The Efficiency of Pension Plan Investment Menus: Investment Choices in Defined Contribution Pension Plans

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.

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Optimization of the Actuarial Model of Defined Contribution Pension Plan

Discrete Dynamics in Nature and Society ◽

10.1155/2014/576213 ◽

2014 ◽

Vol 2014 ◽

pp. 1-7

Author(s):

Yan Li ◽

Yuchen Huang ◽

Yancong Zhou

Keyword(s):

Pension Plan ◽

Pension Plans ◽

Current Status ◽

Defined Contribution ◽

Replacement Ratio ◽

Investment Rate ◽

Defined Contribution Pension Plan ◽

Actuarial Model

The paper focuses on the actuarial models of defined contribution pension plan. Through assumptions and calculations, the expected replacement ratios of three different defined contribution pension plans are compared. Specially, more significant considerable factors are put forward in the further cost and risk analyses. In order to get an assessment of current status, the paper finds a relationship between the replacement ratio and the pension investment rate using econometrics method. Based on an appropriate investment rate of 6%, an expected replacement ratio of 20% is reached.

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Life After Defined Benefit Plans

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v4i8.3325 ◽

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.

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Missing Participants and Beneficiaries From Private-Sector Pension Plans

Compensation & Benefits Review ◽

10.1177/08863687211045144 ◽

2021 ◽

pp. 088636872110451

Author(s):

John G. Kilgour

Keyword(s):

Pension Plan ◽

The United States ◽

Pension Plans ◽

Pension Benefit ◽

Defined Benefit ◽

Defined Contribution ◽

Social Security Administration ◽

Retirement Benefits ◽

Department Of Labor ◽

For Profit

This article examines the problem of missing and nonresponsive participants and beneficiaries from defined-benefit (DB) and especially defined-contribution (DC) pension plans, mainly in the private (for profit) sector of the United States. It focuses on the current search requirements of the three government agencies involved in finding missing participants and beneficiaries: the Pension Benefit Guaranty Corporation (PBGC), the Department of Labor (DOL) and its Employee Benefit Services Administration (EBSA), and the Internal Revenue Service (IRS). The article also reviews the efforts of the Social Security Administration (SSA) in this area. It then reviews proposed legislation, the Retirement Savings Lost and Found Act of 2020 (now S. 1730; RSLFA). The issue of missing participants and beneficiaries often becomes critical when an employer goes out of business or for some other reason stops sponsoring a pension plan. The missing participants are owed their earned retirement benefits. They, not the employer, own them.

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How good are default investment policies in defined contribution pension plans?

Journal of Pension Economics and Finance ◽

10.1017/s1474747220000153 ◽

2020 ◽

pp. 1-21

Author(s):

Daniel Duque ◽

David P. Morton ◽

Bernardo K. Pagnoncelli

Keyword(s):

Closed Loop ◽

Pension Plans ◽

Investment Model ◽

Defined Contribution ◽

Central Question ◽

Investment Policies ◽

Private And Public ◽

Overall Performance ◽

Using Data ◽

Investment Choices

Abstract Defined contribution (DC) pension plans have been gaining ground in the last 10–20 years as the preferred system for many countries and other agencies, both private and public. The central question for a DC plan is how to invest in order to reach the participant's retirement goals. Given the financial illiteracy of the general population, it is common to offer a default policy for members who do not actively make investment choices. Using data from the Chilean system, we discuss an investment model with fixed contribution rates and compare the results with the existing default policy under multiple objectives. Our results indicate that the Chilean default policy has good overall performance, but specific closed-loop policies have a higher probability of achieving desired retirement goals and can reduce the expected shortfall at retirement.

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Case Study

Compensation & Benefits Review ◽

10.1177/088636879803000605 ◽

1998 ◽

Vol 30 (6) ◽

pp. 25-31 ◽

Cited By ~ 3

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.

