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TheStreet Open House

Dow Companies Are Holdouts on Pension Plans

Stocks in this article: GEXOMF

BOSTON ( TheStreet) -- Pension plans, also known as direct-benefit plans, are going the way of the $10 health-insurance co-payment, the thrift savings plan and the lifelong job guarantee.

Companies are increasingly finding pension plans too expensive, too complicated and too risky when compared with 401(k) plans. Dow-member companies dominate the list of those that offer conventional pensions.

A survey by Towers Watson, the global consulting firm, found that only 17% of Fortune 100 companies still offer a direct-benefit plan, down from 67% in 1998. Those that offer direct-contribution plans, such as 401(k)'s, total 58%, up from 10%. Despite the decline, many of the country's best-known companies still offer pensions to at least some employees.

General Electric (GE), in its annual report, said its plan was fully funded as of Jan. 1 and running effectively enough that it shouldn't have to subsidize it this year or next. It holds assets of $58.3 billion.

Responding to stock-market conditions, Exxon Mobil (XOM) contributed $3 billion to its U.S. plans, up from $53 million in 2008.

Other large direct-benefit plans include AT&T (T), Verizon (VZ), Ford (F), Lockheed Martin (LMT), UPS (UPS), Honeywell (HON), Johnson & Johnson (JNJ), Procter & Gamble (PG), Hewlett-Packard (HPQ), 3M (MMM), Pepsi (PEP), Bank of America (BAC), Citigroup (C) and Wachovia.

According to Towers Watson, 58 companies in the Fortune 100 currently offer only a direct-contribution plan to new hires. Others are increasingly considering "hybrids," such as cash-balance plans.

Proponents claim that hybrid plans reduce costs for employers. Participants in cash-balance plans also continued to see their pension accounts grow during the financial crisis, unlike the sizable drops suffered by most 401(k) accounts.

In a cash-balance plan, a participant's account is compensated each year with a set employer contribution and interest credit (either a fixed rate or a variable rate linked to an index such as the 1-year Treasury bill rate). When a participant is eligible to receive benefits under a cash-balance plan, the distribution is either a lump-sum payment or given as an annuity. Investment risk is borne by the employer.

Still, The National Institute on Retirement Security, a non-profit advocacy group, makes the case that pensions can provide same benefit as individual 401(k) plans at half the cost.

In a research paper, A Better Bang for the Buck: The Economic Efficiencies of Defined-Benefit Pension Plans, it says defined-benefit plans pool longevity risks among large numbers of individuals. Because defined-benefit plans, unlike investors, don't age, "they are able to take advantage of the enhanced investment returns that come from a balanced portfolio throughout an individual's lifetime."

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