Converting Traditional Defined Benefit Plans to Hybrid Plans:
A Decade of Change

Abstract

Over the past two and a half decades, a number of large employers have converted their traditional defined benefit plans to hybrid plans. Plan conversions are based on employer and employee preferences, and the desirability of hybrid plans depends on economic conditions, the regulatory environment, and legal uncertainty. The authors examine the factors that affected plan sponsors’ decisions to convert traditional DB plans to hybrid plans during years 2000–2009, a period characterized by adverse economic conditions, legal controversies, and regulatory change. They examine the pension choices of Fortune 1000 companies and estimate the likelihood of plan conversions as a function of the financial status of the plan sponsor, pension plan funding, and costs. The timing of plan conversions relative to major changes in federal regulations, specifically the passage of the Pension Protection Act of 2006 and the economic crisis, are explored. Finally, they examine whether the factors that prompted conversions in the early part of the decade were the same as those that prompted similar conversions later in the decade.

TOPICS: Pension funds, retirement, financial crises and financial market history