Scrambling the Nest Egg: How Well Do Teachers Understand Their Pensions, and What Do They Think about Alternative Pension Structures?

2010 ◽  
Vol 5 (4) ◽  
pp. 558-586 ◽  
Author(s):  
Michael DeArmond ◽  
Dan Goldhaber
Keyword(s):  
Pension Plans ◽  
Washington State ◽  
Retirement Savings ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Administrative Records ◽  
Defined Contribution Plans ◽  
Alternative Plan ◽  
Defined Benefit Plans ◽  
Career Teachers

In this article we focus on two questions: How well do teachers understand their current pension plans, and what do they think about alternative plan structures? The data come from administrative records and a 2006 survey of teachers in Washington State. The results suggest that Washington's teachers are fairly knowledgeable about their pensions, although new entrants and mid-career teachers appear to be less knowledgeable than veterans. As for teachers' preferences for plan structure, the survey suggests that when it comes to investing additional retirement savings, a plurality of teachers favor defined contribution plans that offer more portability and choice but also more risk than traditional defined benefit plans. Again, perhaps unsurprisingly, the findings suggest that, all else equal, teachers newer to the profession are more likely than veterans to favor a defined contribution structure.

scholarly journals The Distribution of Investment Risk in Defined Benefit Pension Plans: A Reconsideration

2005 ◽  
Vol 51 (1) ◽  
pp. 136-157
Author(s):  
Douglas E. Hyatt ◽  
James E. Pesando
Keyword(s):  
Empirical Evidence ◽  
Pension Fund ◽  
Fund Performance ◽  
Pension Plans ◽  
Investment Risk ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Contribution Plans ◽  
Defined Benefit Plans ◽  
Defined Benefit Pension Plans

The "textbook " description is that members of defined benefit pension plans bear no investment risk, in sharp contrast to members of defined contribution plans. Yet formal or informal bargaining may focus on the size of required employer contributions to a defined benefit plan. If at least some of the costs of such employer contributions are shifted back to workers, then members of defined benefit plans do bear investment risk. We utilize three sources of empirical evidence (a survey of pension specialists, econometric analysis, and case studies) to support the proposition that employees do bear at least some of the investment risk associated with pension fund performance. Poor fund performance leads to larger employer contributions to maintain the defined benefit obligation and this in turn leads to lower levels of other forms of compensation. We conclude that riskshifting does occur, in at least some plans, and that the textbook distinction is overstated.

scholarly journals Life After Defined Benefit Plans

2011 ◽  
Vol 4 (8) ◽  
Author(s):  
Martin A. Goldberg ◽  
Robert E. Wnek ◽  
Michael J. Rolleri
Keyword(s):  
Pension Plan ◽  
Profit Sharing ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Cash Balance ◽  
Benefit Plan ◽  
Defined Contribution Plans ◽  
Defined Benefit Plans ◽  
Recent Developments

Employers have moved from traditional pension plans to cash balance and other alternative defined benefit plans. However, it may be that the best approach lies beyond defined benefit plans completely. The Employee Retirement Income Security Act of 1974 (ERISA) was enacted to protect workers. Its focus was on the defined benefit plan, which at that time meant a traditional pension plan that provided lifetime income to retired workers. Over the years traditional pension plans have declined in number, often due to their increasing costs. Many of these plans have been replaced by the 401(k) plan, a profit-sharing plan partly or wholly funded by employee contributions. There has also been a rise in hybrid plans, plans that have features of both defined benefit and defined contribution plans. Recent developments highlight the weaknesses in traditional pension plans. Replacing a traditional pension plan with a cash balance plan, a hybrid plan that qualifies as a defined benefit plan, does not fully address all the problems. It may be that there is limited advantage to the continued emphasis on defined benefit plans. Instead, defined contribution plans that contain some features of defined benefit plans may better address the current retirement-plan issues.

Adopting cash balance pension plans: implications and issues

2004 ◽  
Vol 3 (3) ◽  
pp. 271-295 ◽  
Author(s):  
ROBERT L. CLARK ◽  
SYLVESTER J. SCHIEBER
Keyword(s):  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Contribution Rate ◽  
Cash Balance ◽  
The Past ◽  
Defined Contribution Plans ◽  
Lump Sum ◽  
Defined Benefit Plans ◽  
Cash Balance Pension Plans

Over the past 15 to 20 years, many companies have converted their traditional defined benefit plans to cash balance or pension equity plans. In a cash balance plan, the worker's ‘account’ is based on an annual contribution rate for each year of employment, plus accumulating interest on annual contributions. A pension equity plan defines the benefit as a percentage of final average earnings for each year of service under the plan. Both types of plans specify the benefit as a lump sum payable at termination. In contrast, traditional defined benefit plans specify benefits in terms of an annuity payable at retirement. From the employees' perspective, cash balance and pension equity plans look somewhat like defined contribution plans. However, they are funded, administered, and regulated as defined benefit plans.

