Reuters Money

Government workers in Madison are trying to save their pensions by camping out in Wisconsin’s capitol building. That’s the state of things in the public sector, where nearly all employees still have traditional pensions. How about the private sector? Can anything be done to bring back the Great American Pension in Corporate America, where it’s an endangered species?

Workers still want defined benefit (DB) pensions –- 84 percent of poll respondents tell Matthew Greenwald & Associates that workers with pensions are more likely to have a secure retirement, and 77 percent think the disappearance of pensions has made it harder to achieve the “American Dream.”

A wide array of research shows that guaranteed income sources — like pensions — offer the best route to long-range retirement security. For example, a National Institute on Retirement Security study (NIRS) found that “DB pension receipt was associated with 1.72 million fewer poor households and 2.97 million fewer near-poor households in 2006.”

The shift to defined contribution (DC) plans, coupled with the 2008 market crash and general stock market volatility, has made it difficult for some employees to retire. That has forced some plan managers to re-think their approach to retirement benefits.

“The last few years have sent a wake-up call to sponsors that you need to have the right balance as to where risk ought to be” says Alan Glickstein, a senior consultant and pensions expert at Towers Watson. “If an employee can’t afford to retire it’s not just the employee’s problem. It becomes a risk for sponsors when they have a large number of employees who can’t afford to leave. It has real financial implications and it disturbs the flow of the workforce.”

Yet, companies that once offered DB plans are dropping them at a record pace. The percentage of Fortune 1000 companies with at least one frozen DB plan (where the sponsor company retains the plan but stops future accruals for all or some workers) more than quadrupled between 2004 and 2010, as this chart shows:

Could that trend be turned around? Here are five ways we could encourage a rebound of DB pensions in the private sector.

1. Reform regulation. Regulatory changes enacted over the past three decades have had the unintended effect of making DB plans more difficult to sponsor.

The rules surrounding funding and accounting have become more complex, and funding requirements have become more volatile – most recently under the Pension Protection Act of 2006 (PPA). The law mandates that all plans be funded at 100 percent of future obligations, but experts criticize PPA provisions that accelerate amortization of funding shortfalls to seven years from 30 previously and require more conservative funding assumptions. The upshot is that pension funding has become more volatile and harder for sponsors to handle.

Funding volatility was one of the top two causes of plan freezes, according to a 2008 Government Accountability Office study; the other was the impact of annual contributions on cash flows.

Longer smoothing periods for funding would be a big help, says Ilana Boivie, director of programs at NIRS. “DB plans are very long-term entities,” she says. “We need to be able to smooth out the funding period to reduce volatility from interest rates or the stock market.”

2. Encourage hybrids. In the 1980s, many plan sponsors adopted hybrid cash balance plans, which typically are described to beneficiaries as having a hypothetical balance similar to what you’d see in a 401(k) account. Workers accumulate credits based on a percentage of compensation as well as interest credits. But unlike a DC plan, cash balance plans still are defined benefit plans, in that the employer has an obligation to pay out a specific sum at retirement. And cash balance plans default to annuity payment streams, unless beneficiaries specifically request a lump sum.

But momentum stalled out as a result of sponsor uncertainty about how the plans would be regulated, Glickstein says. “Cash balance plans got started around 1985, and we didn’t get a regulatory response until the PPA in 2006,” he says. “And some of the regulations in PPA are just now being finalized [by the federal government.]”

DC plans with annuity conversion options at retirement offer another possible route to better retirement security. Many of the big retirement investment companies have been dancing around this idea for the last few years, with little progress. But TIAA-CREF, which operates retirement plans for academic, research and cultural organizations, has had a successful annuity conversion product for years, called TIAA Traditional.

This works like a DC product during an employee’s working years. It pays a guaranteed three percent rate of return on contributions; at retirement the employee has the option of converting all or part of the account to a lifetime annuity. Nearly one-third of TIAA-CREF plan participants choose to annuitize some portion of their assets, according to Dan Keady, the company’s director of financial planning.

3. Improve portability. Traditional DB plans are most valuable for workers who stay at one job for a long time, but the workforce now is very mobile, so greater plan portability would be a plus. NIRS research points to multi-employer plans, like those operated by some unions or employer groups, as one way of achieving greater portability for workers who change jobs within an industry.

4. Let workers contribute. Public sector workers usually defray the cost of their DB plans with payroll contributions, but private sector workers don’t. Steady contributions from workers also would help smooth out the volatility of employer contributions, NIRS research shows.

5. Let the government run it. Some progressive retirement security advocates are promoting creation of a new federally-sponsored Guaranteed Retirement Account (GRA). A GRA would feature employer and employee contributions (totaling five percent) to a federally-administered cash balance plan. GRA participation would be mandatory for companies except those where workers participate in an equivalent or better DB plan.

The plan would be invested by an entity similar to the Thrift Savings Plan, which provides DC benefits to federal employees, and guarantee a three percent annual return above inflation; the accounts would be converted to lifetime annuities at retirement. The Economic Policy Institute calculates that a GRA –- combined with Social Security –- would replace 70 percent of the average worker’s pre-retirement income in retirement.