DuPont Ditches Traditional Pension Plan, Shifts to 401(k) Plan

Strategic Insights -

DuPont Co. has made the decision to close its traditional pension plan to workers hired after January 1, citing the expense and risks associated with defined-benefit plans. The company, a leading chemical and materials science giant, has followed the trend of other major US companies such as Unisys Corp., IBM Corp., Alcoa Inc., Hewlett-Packard Co., Verizon Communications Inc., and Sprint Nextel Corp. in shifting to an enhanced 401(k) plan. The change affects 30,000 US workers, while 66,000 US retirees will remain unaffected. DuPont's decision to ditch the traditional pension plan has raised concerns among advocates for defined-benefit plans, who argue that they offer greater security for retirees.

Key Takeaways:

  • DuPont Co. has announced plans to close its traditional pension plan to workers hired after January 1, citing costs and risks associated with defined-benefit plans.
  • The company will replace the plan with an enhanced 401(k) plan, offering a base contribution of 3% of employee pay and matching the first 6% of employee savings.
  • Current employees will retain their accrued defined-benefit pensions but will see company contributions cut by two-thirds, starting in 2008.
  • DuPont will also eliminate a company subsidy for retiree health-care insurance for new hires.
  • The changes are expected to boost earnings by 3 cents a share in 2007 and 5 cents a share in 2008.
  • Karen Ferguson, director of the Pension Rights Center, argues that 401(k) plans are "the impossible dream" due to their reliance on employee contributions and investment decisions.
  • The number of defined-benefit plans has declined from 115,000 plans in 1985 to 29,000 plans in 2004, according to James Klein, president of the American Benefits Council.
  • Proponents of defined-benefit plans contend that they offer greater security for retirees, particularly those with uncertain lifespans.

Statistics:

  • 30,000 US workers at DuPont will be affected by the change from traditional pension to 401(k) plan.
  • 66,000 US retirees at DuPont will remain unaffected by the change.
  • 3% base contribution to employee pay in the enhanced 401(k) plan.
  • 6% match of employee savings in the enhanced 401(k) plan.
  • 2/3 reduction in company contributions to the defined-benefit plan for current employees, starting in 2008.
  • 3 cents per share earnings boost in 2007.
  • 5 cents per share earnings boost in 2008.

Sources:

  • "DuPont Co. to Drop Traditional Pension Plan for New Workers," by Bob Fernandez, The Philadelphia Inquirer, December 2006.
  • "DuPont Co. to Cut Pensions and Benefits," by Bob Fernandez, The Philadelphia Inquirer, December 2006.
  • "The Shrinking Number of Defined-Benefit Plans," by James Klein, president of the American Benefits Council.