Examining Transitions from DB to DC Plan
Just as society is transitioning from defined benefit (DB) plans where companies save on behalf of their employees managing the investments and taking on unfunded liability, to defined contribution (DC) plans where that responsibility is shifting to employees, companies have to make that transition as well. The VP of HR at a large not-for-profit organization attending a TPSU program held at Fordham University discusses how her company made a success conversion.
The organization, which used to offer a DB plan, provides a 100% match up to 3% for employees participating in their 403b plan but the company also makes an annual contribution based on an employee’s age and years of service. So everyone is getting something for their retirement, just like with a DB plan, plus those participating, which is close to 85%, get an additional match.
The employer contribution based on age and service not only is attractive to recruits but it also is helpful in retaining employees. So the plan is really a combination of some of the best aspects of DB plans without the liability.
Though some organizations think they are being generous matching 100% of 3% of an employee’s salary, there may be better ways to help. Matches don’t increase participation but they do increase deferral rates. The match is also a not so subtle signal from employers about how much people should be saving. It might be better to stretch that match offering 30% of the first 10% or even 25% of an employee’s 12% deferral getting to the recommended goal of 15% savings.
No doubt we are in a “401k World” as coined by Thomas Friedman, noted NY Times columnist and author of “The World is Flat”, where people’s fates are decided by their own actions. But people need help. Incorporating some aspects of a DB plan without the liability as well as progressive DC plan design like auto-enrollment and re-enrollment, auto-escalation and a stretch match is a sound recipe resulting in more productive employees able to retire at the right time for them – and the company.
