Thursday, July 24, 2008

About half of pension sponsors have frozen plans

A government report finds the retirement incomes of millions of people could be at risk.

The Government Accountability Office said more than 3 million people covered by its study, which represented about a fifth of all participants in single-employer defined-benefit plans, are affected by freezes.

Most sponsors with frozen plans have set up retirement savings alternatives, such as 401(k) plans that may offset some losses, but "a freeze generally implies a reduction in anticipated future retirement benefits," the GAO said.

Employers often freeze pension plans as a step toward terminating those plans and replacing them with defined-contribution plans such as 401(k) plans. The GAO survey of 471 single-employer defined-benefit plan sponsors found that nearly a third ultimately expect to terminate their largest frozen plan.

A defined-benefit plan promises a benefit based on a formula that usually includes an employee's salary and years of service. Under defined-contribution plans, employees have individual accounts to which employers and employees may contribute and benefits are based on contributions along with investment returns.

It said that very few sponsors envision "thawing" or unfreezing plans. About one-third said they will eventually terminate their largest frozen plans, while nearly half said they will keep the plan frozen indefinitely.

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