October 2006 — Pension Suspension — Companies move to freeze pension plans, enroll employees in 401(k) accounts

New employees at the Richmond (Va.) Times-Dispatch, Winston-Salem (N.C.) Journal and The Tampa Tribune starting after Dec. 31 will receive a compensation package somewhat unfamiliar to many of their colleagues. Instead of the guaranteed pension plan all Media General Inc. properties had previously offered full-time employees, new hires will instead receive a 401(k) retirement account option.

Media General, based in Richmond , isn't alone among U.S. companies in making the switch, and it's a group that will likely increase with time. A pension reform bill signed into law in August by President Bush requires companies to fully fund their pension plans by 2011, and encourages the automatic enrollment of employees into 401(k) accounts.

Defined-benefit programs, such as pensions, allow an employee to receive specific benefits, often provided by the company and are guaranteed no matter how the investments perform. Defined-contribution programs—the most popular ones are 401(k)s; 403(b)s, which are often offered by nonprofit organizations; and 457 plans, which are available to government workers—allow employees and employers to both contribute to an investment account that grows based on how the investments perform. Unlike pensions, however, the bulk of contributions come from employees, through pretax salary reductions.

Media General announced its across-the-board retirement plan restructuring in May with few complaints from employees, says company spokesperson Liz Cleal. "They're not losing anything," she says.

Although the company's defined-benefit program will be frozen for existing employees, funds will continue to accrue based on their final average earnings, Cleal says. Moreover, Media General will increase its match (entirely with company stock) for its current 401(k) plan, to 100 percent on the first 5 percent of an employee contribution. The previous plan featured a 100 percent match on the first 4 percent.

Employees 55 and older can sell their company stock at any time and transfer the funds into a different 401(k) investment account, Cleal says. Those under the age of 55 can sell and reinvest 25 percent of their company stock each quarter. The new pension reform law sets minimum standards for company stock. Employees must be allowed to sell it no later than after three years of service.

In addition, Media General will establish a retiree medical savings account for all previous participants of its defined-benefit plan. Participants will receive $500 from the company for every year of service, as of Dec. 31, 2006. Account balances will increase at 6 percent annually until retirement.

Those changes, Cleal says, were inspired by the fact that pension funds, and defined-benefit plans in general, have "unpredictable and volatile expenses that the company wants to eliminate.

"With a defined-contribution plan like a 401(k)," Cleal adds, "the company has a pretty good idea of what expenses will be in five years."

Michael Martz, a reporter at the Times-Dispatch and head of the journalists' union there, declined comment.

Pierce Noble, world partner for Mercer Human Resource Consulting and an actuarial consultant on retirement issues, says U.S. companies have steadily switched from pensions to 401(k) plans for the past 10 years. However, the move has become increasingly popular since early 2005 because of the changing nature of the job market and the ever-present need for businesses to find new ways to save money in a relatively slow economy.

"Because you have to pay out a set amount [for pensions], no matter how well the stock market does, you've really got to hope the market does what you want it to," he says. "If it doesn't, you've got some bills to pay."

On the human resources front, Noble says the portability of 401(k)s and other defined-contribution plans is far more attractive to today's workers than the idea of a pension is. Linda Foley, president of The Newspaper Guild-Communications Workers of America in Washington, agrees.

"Younger workers want that portability," she says. "Many workers don't tend to stay in one place anymore, which is what the pension is all about, and want a retirement plan they can take with them."

According to the most recent data from the Federal Reserve, about 58 percent of families in 2004 had some type of company-provided retirement plan. Of those, 57 percent had a standard defined-benefit plan, and 63 percent had personal accounts, such as 401(k)s. Twenty percent of the families had both types of plans.

Moving Toward a 401(k) 

The new pension-reform law, The Pension Protection Act of 2006, makes it slightly more challenging for companies to maintain pension plans because of funding requirements. The new law, which doesn't go into effect until 2008, requires that pension funds are fully funded by 2011. The previous law required that they be funded at a minimum of 90 percent, although numerous companies fell short of that mark.

Aliya Wong, director of pension policy for the U.S. Chamber of Commerce, who was heavily involved in negotiations with Congress over the new law, says the tougher funding requirements could compel more companies to freeze their defined-benefit plans.

"If you have a traditional pension plan, it'll mean that you'll have to put more money in," she says. "It'll mean tougher funding rules that may mean making hard decisions about whether you can pay to maintain the plan."

The new law also will make it easier for companies involved in multi-employer pension plans to gain access to funding records in a more timely fashion, say Kathy Elsen, NAA vice president of public policy.

The law further makes permanent a number of provision for 401(k) providers—such as the maximum amount of pre-tax money an employee can contribute ($15,000 a year, or $20,000 for those age 50 or older)—that were previously set to expire in 2010. "Now, employers have a lot more certainty about maintaining their plans going forward," Wong says.

New automatic enrollment provisions, which require employees to opt-out rather than opt-in, also will help make administering plans more manageable for employers.

Nonetheless, Foley says companies should offer workers both options in recognition that employees have greatly varied retirement goals. "We urge our local chapters to bargain for both defined-contribution and defined-benefit plans to be in their contracts so there will be options for different situations."

Several years ago Belo Corp. in Dallas began putting all new employees in an enhanced 401(k) plan rather than a defined-benefit pension plan. At the same time, if offered a choice to current employees to either stay in the company's pension plan, or to move to the same enhanced 401(k) plan being offered to new employees.

In August, Belo sent a memo to all employees—the company owns The Dallas Morning News and the Providence Journal, among other papers—about potential changes to the retirement package. Like many companies across the nation, the memo reported, Belo was considering freezing pension plans in favor of defined-contribution plans "in which most Belo employees already participate."

Carey Hendrickson, vice president of investor relations and corporate communications at Belo, says no decision has yet been made and declined further comment.

In a newsletter published by The Providence Newspaper Guild, the employee union of the Providence Journal, union officials noted that they had consulted with an attorney and the national union, and believed an attempt to unilaterally freeze the pension benefits of Guild members was prohibited by contract.

"We believe the current pension plan must remain in place at least through the end of our current contract, which runs through the end of 2007," says Timothy Schick, administrator of The Providence Newspaper Guild. "We expect the pension issue to be part of negotiations during our contract talks at the end of next year."

It's a common refrain among union leaders.

"Retirement and health insurance are the two biggest things when it comes to contract negotiations," Foley says.

"Pensions are right at the forefront of the negotiations going on concerning the recent sale of Philadelphia's two big dailies [The Philadelphia Inquirer and the Philadelphia Daily News, to the privately owned Philadelphia Media Holdings LLC]," she says. "It's a key ingredient to employee satisfaction."

An executive at The McClatchy Co. in Sacramento says her company has not made any changes to its retirement plans since agreeing to purchase Knight Ridder in San Jose in March. "We have always offered both [pensions and 401(k) plans] and believe the two programs allow employees to have the ability to prepare for their retirement, and have a hand in doing so under the 401 (k)," says R. Elaine Lintecum, treasurer of McClatchy.

Because the new pension law doesn't go into effect until 2008, Wong strongly encourages company representatives to meet with actuaries, accountants and attorneys to see how the actual language will affect them.

"We can only hope that new, creative ways are consistently found to bring more incentives and savings to the American worker," Wong says. "Otherwise, we're going to have a pretty big retirement problem on our hands."

by Mark J. Miller (October 2006 PRESSTIME)

Sources:

Kathy Elsen, NAA
Linda Foley, the Newspaper Guild-CWA
Pierce Noble, Mercer Human Resource Consulting
Aliya Wong , U. S. Chamber of Commerce

First Published:
August 8, 2007