agribusiness giant said Sept. 20 in a filing with the U.S. Securities and Exchange Commission.

ADM’s offer comes after one made this week by Van Buren Township, Michigan-based automotive industry supplier Visteon Corp. to about 10,000 former employees.

In addition, The New York Times Co. announced last week that it is making such an offer to about 5,200 plan participants.

Other well-known employers that also have made annuity to lump-sum benefit conversion offers in recent months include Ford Motor Co., General Motors Co. and NCR Corp.

When pension plan participants take lump-sum benefits and are no longer covered by the plan, their former employers do not have to worry about how interest rate fluctuations and investment results could affect how much they will have to contribute to their pension plans to fund future annuity payments.

In addition, when participants take lump sums and move out of the pension plan, employers can reduce certain fixed costs, such as the payment of sharply rising premiums to the Pension Benefit Guaranty Corp.

Jerry Geisel writes for Business Insurance, a sister publication of Workforce Management. To comment, email editors@workforce.com.

Stay informed and connected. Get human resources news and HR features via Workforce Management’s Twitter feed or RSS feeds for mobile devices and news readers.