The Future of DB Plans

Defined Benefit Plans are under assault. The number of DB plans has declined
continually over the past few decades.

Workers usually prefer DB plans because the risk of investment loss is on the employer. The employer guarantees a benefit based on a formula. For example, the formula might be $50 per month per year of service. At retirement, a worker with 20 years of service will retire with a monthly benefit of $1000. The formula can also be based on average final salary. For example, the formula might guarantee a benefit of 50% of the workers' highest three years of service. If the highest three years were $80,000, $85,000 and $90,000, then the worker will receive an annual benefit of $85,000 x 50% or $42,500. The Pension Benefit Guaranty Corporation insures defined benefit plans.

Employers prefer defined contribution plans because they place the risk of loss on the worker. A 401(k) plan is a defined contribution plan. The employer and worker contibute to the plan, and at retirement, the worker is entitled to whatever amount the contributions have grown to. If the stock market crashes, the worker may be left without a pension.