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Manufacturing Finds Defined Contribution Plans Work Best

Competition in today's tight labor market has forced even small companies to realize that pension and retirement benefits make a difference to employees.

February 28, 2001
Competition in today's tight labor market has forced even small companies to realize that pension and retirement benefits make a difference to employees. These benefits can be a tool to attract and retain talent, a way to compensate employees for gambling on a start-up, or just plain good sense from an employee-relations point of view.

    Jobs today are not about lifetime employment. The 21st-century workforce is transient. Most people will have more than half a dozen jobs in a lifetime. Employees like portability and practicality in retirement benefits. They are demanding and getting more choices, visible cash benefits plans, self-service participation, and access to and self-direction of investments.

    Traditionally, most companies offered defined benefit plans, which favor long-term employees. An employee works for the same company for 30-odd years, retires, then receives a monthly pension check based on a predetermined formula. That works well for people who have the same employer for life, but not so well for a mobile workforce. Termination well before retirement offers few, if any, benefits.

    Instead, there has been a shift by employers of all sizes to defined contribution plans or hybrids of defined benefit plans that offer employees more visible value, says Steve Vernon, vice president and consulting actuary for Watson Wyatt Worldwide in Los Angeles. Defined contribution plans are individual retirement accounts based on amounts contributed or allocated, like a 401(k). Matching funds are optional.

    From an employer's point of view, these defined contribution plans can be less costly and transfer the risk and responsibility to the employee, says Craig Copeland, senior research associate with Employment Benefit Research Institute, a Washington-based nonprofit group.

    They are especially popular with small- and medium-size employers because they aren't as complex from a regulatory standpoint and don't require costly actuarial evaluations, adds Anna M. Rappaport, a Chicago-based principal with William M. Mercer Inc., worldwide benefits consultants.

    Here's a look at how three companies, each involved in manufacturing of various kinds, are coping with changing workforce demographics and the retirement issue.

Workforce, March 2001, pp. 66-75 Subscribe Now!