But if GM agrees to take this action, it could be the final nail in the coffin for defined-benefit plans, observers say.
Last year, GM froze its pension for new salaried workers, so doing the same with the hourly workers would be an obvious next step, experts say. And if it does, it’s only a matter of time before the rest of the auto manufacturers and suppliers follow suit, they say.
“If GM does this, it would be extremely significant because the auto industry is the last big one with defined-benefit plans and strong union backing to move away from these plans,” says Ted Benna, who is COO of Malvern Benefits Corp., a 401(k) plan administrator, and is also known as the founder of the first 401(k) plan. “The steel industry went down, then the airline industry went down. The auto industry would be the last biggie.”
The current contract between GM and the UAW expired on Friday, September 14, but the two sides have continued to work day and night to come to an agreement on a number of issues, including health care benefits for retirees and the status of the pension plan.
If GM does freeze its defined-benefit plan for hourly workers, it will signal to employers in all industries that they can do this as well, says Alicia Munnell, director of the Center for Retirement Research at Boston College.
“It does seem that there is a tendency for firms to freeze their plans if other firms have done so,” she says. “It makes it more socially acceptable.”
But David Wray, president of the 401(k)/Profit Sharing Council of America, doesn’t agree. He believes that most companies with defined-benefit plans are coming to this decision on their own and won’t be affected by what GM does.
“Obviously other companies within the automobile manufacturing sector will follow suit,” he says. “But companies in other industries will continue to make this decision on a company-by-company basis.”
And the reality is that there are still many industries where defined benefit plans are alive and well, says Dallas Salisbury, president of the Employee Benefit Research Institute.
“Twenty percent of the labor workforce are in defined benefit plans accruing benefits,” he says, noting that companies like General Electric and AT&T still run these plans.
“While it may be true that old-school declining industries are moving away from defined benefit plans, there are still many growing industries that are keeping them.”
The potential upside of an employer the size of GM switching solely to a 401(k) plan for new hires is that it could create further public scrutiny of whether these plans are adequate to ensure employees’ retirement security, Munnell says.
While the Pension Protection Act, which allowed for automatic enrollment and increases, helped a lot in this regard, more needs to be done, she says.
“If we are going to have an additional hundreds of thousands of employees depending on the 401(k) plan, hopefully it will further these discussions,” Munnell says.