News of companies freezing their defined-benefit plans has become standard fare. Usually when it happens, the organizations increase the company match to the 401(k) plan to appease potentially disgruntled employees.
But executives at Tenneco, which recently announced it would freeze its defined-benefit plans, didn’t think that was a fair trade for its employees.
"We wanted to provide a competitive replacement to our defined-benefit plans," says Rex Abercrombie, vice president of compensation and benefits at the Lake Forest, Illinois-based auto parts manufacturer.
On August 23, Tenneco announced it was freezing its defined-benefit plans. But instead of enhancing its existing 401(k) plan, Tenneco is creating a new defined-contribution retirement account, into which it will make contributions to employees’ accounts. Employees don’t have to do a thing. The amount of Tenneco’s contribution will be based on the employee’s age.
"We could have simply increased the match, but that would not have provided the same solution," Abercrombie says. "We were drawn to the idea of basing the contribution on age because that more closely replicates the accrual that the old defined-benefit plans provided."
As more companies freeze or terminate their defined-benefit plans, many are looking at new ways to provide the same kind of benefits to employees without having the costs, says David Wray, president of Profit Sharing/401(k) Council of America.
Most companies that provide employees with something on top of their 401(k) plans choose to launch a profit-sharing account because they can control the range of annual contributions, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) consultant.
Only a few employers currently are creating benefits based on age or years of service, Wray says. A recent Profit Sharing/401(k) Council survey found that 6.2 percent of companies base a contribution on age, while 2.9 percent base it on service.
Experts predict that as companies realize the need to retain older workers in the face of a potential talent shortage, more employers will do defined-contribution accounts that favor older, tenured employees.
"I think companies will be more creative with how they are doing contributions to appeal to their own unique workforce and business needs," Wray says.
One issue that companies need to consider when creating an account with age-based contributions is the operational challenges, Stone says.
"This is one more place where the record keeping could go bad," he says.
But Abercrombie says that Tenneco has discussed these issues with its record keeper, Affiliated Computer Services, and doesn’t anticipate a problem.
Tenneco’s new account will launch January 1 and will be available to the 1,400 salaried and 4,000 nonunion hourly workers affected by the defined-benefit freeze.
"We view this as a demonstration that we do care about employees’ long-term financial success," Abercrombie says.