This article was updated on July 22, 2018.
Retirement plans matter to your workforce and can be a major driver of loyalty toward the organization. Quality retirement benefits can also serve to bolster your recruitment efforts as they are often an important consideration for prospective employees. But change is afoot, and defined benefit plans are dwindling as more employers transition to defined contribution plans.
These HR tips for pension changes can help your organization control the costs of retirement plans while supporting your talent through these changes.
The Move Toward Defined Contribution Plans
In a defined benefit plan, or pension plan, the employer faces higher costs and higher risks — especially as life expectancies and the number of years the average American will spend in retirement continue to increase. This combination of paying guaranteed monthly benefits while assuming the risks of market volatility and longer life spans has placed massive burdens on employers.
According to Willis Towers Watson, employers offering traditional defined benefit plans have decreased from roughly half to a mere 5 percent. Boeing Co. is one example of a business that has successfully transitioned to a defined contribution plan, a move that covered approximately 68,000 employees, including managers and executives.
But defined contribution plans, such as 401(k)s and 403(b)s, have become an increasingly popular way for employers to help their workers retire while shifting investment risks and costs onto employees.
HR Tips for Pension Changes: Facilitating a Smooth Transition
Here are tips for HR leaders to consider when transitioning from pension plans to more updated retirement plans.
Start With a Plan
HR leadership should work alongside finance leaders and other C-suite leadership to discuss the conversion's impact. How will it affect your costs? How will it change the cost to your employees?
Your leadership team must have a clear communication plan in place. Work with your retirement plan provider to share as much relevant information as possible. Automatic plan features and tools like personalized retirement income statements and online calculators offer the kind of information employees want to estimate their savings targets, measure if they're on track and make important ongoing decisions that can generate better retirement outcomes for them.
There may be employees who feel like the move to a defined contribution plan represents a broken promise, a violation of the unwritten social contract — employee loyalty exchanged for guaranteed fixed retirement income. Give employees adequate time to adapt to the changes. When employees know how the switch will impact them and understand the risks and advantages, it reduces their financial stress and allows them focus on doing their jobs well.
The best way for HR leaders to build trust as they convert their defined benefit plan to a defined contribution plan is to communicate continuously about the change, monitor employee happiness and productivity, and offer support and guidance throughout the transition.