It’s certainly not a popular move with potentially hundreds of employees in the Fort Smith region, but officials with Rheem and Arkansas Best Corp. recently said they will close their defined benefit pension plans.
In the case of Fort Smith-based Arkansas Best Corp., the change is only for the nonunion plan. Arkansas Best, which is a transportation company whose largest subsidiary is less-than-truckload carrier ABF Freight System, made the announcement on May 17.
“Effective July 1, 2013, the Plan will be frozen with the result that the accrual of future benefits under the Plan will stop. Retirement benefits earned by participants through June 30, 2013 will be preserved,” noted the Arkansas Best statement. “In accordance with legal requirements applicable to pensions, the Plan changes will not impact the vested pension benefits of retirees or former employees. Active employees participating in the Plan will become eligible for the discretionary defined contribution plan effective July 1, 2013.”
According to David Humphrey, vice president of investor relations and corporate communications for Arkansas Best Corp., there are about 3,700 nonunion employees at the company. The company has about 11,250 total employees, with 67% being union members.
“All nonunion employees who have joined our company since 1/1/06 have already been in the discretionary defined contribution plan, so this wouldn’t affect them,” Humphrey explained in an e-mail statement. “As we mentioned in the press release, the active employees participating in the defined benefit pension plan, whose benefits are being frozen, are now eligible to join that same discretionary defined contribution plan.”
Humphrey also said the pension change is not related to contract negotiations with the International Brotherhood of Teamsters. Officials with ABF and the Teamsters announced May 3 that they reached a tentative agreement on a five-year labor contract.
“This action is not related to the Teamster agreement, but it is another sacrifice being made by our non-union employees,” Humphrey said.
John Taylor, senior vice president of Sterne Agee in Fort Smith, said Arkansas Best and Rheem are simply part of a long line of companies that have moved away from defined benefit plans.
“Defined benefit plans are dinosaurs. Frankly I’m surprised they haven’t already done this,” Taylor said.
The defined benefit plans essentially guarantee a set pension amount upon retirement. With the combination of fewer participating employees, historic low interest rates and people living longer, the defined benefit plans have become a huge financial burden on companies and governments. Because pension contribution formulas are based on interest rate revenue, low interest rates require more money to be put into pension plans.
“So what you have is corporate America saying that in this low interest rate environment, and with people living longer, we can’t afford to do this and still be competitive,” Taylor explained.
Taylor said ABF is at a “huge cost disadvantage because it competes with companies who are non-union” and also do not have defined pension costs. And although he understands the decisions by Arkansas Best and Rheem to move away from a “vestige of a previous corporate culture that is no longer sustainable,” he does sympathize with employees who will see their retirement plans change.
“If I was one of those employees, I’d be ticked off too. … But I do think it speaks well of these two companies that they’ve held on to it for so many years,” Taylor said, adding that such moves are also part of trend to shift responsibility for personal finances back to the individual.
Taylor reminded that the defined benefit contributions played a big part in the bankruptcy of several California municipalities.
A December report from the U.S. Bureau of Labor Statistics said the “dramatic shift” from such plans began in the 1980s.
“This shift was away from traditional defined benefit plans and towards portable defined contribution plans, such as the popular 401(k),” noted the BLS report. “Reasons for this shift were due, in part, to costs and flexibility for both employers and employees. Employer contributions required for defined benefit pension plans can fluctuate based on plan investment returns. By comparison, employer costs for defined contribution plans are often based on a fixed formula that matches employee contributions.”
Macy’s, General Motors, NBCUniversal/Comcast, American Airlines and Verizon are just a few of the high-profile companies to have ended, frozen or otherwise changed their defined benefit pension plans in recent years.