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A Shift to Defined Contribution Retirement Plans

By Shai Akabas, Brian Collins

Tuesday, June 10, 2014

BPC’s new Commission on Retirement Security and Personal Savings will examine the state of personal savings and retirement security in the U.S. and make recommendations on how to improve the economic circumstances of retirees. Over the next few weeks we will look at the many important measures that illustrate different aspects of savings and retirement security.

The number of companies offering any sort of defined benefit (DB) retirement plan of the sort that used to be common for employees of large unionized companies has steeply declined over the last few decades. DB plans guarantee retirees a specific cash benefit, often defined as a percentage of average salary during the final few years of employment, for the duration of their retirement. Even the prosperous companies on the Fortune 100 list in 2013 have been quickly shedding DB plans since the late 1990s.

During that time, many companies have switched to a defined contribution (DC) plan, such as a 401(k), where workers are responsible for contributing to and managing their own retirement accounts. Furthermore, many of those employers that still have DB plans have switched to hybrid plans that promise a cash balance at retirement, rather than an income based on percentage of salary. Of the 30 companies on the Fortune 100 that offered DB plans in 2013, only seven were traditional pension plans.

This trend probably suits the modern workplace because DC accounts are portable from employer to employer and tend to accrue benefits faster (than DB plans) during the early years of a career. On the other hand, the switch from DB to DC has shifted responsibility for contributing and managing investments (and the risk of poor investment returns) from employer to employee. Combined with falling rates of personal saving and the difficulty many Americans have in saving at all, that added responsibility means that too many Americans are heading toward and reaching retirement unprepared for the financial challenges ahead.

Alex Gold and Nick Peacher contributed to this post.

KEYWORDS: 401(K)S, COMMISSION ON RETIREMENT SECURITY AND PERSONAL SAVINGS, DEFINED BENEFIT PENSION PLANS, DEFINED CONTRIBUTION PLANS, FORTUNE 100