As more companies move away from offering defined-benefit plans, many are looking for alternatives, says Don Fuerst, principal at Mercer. Defined-contribution plans are no panacea. “Employers are frustrated that a 401(k) plan on its own is not going to provide sufficient benefit to long-term employees,” Fuerst says.
Mercer’s new Retirement Shares Plan is a defined-benefit plan with defined-contribution features. With the plan, employees accrue a benefit each year based on a percentage of their salaries. At the end of each year, the employees’ benefits are converted into retirement shares.
For example, an employee who makes $100,000 a year and accrues a 1 percent benefit would have $1,000 at the end of the year to buy retirement shares. Employees can choose how to invest their retirement shares between stable-value and equity shares or a mix of both, Fuerst says. The employer determines the plan design and managers.
Similar to a traditional defined-benefit plan, the Retirement Shares Plan will provide employees with guaranteed retirement income. The amount employees receive each year depends on the plan assets, Fuerst says. If the plan’s assets have decreased because of down markets, a retiree’s benefit one year could be half of what it was the year before. That’s why Mercer is pitching the Retirement Shares Plan as something to offer with a 401(k), rather than as a replacement for it, Fuerst says.
Many vendors are working on similar offerings: retirement plans that give employees choice while providing a guaranteed retirement income stream, says Melissa Kahn, vice president of government and industry relations at MetLife and a member of the Conversation on Coverage, a group of representatives from business, unions, financial institutions, consulting firms and academia working to come up with new ways to increase retirement savings.
MetLife teamed up with Merrill Lynch to launch its Personal Pension Builder, which allows employees to purchase guaranteed future income for use during retirement. “Different financial service providers have products that they are developing like our Personal Pension Builder,” Kahn says.
The main difference between Mercer’s product and the other offerings in the works is that Mercer is adding defined-contribution features to a defined-benefit plan. Most firms are going in the other direction by developing defined-benefit features for a 401(k) plan.
A danger in the proliferation of hybrids is that employers will end up confused, says Ari Jacobs, a consultant at Hewitt Associates.
“There will be more tweaks on common designs until some legislation is passed telling us we can do more,” he says.