Many other corporations have made a similar change to reduce distant pension costs; 3M also changed retiree health benefits.
3M Co. said Monday that it is altering retiree medical plans and eliminating a defined-benefit pension plan for new hires, a benefit once regarded as one of the most generous in the nation.
In lieu of 3M's traditional pension plan, new hires will receive a new 401(k) savings plan, to which 3M will contribute 3 percent of pay to retirement accounts and a dollar-for-dollar match on employee contributions, up to 6 percent of pay.
The changes, which are similar to those taken by scores of other corporations looking to reduce distant pension costs, will generally go into effect next year. Spokeswoman Jackie Berry said the new pension plan is designed to be portable, a characteristic that is highly desired by workers.
Current employees and retirees will not see a change to their existing pension plan or to the current 6 percent match to their 401(k) plans, Berry said. But 3M will end its practice of quarterly and annual contributions to the 401(k) plan, which had varied depending upon 3M's performance each quarter, officials said. Instead, the company will contribute a fixed amount.
Company officials would not say how much 3M expects to save in 2009 when pensions will no longer be offered to new hires.
3M had about 76,239 workers worldwide last year, including 16,200 in Minnesota. 3M's annual report says consolidated pretax pension expense was $190 million in 2007, down from $347 million in 2006. Pension expense could hit just $126 million in 2008. Benefit experts speculated that the decrease could be due to the sale of 3M's pharmaceutical division and widespread job cuts over the last two years.
Deloitte & Touche audit partner Wally Carson said "It's really hard to figure out the savings because there are so many details embedded in all that."
But savings is what it's all about. "With manufacturing companies in particular, this [pension cutting] is a pretty common trend because they are getting squeezed on their profitability" with rising raw material costs, skyrocketing energy expenses and the fight to keep labor costs down in order to compete with India and China, Carson said.
"Pension costs are pretty expensive for them, just like medical costs," he said. "So they are shifting more of those costs down to the employees."
3M also is revising its retiree medical plan. Retirees not yet eligible for Medicare will get a plan that offers "a new cost-sharing approach to help pay medical premiums," officials said. Retirees who leave before 2013 will have the choice of either the current 3M medical plan or a new open-market, "consumer-directed" plan that pays premiums with a company-sponsored retiree medical savings account. After 2013, retires will only pay premiums with credits accumulated through their retiree medical savings account.
Second change in a year
Monday's pension and medical changes mark 3M's second major change to compensation and benefits. Last year, 3M began significantly cutting stock-option plans for managers and ending the quarterly profit-sharing checks it had disbursed since the 1950s. Despite complaints from managers who said they relied on the quarterly income, profit sharing is now issued just once a year. The number of lower-level managers eligible for stock option plans also dropped significantly.
Jan Angell, 3M's compensation and benefits vice president, said the changes announced Monday "will ensure value and sustain our program that is consistently ranked among the best." Berry added that new workers and retirees are most concerned with the portability of retirement funds and want more choices in medical plans.
Fred Zimmerman, author and retired manufacturing professor at the University of St. Thomas, said that 3M is joining the likes of John Deere, General Electric and Winnebago in ending traditional pension plans for new hires.
"The motivating factor behind many of these changes that companies are doing has little to do with their regard for their employees or their willingness to share the wealth with employees. It has more to do with the unintended consequences of increased [accounting] regulation," Zimmerman said.
While new accounting and Sarbanes Oxley rules helped make corporations more transparent, they also require tens or hundreds of millions of dollars in future pension liabilities to be accounted now and "that bites into equity," he said.
In Winnebago's case, retaining pension plans as is would have meant $135 million liability, "which is equal to roughly three years worth of profit," said Zimmerman, who was a former board member.
By killing defined-benefit pension plans for future hires, 3M and others get out from under "future liability," said Bob Hartman, who heads Lindquist & Vennum's employee benefits department. "With these kinds of plans, the onus is on the company to fund it."
Dee DePass • 612-673-7725
« PENSION COSTS ARE PRETTY EXPENSIVE FOR THEM, JUST LIKE MEDICAL COSTS. SO THEY ARE SHIFTING MORE OF THOSE COSTS DOWN TO THE EMPLOYEES. »
Wally Carson, Deloitte & Touche audit partner