Effects of Financial Crisis Shake Plan Sponsors into Action
BROOKFIELD, WI, May 13, 2009 -- As the financial crisis continues, it appears U.S. employers view the situation as significantly more serious than they did just six months ago. A follow-up survey conducted by the International Foundation of Employee Benefit Plans in May 2009 found that the crisis has forced both defined benefit (DB) plan sponsors and defined contribution (DC) plan sponsors to make changes to their retirement coverage and plan design.
"Six months ago, many retirement plan sponsors reported they were 'taking the long view' of the situation," said Sally Natchek, Senior Director of Research at the International Foundation. "Now, employers seem to view the crisis as more severe. There's been a jump in the number making changes to their offerings, categories of employees covered, asset allocations and employer matches."
DB Plans Change Asset Allocations and Reexamine Offering Pension Benefits
The survey found that the financial crisis has prompted 42% of DB plan sponsors to make changes to their strategic asset allocation—more than double the 20% who reported having changed allocations six months earlier. Of the DB plan sponsors who changed asset allocations as a result of the crisis, the most common changes are increasing fixed income assets (37%), reducing U.S. equity allocations (17%) and increasing alternative fund investments (13%).
In addition to changing their asset allocations, DB plan sponsors are reexamining offering a pension plan at all. More than a quarter of DB plan sponsors (27%) have discontinued offering pension benefits for all or some employees and 21% have closed their plan to new participants. Respondents from the corporate sector are the most likely to have implemented these changes with 40% reporting they had discontinued offerings to some or all employees and 34% stating they had closed their plan to new participants.
DC Plans Change Product Offerings and Reconsider Employer Matches
As of May, 13% of DC plan sponsors have changed their investment product offerings as a result of the crisis—almost double the 7% who reported executing changes six months earlier. Of the 13% who have implemented changes, 21% added more low-risk investment choices, 18% increased diversification, 16% added life cycle (target-date) funds or money market funds, and 15% added government-backed options.
Besides impacting investment offerings, the crisis is also having an impact on the employer match. Sixteen percent of DC plan sponsors reduced or eliminated employer matches as a result of the economic situation. Of those who report having changed their match, 44% have reduced the amount of the match and 52% have suspended the match all together; corporations are the most likely to have taken this action.
"Although the number of plan sponsors who have reduced or eliminated their employer match is relatively small, the number is still significant since any change tends to result in the employee lowering his or her contribution," said Natchek.
Impact of the Crisis Causes Employees to Alter Their DC Plan Contributions
The ongoing crisis appears to be having a substantial impact on employee efforts to save for retirement. A large percent of DC plan sponsors, 44%, report a decrease in participants' overall amount of contributions. This is a sharp uptick since October 2008 when just 28% of plan sponsors reported this trend. Even more notable, 40% of DC sponsors report an increase in the number of participants completely stopping plan contributions.
Hardship withdrawals and loans from DC plans are also on the rise with 42% of plan sponsors reporting an increase in the number of participants making hardship withdrawals and 40% reporting an increase in those borrowing from retirement accounts. This is in contrast to six months ago when 29% of plans sponsors reported an increase in hardship withdrawals and 28% indicated an increase in loans.
"It's important for employees to keep contributing to their 401k accounts to ensure a secure retirement, however if the crisis continues we're likely to see these numbers increase even higher," said Natchek. "This could have a potentially devastating impact on the retirement future of many Americans."
Job Security Ranks as Employees' Number One Concern
As the crisis continues, it appears that employees' main concern has shifted from retirement worries to anxiety about their job security. Plan sponsors report decreased job security as the major concern of their employees given the current crisis (48%). This is in contrast to six months ago when job security ranked fourth among major concerns at 34%, while delaying retirement topped the list.
"As the crisis continues, employees' growing concern seems to be not how they will finance their future, but how they will finance their present," said Natchek.
It seems that employees' worries are justified as half of employers (50%) have already implemented layoffs or reductions in their workforce and an additional 11% expect to take such actions in the next 12 months. In addition, 52% of organizations have a hiring freeze in place.
Finally, the survey found that employees' view of the severity of the crisis may differ based on whether they are enrolled in a DC plan or a DB plan. DC plans sponsors (47%) were more than twice as likely as DB sponsors (23%) to think a majority of their participants view the long-term impact as severe. These findings are noticeably higher than just six months ago, when 31% of DC plan sponsors and 19% of DB plan sponsors reported that a majority of their participants viewed the long-term impact as severe.
The survey includes responses from 1,305 U.S. pension plan sponsors. Respondents represent a cross section of employee benefit sectors: corporate plans, public and governmental plans, multiemployer plans and others with pension plans.
Pension Plans: Impact of the Financial Crisis, May 2009 Update (Item #6597A) is published by the International Foundation of Employee Benefit Plans. Members of the International Foundation receive the survey results free of charge. Nonmembers can purchase the survey for $50. To order visit www.ifebp.org/books.asp?6597A or contact the Foundation Bookstore at bookstore@ifebp.org or 888.334.3327, option 4.
About IFEBP
The International Foundation of Employee Benefit Plans is a nonprofit organization, dedicated to being a leading objective and independent global source of employee benefits, compensation, and financial literacy education and information.
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