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Recruiting Blues: When Your 401(k) Package Excites No One

Dec. 3, 2018
Pension plans, which used to be manufacturing’s advantage, are dinosaurs now. But there is another way for employers to distinguish themselves from the retirement pack.

Workforce management has long been a challenge in manufacturing. To paraphrase a now-retired manufacturing CEO we’ve worked with, “If I can’t keep them for close to ten years, they haven’t fully learned their jobs. I need them to stay at least another 15 to get full value from them and then I need a way to make them comfortable with retirement after that.”

The challenge of recruiting new workers—not to mention retaining experienced workers and setting them on the path to a healthy retirement—may be even greater now than before. We’re in a very mobile work environment with global competition. Recruitment is difficult; retention perhaps even more so.

Part of manufacturing’s recent workforce woes may be rooted in the decline of its generous retirement plans. If we can think back to the 1980s and 1990s for just a minute, we remember the days when virtually every manufacturer in the US had one or more defined benefit (DB) plans. These plans had lots of excellent attributes, such as vesting schedules of three to five years to help retain employees for that amount of time, early retirement provisions to afford employees the opportunity to retire on their timetables, and lifetime income options (annuities) so that soon to be retirees could budget for retirement.

Where they fell into disfavor was that costs were unpredictable and when they rose, those costs tended to rise to untenable levels. Thus began the move out of defined-benefit plans and into the 401(k) world.

I don’t want to dump on the 401(k). Everyone should have one. But, it should not be the primary retirement vehicle. It was always intended as merely a supplemental tax-favored savings opportunity for employees. But it doesn't work as a recruiting tool—401(k)s are unremarkable and virtually every employer has one—and it doesn’t prepare your employees for retirement at a reasonable age, with a reasonable income.

Enter the market return cash balance plan, an underused option whose costs are far less volatile than a traditional defined benefit plan. It affords a number of options not readily available in a 401(k)—and can help with recruiting as it sets an employer apart from the pack.

Technically, a market-return cash balance plan is a defined benefit plan. To employees, it will look like a better 401(k) because they get company money whether they defer their retirement or not. Assets are professionally managed. But, it also can help your tenured employees prepare better for retirement, with vesting schedules, the ability to do early retirement windows, and annuity options. From a finance perspective, it checks the right boxes. Costs are highly predictable and stable, each employee’s benefit is funded during his working lifetime, and according to recent October Three study, more than 90% of them in existence today are fully funded.

In a nutshell, here is how it works. Each year, a participant gets an allocation or pay credit to his hypothetical account. It grows with returns, calculated daily, based on the returns (interest credits) in the pension trust. There is a guarantee of a cumulative return of “principal.” And, upon termination from the company, the employee can take an annuity from the plan or a lump sum generally equal to the value of his hypothetical account. Annual funding will be usually be about equal to the sum of the pay credits adjusted very slightly if the company delays its contributions to the plan as long as possible.

That’s it. It’s easier to communicate than a 401(k) because there are no participant investment decisions. It’s more flexible than a 401(k) because lifetime income options are readily available. Costs are predictable and manageable by design. You can choose to make workforce management decisions—hiring, reductions in force, easing people out, phased retirement—through  tools like early retirement windows as the needs arise and budget allows. And, as long as your administrator has daily valuation capabilities, administration can be integrated online with your 401(k) administration.

What’s the catch? These designs have only been around for about ten years, as they were first sanctioned by the Pension Protection Act, so there aren’t too many yet. (Similarly in 1988, 10 years after section 401(k) was added to the Internal Revenue Code, most companies didn’t have 401(k)s.) As a result, effectively communicating the benefits of these plans—to employees, to company leadership—may require some initial extra effort.

As they compete in a globally competitive environment, manufacturing companies may be looking for a retirement program that strikes a balance: that is, a program that has appeal to financial executives because costs are predictable and manageable;  that has appeal to HR because it allows them to better manage their workforce; and that has appeal to employees because it gives them an account balance that they can look at every day, but relieves them of the burden of having to make investment decisions. It’s not intended to make the 401(k) disappear, but to make an employee’s participation in a 401(k) more valuable.

John Lowell is a partner and consulting actuary with October Three and is based in the Atlanta area. He recently served as President of the Conference of Consulting Actuaries and has worked on the design, funding, administration, and compliance of cash balance and other defined benefit plans for nearly 35 years. 

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