Fidelity Investments is not the only money manager ditching its defined benefit plan.
Citigroup Inc., New York, announced in November that it will freeze benefit accruals in its $10 billion cash balance plan for all employees beginning Jan. 1.
Fidelity and Citigroup are joining the ranks of several other money management firms, including Old Mutual Asset Management and Franklin Templeton Investments Inc., that do not or no longer offer defined benefit plans to new employees.
Other money managers have cut costs by converting to a cash balance plan while some managers and consultants have opted to keep their traditional DB plans up and running.
Boston-based Fidelity Investments’ recent decision to terminate its $727 million defined benefit plan as of May 31 generated headlines across the country. Fidelity will increase the matching contribution to its existing $4.3 billion 401(k) plan, said spokeswoman Anne Crowley. Contributions will rise to 7% of pay from 5%; contributions to the company’s $4.3 billion profit-sharing plan will remain around 10%. Ms. Crowley said the 32,000 Fidelity employees vested in the company’s defined benefit plan can either take a lump-sum payout, which can be rolled over to their profit-sharing plans, or receive their accrued benefits in the form of an annuity.
Informal survey
In an informal survey, Pensions & Investments found four big players in the investment management business that have closed, frozen or terminated their traditional defined benefit plans and shifted to cash balance or defined contribution plans.
•Citigroup is shifting employees into its $12 billion 401(k) plan and will increase its match to 100% of participant contributions — up to 8% of pay for employees who earn less than $100,000, and 6% for those with higher salaries, said Michael Hanretta, spokesman. Citigroup now offers a 3% match for all levels of pay.
•Prudential Financial Inc., Newark, N.J., converted its traditional defined benefit plan into a cash balance plan for new employees in 2001. At that time, current employees were given the option to stay with the traditional DB plan or move to the cash balance plan. Only about a quarter of Prudential’s 24,000 eligible employees stayed in the traditional plan, said Nancy Palmesino, vice president of corporate employee benefits at Prudential. The firm has about $10 billion in defined benefit and cash balance plan assets.
Prudential started offering a 401(k) plan to its employees in the late 1980s, Ms. Palmesino said. That plan has been very popular with employees, with $6 billion in assets and a 96% participation rate. Prudential matches up to 4% of an employee’s salary each year.
•The $3.6 billion defined benefit plan at the Hartford Financial Services Group Inc., Hartford, Conn., was closed to new employees starting in 2001. Employees hired after that date were put in a cash balance plan. Beginning in 2009, all employees will be put in the cash balance plan, and the traditional DB plan will be frozen. The Hartford also offers a 401(k) plan, matching half of the first 6% of an employee’s salary that is put in the plan.
•Principal Financial Group, Des Moines, Iowa, had a traditional DB plan until 2002, when it was converted to a cash balance plan, said Natalie Bachman, benefits director for Principal. The plan has $1.4 billion in assets, she said.
DC from the start
Other managers and consultants never offered a defined benefit plan, opting for a defined contribution plan from the outset.
Edward Costello, spokesman for Federated Investors Inc., Pittsburgh, said the firm only provides a 401(k) plan, which now has $240 million in assets. On a pre-tax basis, employees can defer up to 50% of salary. For the first 2% deferred, Federated matches 100% and for the next 4% deferred, Federated matches 50%, he said.
Callan Associates Inc., San Francisco, never offered a traditional pension plan. All employees are eligible for the firm’s profit-sharing plan and 401(k) plan. The firm will match 25% of total employee contributions to the 401(k) up to $15,500. Spokeswoman Nancy Malinowski would not release further details about either plan.
Old Mutual Asset Management, Boston, has 17 underlying subsidiaries and 14 of those firms have chosen to participate in the firm’s “umbrella retirement plan,” which includes profit sharing and a 401(k) plan. The firm never had a DB plan, said Tracy Aber, retirement plan manager.
Franklin Templeton Investments, San Mateo, Calif., also does not have a defined benefit plan, said Stacey Johnston, spokeswoman. She said the firm had a frozen DB plan from an acquisition she declined to identify that was terminated in 2005. Franklin has a $700 million 401(k) plan that matches 50% on the first 6% of eligible pay contributed.
Only three firms interviewed have traditional defined benefit plans that are open to new employees.
“We’re in the benefits business,” said Kevin Meehan, the North American regional manager for Watson Wyatt Worldwide, Washington. “People have more knowledge about these kinds of benefits here. It would have been very unpopular to move away from that.”
Watson Wyatt’s DB plan has $557 million in assets. Employing a traditional asset allocation of 65% equities and 35% fixed income, the plan is at a current funding level of 106%.
Marsh sticks with plan
Marsh & McLennan Cos. Inc., New York, the parent of Mercer Human Resource Consulting, offers a defined benefit plan for most of its underlying companies. Marsh’s $3.38 billion DB plan is fully funded, but the firm has enacted some recent cost-savings changes. Last year, Marsh switched to a career-average formula. Previously, the company had calculated benefits based on an employee’s five highest-paid years of employment.
“It’s generally a cost saver,” said Steve Pennacchio, vice president of global compensation and benefits at MMC.
Marsh also made changes to its 401(k) plan in 2006, tying its 401(k) matches to the firm’s performance. The firm automatically matches 25% of employee contributions, up to 6% of the employee’s salary. The firm can increase its contributions to fully match the entire 6% if corporate performance is solid in a given year.
The $2.5 billion DB plan sponsored by Mellon Financial Corp., Pittsburgh, remains open to all employees and is fully funded, said Robert Skena, chief investment officer of Mellon’s retirement plans. Mellon also offers a 401(k) plan, with $1.6 billion in assets, that matches 75 cents on the dollar up to 6%, he said.
“Mellon, over the years, looked at its DB plan and retirement income policy and decided to continue to maintain a DB plan,” said Mr. Skena.
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