Plan sponsors are trying to connect the dots on how the Wall Street crash will affect their retirement plan benefits. Watson Wyatt's experts recently weighed in on the pros and cons of defined benefit and 401(k) plans amid a financial crisis.
"The current environment underscores some latent employer risks with 401(k) plans," says Alan Glickstein, a senior retirement consultant at Watson Wyatt. "For example, they make it harder for companies to predict who will retire and when. Employees who mostly rely on 401(k)s are also more likely to worry about their financial security, creating an additional drain on morale and productivity during turbulent times."
To counter those problems, more employers are educating their workers about "glide paths," which reduce risk in 401(k) accounts and allow for a predictable level of retirement income, according to the HR consulting firm. Plan sponsors are also beefing up target-date retirement funds and annuity options in their 401(k) plans.
Yet on the cusp of an economic recession, employers should think twice before replacing their DC plan provider. "Now is not the time to switch 401(k) vendors or change investment choices unless absolutely necessary," says Robyn Credico, national director of Watson Wyatt's DC practice. "The market is too fluid," she adds.
The market meltdown means DB plan sponsors will have to become more strategic in funding their plans as it relates to the current market value of the plan's assets.
"The federal bailout of the credit markets is an acknowledgment that in extreme cases, the mark-to-market principle does not work," says Kevin Wagner, a senior retirement consultant at Watson Wyatt. "This crisis should increase pressure generally to revisit mark-to-market principles. Without some relief, a sustained downturn in asset values will noticeably increase required contributions to pension plans starting next year, when plan sponsors will also be facing significant business pressure," he explains.
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