How defined contribution plans and 401(k)s affect employer pension costs

2006 ◽  
Vol 5 (2) ◽  
pp. 175-196 ◽  
Author(s):  
TERESA GHILARDUCCI ◽  
WEI SUN
Keyword(s):  
Fixed Effects ◽  
Pension Plan ◽  
Ordinary Least Squares ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Contribution Plans ◽  
Pension Costs ◽  
Administrative Expenses ◽  
Pension Contribution

We investigate the pension choices made by over 700 firms between 1981 and 1998 when DC plans expanded and overtook DB plans. Their average pension contribution per employee dropped in real terms from $2,140 in 1981 to $1,404 in 1998. At the same time, the share of their pension contributions attributed to defined contribution plans was 23% in 1981 and increased to 68% in 1998. By analyzing pension plan data from the IRS Form 5500 and finances of the plan's sponsoring employer from COMPUSTAT with a fixed-effects ordinary least squares model and a simultaneous model, we find that a 10% increase in the use of defined contribution plans (including 401(k) plans) reduces employer pension costs per worker by 1.7–3.5%. This suggests firms use DCs and 401(k)s to lower pension costs. Lower administrative expenses may also explain the popularity of DC plans. Although measuring a firm's pension cost per worker may be a crude way to judge a firm's commitment to pensions, this study suggests that firms that provide both a traditional defined benefit and a defined contribution plan are the most committed because they spend the most on pensions. Further research, especially case studies, is vital to understand employers' commitment to employment-based pension plans.

scholarly journals Portability Rewards And Avoidance Of Longevity Risk: Factors In The Growth Of Defined Contribution Plans

2010 ◽  
Vol 8 (10) ◽  
Author(s):  
Beverley Hollingsworth ◽  
Wei Wang
Keyword(s):  
Investment Strategy ◽  
Longevity Risk ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Insufficient Evidence ◽  
Font Size ◽  
Defined Contribution Plans ◽  
Investment Returns ◽  
Defined Benefit Plans ◽  
The Relationship

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="color: black; font-size: 10pt; mso-themecolor: text1;"><span style="font-family: Times New Roman;">The decline in defined benefit plans has been offset by a significant growth in defined contribution plans. An important consideration in this phenomenon lies in the fact that employees view this shift as a tradeoff between longevity risk and portability rewards. Companies are shifting from defined benefit plans to avoid the longevity risks associated with such plans. On the other hand, in some instances when given the option, employees chose defined contribution plans, due to the associated portability rewards where participants have a choice of rolling over, or transferring plans from former employers.. This paper examined research relevant in assessing factors contributing to growth in defined contribution with particular interest in 401(k)s and the relationship between investment returns, the availability of loans, and investment strategy that may affect plan growth. It is concluded that there is insufficient evidence for assuming a relationship between investment returns, loan availability and investment strategy and the growth of defined contribution plans. </span></span></p>

scholarly journals Implicaciones del consumo y de la flexibilidad de la oferta laboral en el bienestar de los partícipes de planes de pensiones del Sistema de Empleo

2020 ◽  
Vol 30 (3) ◽  
pp. 1069
Author(s):  
Francisco J. Peláez Fermoso ◽  
Ana García González ◽  
Jesús Mª. Gómez García
Keyword(s):  
Intertemporal Choice ◽  
Pension Plan ◽  
Pension Plans ◽  
Point Of View ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Employment System ◽  
Defined Contribution Plans ◽  
Markovian Processes

This work aims to carry out a comparative analysis of the pension plans of the employment system (both defined benefit and defined contribution plans) from the point of view of the welfare perceived by each worker. Considering flexibility in the labor supply of the promoting company of the pension scheme, we seek to maximize the utility of the time preferences of consumption and leisure for each employee. We propose a dynamic optimization problem of intertemporal choice, and we describe both the returns on the investments of the Fund and the annual wage growth rates as discrete markovian processes. For each type of pension plan, we analyse the optimal consumption and leisure values that maximize the utility (welfare) of the worker over several periods of time.

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