In the late 1970s and early 1980s, a financial revolution was brewing as Congress and the Internal Revenue Service (IRS) forever changed how Americans saved for retirement. After the passage of the Revenue Act in 1978 and the publication of a rule allowing employees to contribute to their retirement accounts through payroll deductions, companies began adopting 401(k) plans at record rates.
The Census Bureau estimates that 35% of Americans had a 401(k) in 2020. However, data shows that the tide may be turning. Companies may once again be leaning toward offering an employee pension.
Data from Willis Towers Watson shows that 100% of the largest corporations funded pension plans fully at the end of 2023 for the first time since the 2008 Great Recession. In January of 2024, IBM made the groundbreaking decision to end its 401(k) match program. Instead, it would use the money allocated to that 5% match to reopen its employee pension plan.
Many employees and human resource experts are hopeful that other companies will join in and make this a high-profile trend. Doing so could have many benefits for employees, who will undoubtedly appreciate having the peace that comes with knowing what their income will be for the entirety of their retirement years.
However, employers can also see a positive impact from the switch, as offering a pension plan can help attract top talent for future projects. Because employees will want to hold on to a guaranteed retirement income, it may also increase loyalty. These plans can also help companies save money and offer better protection from unstable markets.
Vitech, one of the leading providers of pension and group benefits administration software, is seeing a spike in companies returning to employee pension benefits. The company’s CEO, David Burns, provided insight in a Q&A to help corporate leaders understand what a pension plan entails, how to know if your organization should provide one, and tips on planning a productive program that will excite and reinvigorate employees.
At what employee headcount does it make economical or logistical sense for a company to consider a pension program?
Burns: While there is no strict minimum employee headcount, pension programs typically become more economical for mid-sized to large organizations. Generally, companies with over 100 employees start to see cost advantages due to economies of scale as administration costs per employee decrease and pooled investment strategies become more efficient. That said, smaller companies in niche industries that require high employee retention might also consider pensions as a strategic investment, particularly when recruiting experienced or high-demand professionals who value long-term financial security.
Are pension programs only sensible for very large organizations?
Burns: No, while large organizations are often associated with pension programs due to their capacity to handle administrative and financial obligations, they are not exclusive to large firms. Small and midsized companies with specific long-term workforce needs, or those in industries where stability and retention are key, may find pensions beneficial. With advancements in pension administration technology and outsourcing options, it has become easier for smaller organizations to consider pension programs as part of their benefits strategy.
What are the major decision-making factors for senior leaders to consider when deciding between a 401K and pension plan?
Burns: Key factors include cost predictability, risk tolerance, and workforce demographics. Pension plans provide fixed costs and guaranteed retirement benefits, which are appealing to companies that prefer long-term planning and risk management. On the other hand, 401K plans shift investment risk to employees and offer more flexibility in terms of contribution matching. Leaders must also consider recruitment and retention goals, as pensions tend to attract long-term, stable talent, while 401Ks offer greater portability for employees. However, in recent years, many large firms have switched to more “portable” pension plans.
What are the notable cost or administrative differences?
Burns: Pension plans involve higher upfront costs and long-term funding obligations for the employer but provide a more predictable expense structure. In contrast, 401K plans have lower immediate costs but shift the responsibility and risk of investment returns to employees. From an administrative perspective, pensions require more complex actuarial calculations and funding strategies, while 401K plans, though more flexible, demand more ongoing employee engagement and decision-making.
What should be the starting place in planning a potential pension program for your organization?
Burns: The first step is a thorough analysis of your workforce demographics and retention needs, coupled with a clear understanding of your company’s financial capabilities. Engaging with a pension consultant or actuary can help design a program tailored to your organizational goals. It’s also essential to assess regulatory requirements, funding strategies, and the long-term financial impact of maintaining a pension program, ensuring alignment with your company’s strategic vision.
