Traditional company pensions are going away fast

— -- Nine years ago, Devon Group, a small public relations and marketing group based in Middletown, N.J., began offering a traditional pension plan to its employees.

Business was booming, and the costs of offering the benefit "seemed very reasonable," says Jeanne Achille, Devon's chief executive officer. A pension plan also provided some valuable tax benefits for the firm, she says.

But after the economy deteriorated last year, "We realized that this was going to be too rich a benefit for us to continue," Achille says. "You're required to fund the plan every year, regardless of whether your profits are where you'd like them to be." Rather than continue funding the plan, Devon Group voluntarily terminated its pension and sent each employee a check for the amount accrued.

The number of companies offering traditional defined benefit pension plans was shrinking even before the recession, but the downturn has accelerated the decline. Since the beginning of the year, at least 20 companies have frozen their defined pension plans, exceeding the number of plan freezes for all of 2008. A recent survey by Watson Wyatt found that, for the first time, the majority of Fortune 100 companies are offering new salaried employees only one type of retirement plan: a 401(k) or similar "defined contribution" plan.

The rapid disappearance of traditional pensions comes at a time when many workers have seen their retirement savings eviscerated by the bear market. The average 401(k) balance plummeted 27% last year, according to Fidelity Investments. While younger workers have time to make up the difference, workers in their 50s and 60s will have a hard time recovering their losses before retirement.

"The market collapse has just proven how fundamentally flawed 401(k) plans are as a vehicle to provide retirement income," says Karen Friedman, policy director for the Pension Rights Center.

But increasingly, employees can't rely on traditional pensions, either. Reasons they're endangered:

•Declining profits. In late April, Lockheed Martin said its first-quarter earnings fell 8.7% because rising pension costs outweighed an increase in sales. The defense contractor plans to continue its pension plan for existing participants, a company spokesman said.

But some plan sponsors fear they'll have to close plants or take other drastic actions unless they lower their pension costs, says Lynn Dudley, senior vice president, policy, for the American Benefits Council, a trade group for companies that offer employee benefits. Freezing a plan, she says, "is better than laying people off."