Community banks have largely resisted the trend toward slashing pension benefits, working instead to salvage their defined benefit plans in an effort to promote employee loyalty and the accompanying community ties these banks consider their lifeblood.
Still, the percentage of small banks freezing their defined benefit plans is slowly rising as big industrial companies rush to do so, according to a company that is a plan fiduciary for more than 500 community banks.
Offering a traditional pension plan helps First Federal Bancshares of Arkansas Inc. engender loyalty among its employees, said Larry Brandt, president and chief executive officer of the $800 million-asset company in Harrison, Ark.
"The pension plan provides a benefit as far as loyalty, dedication, and appreciation from our team members," he said. "I don't think we can put a price on that. I've had longtime employees come up to me and say, 'Larry, we've finally realized how great a program this is.' "
Small banks that freeze their pension plans may lose employees to large retailers that offer comparable compensation, said Ed Brown, an actuary and principal at the Seattle benefits consulting firm Milliman Inc.
"Community banks are definitely the exception in freezing defined benefit plans," Mr. Brown said. "Their salaries may not be as high as other employers', but they do want to offer a good benefits package … One bank said to us, 'Other small banks are not our competitors. Wal-Mart is.' "
About 12.4% of the banks with pension plans responding to an America's Community Bankers 2005 Compensation Survey said their current plan differs from what they had offered in the past 10 years. These differences include plan freezes or terminations, and of the banks that changed their plans, roughly half had had defined benefit pensions.
Pentegra Retirement Services, a plan fiduciary for more than 500 community banks, $1.8 billion of defined benefit assets, and $700 million of multiple-employer defined contribution plans, said a survey of 259 of its customer banks found 7% had frozen their defined benefit plans by 2005, a slow rise from 6.9% in 2004 and 4.2% in 2003.
Its customer banks are concentrated in New England, the Middle Atlantic states, Southeast, and Midwest. Pentegra was founded 60 years ago to provide pension plans for the Federal Home Loan Banks, but excluding them, its average customer has assets of $326.5 million.
Community banks may be particularly unlikely to scuttle their defined benefit plans if they do not offer any other type of retirement plan, said Todd Leone, a managing director at Clark Consulting in Minneapolis, an employee benefits firm that has been endorsed by the American Bankers Association.
"If a bank only has a pension plan, it's not going to freeze the thing because it would completely cut ties to their employees," Mr. Leone said. But banks may scale back their defined benefit plans or supplement them with 401(k) plans, he said.
Scaling back is the path being explored by a Pentegra customer in Indiana. Home Federal Bancorp, an $850 million-asset company in Columbus, Ind., has seen its overall benefit costs rise 60% in the past three years, said John Keach Jr., its president and CEO.
Home Federal has used Pentegra as its retirement plan provider since 1990 and is working with the White Plains, N.Y., company to determine whether its defined benefit plan can be salvaged, he said. The bank offers both defined benefit and defined contribution plans. The defined benefit plan has $10.7 million of assets, the defined contribution plan $8.5 million.
"We're reevaluating our defined benefit plan and looking at the plan features," Mr. Keach said. "We've been looking at ways to reduce multipliers, but we have a standard plan, and there is not a lot of room to work with. Unfortunately, we may be looking at a potential freeze."
Mr. Brandt, the Arkansas banker, said First Federal also offers a supplementary employee stock option plan, but it is considering replacing that plan or supplementing it with a defined contribution program. First Federal Bank of Arkansas has $6.25 million in its defined benefit plan.
Bank employees build up pension benefits at a faster rate than employees in other industries, the Pentegra survey found. Pension benefits accrue at 1.75% of salary per year for small-bank employees, compared with an average of 1.5% for all U.S. employees with defined benefit plans, Pentegra said. And community banks' pension plans are more fully funded than other companies' plans, it said; small banks are able to meet 85% of their pension plan obligations, compared with 83% for the average employer.
"From a management standpoint, the benefit to these institutions of offering richer benefits packages while sometimes paying less than competitive wages is that they get more loyal employees over the long term," said Richard Rausser, a vice president and the head of Pentegra's benefits consulting practice group. "The banks get people who expect to spend a lifetime at the same institution - a benefit for the bank, not just in cost savings but [also] in continuity of the relationships with the community, which is their single most important differentiating quality."
In certain regions, such as New England and the Midwest, community banks need to offer pension plans to remain competitive with their peers, Mr. Rausser said.
About half of community banks allow their employees to take an early retirement package at age 45, but most do not offer early retirement until age 55, according to the Pentegra survey. More than half of small banks offer a lump-sum distribution option for retiring employees, whereas most other employers do not, the survey said.
Larger banks also continue to offer traditional pension plans to their employees. Bank of America Corp. provides a 401(k) plan, a defined benefit plan, and a program that offers cash rewards to employees making less than $100,000 if the company meets or exceeds annual business targets, said Kelly Sapp, a spokeswoman for the Charlotte banking company.
And a Citigroup Inc. spokeswoman said the company offers both defined benefit and 401(k) plans. She did not have a breakdown of what proportion of employees chose each option.
U.S. corporate pension plans continue to be underfunded as more employees retire and market returns remain lackluster, according to a January study by Watson Wyatt Worldwide Inc., an Arlington, Va., consulting firm. Employers' pension plan contributions are expected to have totaled $52 billion last year, up about 53% from the 2004 total, the company said.
