When IBM said it would be unfreezing its defined benefit plan, speculation swirled about whether this signaled the resurgence of traditional pensions. Then there was silence.
No, 2024 didn’t usher in a return of corporate pension plans. But industry insiders now see a notable uptick in corporate interest — driven by plans that are well funded, employee demand, and a renewed focus from employers on retirement readiness.
“The rumors of defined benefit’s death have been greatly exaggerated for years,” WTW’s CEO Carl Hess told Institutional Investor. “Interest is definitely there. Action, as usual with pensions, is slow. But we have seen movement with a number of plan sponsors.”
Companies began moving from traditional pension plans in the early 1980s, shifting retirement savings risk to employees through defined contribution plans like 401(k) accounts. In 1975, pensions represented 32 percent of all retirement plans. By 2023, only 15 percent of private-sector nonunion workers had a defined benefit plan. Meanwhile, private industry workers with access to a 401(k) had grown to 67 percent.
But sentiment has shifted since IBM replaced its 401(k) match with a traditional pension in early 2024. More companies have begun to assess the viability of either resurrecting their frozen pensions or offering a new one to employees. Hess said that WTW has recently “been having conversations with around 100 plan sponsors about DB.”
IBM, one of the largest U.S. DB plan sponsors, made headlines in late 2023 when it announced plans to reopen its pension, which had been frozen since 2008. For about a decade, the company contributed 5 percent to employees’ 401(k) accounts. But in January 2024, the company began depositing that contribution into a cash balance plan within its overfunded pension system, effectively reviving the defined benefit plan. The move allows IBM to tap into its $3.5 billion pension surplus, cutting costs and eliminating annual cash outflows to the 401(k).
A major reason for the renewed interest is that funding ratios, a measure of financial health, for U.S. corporate pensions are the highest they’ve been in 16 years. In fact, IBM reopened its plan to use its surplus to fund retirement contributions. Other companies are weighing whether surplus pension assets could be repurposed to strengthen benefits, whether through reopening plans or increasing contributions to 401(k) plans. “If the frozen plan is overfunded, then somebody may reopen it for little or no cash,” said John Lowell of October Three Consulting.
Employees backed by unions are also bringing the issue to the fore, as demonstrated by unionized workers at Boeing pushing for a pension and Southwest Airlines establishing a cash balance plan for its pilot’s union (while failing to get a DB plan, Boeing’s employees managed to secure a boosted 401(k) match from the airline).
Matt McDaniel, a partner at Mercer, noted that “if the union has a strong bargaining position, then there’s been some willingness” for the employer to reconsider a DB plan.
Support for pensions remains high, with survey data from the National Institute on Retirement Security showing that 82 percent of Americans believing all workers should have access to a pension, while 65 percent think pensions are better than 401(k) plans for ensuring retirement security.
According to McDaniel, this employee demand has led some “enlightened plan sponsors focused on retirement readiness and retirement adequacy” for their employees to look into how to best to serve their employees’ retirement savings needs. These plan sponsors remain interested in maintaining DB plans or exploring risk-sharing structures like variable annuity plans. “Some plan sponsors are content [with] a 401K, but others look at it a little more holistically,” he said. “A DB structure can allow a more orderly succession plan within a business.”
The conversation around DB plans has also evolved as employees gain a better understanding of longevity risk and income security. “One of the greatest fears that workers have is outliving their wealth, if they have any wealth,” Lowell said. “The defined benefit plan is an efficient way to do this because there’s not an insurer in the middle.” As Mercer’s McDaniel put it, “DB plans are a more efficient vehicle for providing lifetime income because of the way they pool longevity risk. Dollar for dollar, it’s better than a DC plan.”
Hess and McDaniel both noted that hybrid designs like cash balance plans or variable annuity plans could also gain traction, since they can offer some risk management that DC plans can’t.
While IBM’s decision to unfreeze its pension plan loosened the ketchup bottle, the industry shouldn’t expect an avalanche of new DB plans in the next year. “No one changes their plan overnight,” WTW’s Hess said. “There’s a lot of due diligence that needs to be done.”
The landscape for retirement benefits is shifting — perhaps not in a wholesale return to traditional pensions, but in a way that reflects a deeper understanding of the challenges employees face in securing a reliable income for life. Whether this translates into a true comeback for DB plans remains to be seen, but the conversation is certainly no longer off the table.
“I think there are going to be more of them than what we anticipated five years ago,” Lowell said. “That said, I don’t think every kid on the block is going to put one in. But for a variety of reasons, some are looking into it.”
