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 Many of these plans have been replaced by the 401(k) plan, a profit-sharing plan partly or wholly funded by employee contributions.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.

scholarly journals Cash Balance Pension Plan Conversions: An Analysis Of Motivations And Pension Costs

2013 ◽  
Vol 29 (2) ◽  
pp. 621 ◽  
Author(s):  
Julia D’Souza ◽  
John Jacob, (Deceased) ◽  
Barbara Lougee
Keyword(s):  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Cash Balance ◽  
Expected Return ◽  
Defined Contribution Plans ◽  
Prior Service ◽  
Pension Costs ◽  
Positive Effect

In recent years, many corporations have replaced their traditional defined benefit (DB) pension plans with cash balance (CB) plans, which share many of the characteristics of defined contribution plans. This study provides empirical evidence on the characteristics of CB converters and the behavior of pension costs and obligations pre- and post-conversion. We find that CB converters are larger than firms that retain traditional DB plans as well as those that terminate DB plans. They are less profitable than the former, but more profitable than the latter. CB conversions are not associated with proxies for greater labor mobility (e.g., firm-specific employee turnover rate). They are associated with a workforce that is closer to retirement, on average, lending credence to the breach of implicit contract rather than the labor market hypothesis as a motivator of CB conversions. Consistent with this intuition, we document that CB converters recognize a reduction of unrecognized prior service costs in the year of conversion, consistent with a negative plan amendment. Unlike pre-conversion, pension costs and obligations are significantly lower for CB firms post-conversion than for a matched sample of firms retaining traditional DB plans. CB conversions are more popular than DB plan terminations among firms with overfunded pension plans in periods when expected return on plan assets is likely to be high, with a consequent positive effect on reported income.

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 Are Cash Balance Pension Plans A Viable Retirement Program For Corporate America?

2012 ◽  
Vol 10 (8) ◽  
pp. 451
Author(s):  
John J. Lucas
Keyword(s):  
Pension Plans ◽  
Defined Benefit ◽  
Corporate America ◽  
Defined Contribution ◽  
Cash Balance ◽  
Benefit Plan ◽  
Recent Trends ◽  
Program Option ◽  
Cash Balance Pension Plans

Cash Balance Pension Plans are a defined benefit plan where employees have a hypothetical account that increases annually, as a result of compensation credit as well as interest credit. In essence, cash balance pension plans combine elements of both a traditional defined benefit plan and a defined contribution plan (Lucas, 2007). This paper examines the recent trends and legal ruling regarding cash balance pension plans. The paper also provides an examination of the role of the Pension Protection Act (PPA) of 2006 and its impact on cash balance pension plans. An evaluation will also be presented to determine if cash balance pension plans are a viable retirement program option in corporate America.

The decline of defined benefit plans and job tenure

2008 ◽  
Vol 8 (3) ◽  
pp. 259-290 ◽  
Author(s):  
ALLISON SCHRAGER
Keyword(s):  
Pension Plan ◽  
Job Turnover ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Job Tenure ◽  
Benefit Plan ◽  
Job Separation ◽  
Defined Benefit Plans ◽  
Defined Contribution Pension Plan ◽  
Defined Contribution Plan

AbstractThis paper investigates the consequences of relying on assets accumulated in a defined contribution pension plan compared to an annuity based on salary from a defined benefit plan. Although a defined contribution plan varies with asset returns, it may be more desirable than a defined benefit plan when wage variability and job turnover are adequately considered. It is found that both job separation rates and wage variance increased in the 1990s. The new calibrations of these variables are used in a life-cycle model where a worker chooses between a defined benefit and a defined contribution plan. It is shown that the increase in job turnover made defined contribution the dominant pension plan.

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 Cash balance pension plan conversions and the new economy

2004 ◽  
Vol 3 (3) ◽  
pp. 297-314 ◽  
Author(s):  
JULIA LYNN CORONADO ◽  
PHILIP C. COPELAND
Keyword(s):  
Labor Markets ◽  
New Economy ◽  
Pension Plan ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Cash Balance ◽  
Defined Contribution Plans ◽  
Defined Benefit Pension Plan ◽  
Pension Liabilities ◽  
Defined Benefit Pensions

Many firms that sponsor traditional defined benefit pensions have converted these plans to cash balance plans in the last en years. Cash balance plans in the last ten years combine features of defined benefit and defined contribution plans, and yet their introduction has proven considerably more controversial than has the increasing popularity of defined contribution plans. The goal of this study is to estimate a hierarchy of the influences on the decision of a firm to convert its traditional defined benefit pension plan to a cash balance plan. Our results indicate that cash balance conversions have been undertaken in competitive industries with tight labor markets and thus can be viewed at least in part as a response to better compensate a more mobile labor force. Indeed, many firms appear to increase their pension liabilities through such conversions.

Case Study

1998 ◽  
Vol 30 (6) ◽  
pp. 25-31 ◽  
Author(s):  
Harold W. Burlingame ◽  
Michael J. Gulotta
Keyword(s):  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Corporate America ◽  
Defined Contribution ◽  
Cash Balance ◽  
Retirement Benefits ◽  
Strategic Objectives

The potential for using a cash balance pension plan as a restructuring tool is one reason it is gaining favor throughout corporate America. Another reason is that it can give employees a better understanding and appreciation of their retirement benefits. Both reasons are important at a time when companies are changing rapidly and sometimes downsizing and when employees are less likely to stay in one place long enough to anticipate reaping the rewards of a defined bene-fit plan. Cash balance plans combine some of the best features of defined contribution (DC) and defined benefit (DB) plans. For employers, they provide more flexibility than traditional DB plans and help companies achieve their strategic objectives. For employees, they better meet the needs of a changing workforce by delivering portable, easily understood benefits. Since 1985, more than 200 companies have replaced their DB pension plans with a cash bal-ance design. One of the newest and most enthu-siastic proponents is AT&T, which, with the help of consulting firm ASA, Inc., designed a cash bal-. ance plan to help meet its restructuring goals.

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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