Are defined Benefit plans still a good option?

• Author: Fuerst, Donald E.
• Position: PensionPlans

Traditional defined benefit pension plans have taken a backseat--in perception if not in reality--to their defined contribution counterparts for the better part of the past two decades. The defined contribution revolution started with the passage of the Revenue Act of 1978, which added Section 401(k) to the Internal Revenue Code.

When the regulations were issued in 1981, employers added matching 401(k) plans to their portfolio of benefits, which increased the ability of individuals to save on a tax-sheltered basis. And defined contribution plans were much easier for employees to understand (and appreciate) than defined benefit plans.

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So, despite the fact that defined contribution plans placed greater responsibility for retirement planning and savings on their backs, employees reacted positively to them.

Little wonder, then, that employers gradually moved from defined benefit plans in favor of defined contribution plans, a trend that has led some to ask: Are defined benefit plans still a good option?

The answer is yes, though defined benefit plans face some serious challenges these days as contribution requirements escalate sharply and the plans remain something of a mystery to the average employee.

Defined benefit plans are an important element of an overall retirement strategy that meets business, human resource and employee needs. A well-designed and well-communicated defined benefit plan creates substantial value for both employer and employee, and can be a source of competitive advantage for the employer.

EMPLOYEE PREFERENCES

One factor that fueled the move from defined benefit plans was the belief of many employers that employees preferred defined contribution plans. Recent research from the Society of Actuaries and AARP shows this is more myth than fact.

The Society of Actuaries indicates that employees with defined benefit plans prefer them over defined contribution plans, while the AARP research shows that disappointing losses in 401(k) plans are forcing more senior employees to postpone retirement, thus, 401(k) plans that once were attractive have exposed their down side thanks to the recent bear market.

This research is consistent with the experiences of employees who have moved from defined benefit plans to defined contribution plans. When given a choice between the old defined benefit plan and the new defined contribution plan--or a hybrid plan, such as a cash balance plan--employees often choose the old...