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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

Studies of Applied Economics ◽

10.25115/eea.v30i3.3620 ◽

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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Fiduciary Principles in Pension Law

The Oxford Handbook of Fiduciary Law ◽

10.1093/oxfordhb/9780190634100.013.7 ◽

2019 ◽

pp. 165-186

Author(s):

Dana M. Muir

Keyword(s):

Service Providers ◽

Pension Plan ◽

Pension Plans ◽

Fiduciary Duty ◽

Defined Benefit ◽

Defined Contribution ◽

Fiduciary Duties ◽

Legal Obligations ◽

Investment Advice ◽

Default Rules

This chapter examines the underlying fiduciary principles of pension law, focusing on two forms of pension plans: defined contribution (DC) plan and defined benefit (DB) plan. It first considers the ERISA principles and how they differ from public-sector pension law, along with the extent to which the courts have applied general principles of trust law when interpreting and filling gaps in ERISA. It then discusses the fiduciary triggers of pension law, laying emphasis on the definition of fiduciary in pension law and the ways in which that definition is circumscribed. It also tackles the fiduciary status that arises when investment advice is given in the case of DC plans, co-fiduciary liability that exists under ERISA, how ERISA circumscribes the extent to which fiduciaries owe duties, and the “two hat” problem that arises when the plan sponsors act as fiduciaries. The chapter proceeds by analyzing the fiduciary duties of loyalty, care, and diversification as applied in the pension plan context; breach of fiduciary duty associated with the selection of investment options and service providers; employer stock as an investment option in DC plans; and economically targeted investments. Finally, it explains ERISA’s periodic and episodic disclosure obligations that intersect with fiduciary duties, along with other legal obligations, mandatory and default rules governing a pension plan fiduciary’s obligations, and remedies under ERISA available to pension plan participants in cases of breach of fiduciary duty.

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Determining Equivalent Administrative Charges for Defined Contribution Pension Plans under CEV Model

Mathematical Problems in Engineering ◽

10.1155/2018/6278353 ◽

2018 ◽

Vol 2018 ◽

pp. 1-10

Author(s):

Hongjing Chen ◽

Zheng Yin ◽

Tianhao Xie

Keyword(s):

Pension Plan ◽

Pension Plans ◽

Defined Contribution ◽

Power Utility ◽

Cev Model ◽

Constant Elasticity ◽

Constant Elasticity Of Variance ◽

The Maximum Principle ◽

Equivalent Equation ◽

Defined Contribution Pension Plan

In defined contribution pension plan, the determination of the equivalent administrative charges on balance and on flow is investigated if the risk asset follows a constant elasticity of variance (CEV) model. The maximum principle and the stochastic control theory are applied to derive the explicit solutions of the equivalent equation about the charges. Using the power utility function, our conclusion shows that the equivalent charge on balance is related to the charge on flow, risk-free interest rate, and the length of accumulation phase. Moreover, numerical analysis is presented to show our results.

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Automatic enrollment and employer match: an experiment with the choice of pension plans

Revista de Gestão ◽

10.1108/rege-07-2019-0077 ◽

2020 ◽

Vol 27 (3) ◽

pp. 281-299

Author(s):

Antonio Gualberto Pereira ◽

Luís Eduardo Afonso

Keyword(s):

Pension System ◽

Pension Plan ◽

The United States ◽

Pension Plans ◽

Low Risk ◽

Control Group ◽

Retirement Savings ◽

Defined Contribution ◽

Content Type ◽

Treatment Groups

PurposeThe purpose of this study is to identify arrangements of fully funded defined contribution (FF-DC) pension plans associated with the continuity of retirement savings.Design/methodology/approachThe authors adopted an experimental design composed of a control group and two treatment groups. In all groups, individuals made decisions throughout nine periods: five during the working period and four at the postretirement stage. The authors asked participants if they wanted to join a pension plan, and which plan. The authors offered three plans with different risk profiles: plan 1 (high risk), plan 2 (moderate) and plan 3 (low risk) and one risk-free plan, plan 4. In treatment groups 1 and 2, there was an automatic enrollment of the participants in the default plan (moderate risk), and in the following periods they had to decide whether to continue contributing, and in this case, to which plan, with a defined percentage.FindingsIn treatment scenarios, participants chose the riskiest plan in all periods of the experiment, and most of them chose the risk-free plan in period 5. These findings suggest that pension plans with automatic enrollment, employer matching and low risk foster the continuation of retirement savings.Research limitations/implicationsThe research has as limitation the fact that the sample is not representative of the population and therefore does not allow generalizations. This is because the authors use social media ads to prospect respondents.Practical implicationsThe research's findings can be relevant for the design of public policies for private pension plans, suggesting that compulsory automatic enrollment can be used as default in plans offered by the employers. The results encourage the inclusion of behavioral elements in the design of the pension system, paying attention to the nudges. In this sense, it is possible to increase participation in the pension plan and develop low cost programs to increase the amount accumulated by people before retirement.Social implicationsDecision-making architecture, such as automatic enrollment, can improve individuals' retirement decisions, affecting savings and welfare in the long run.Originality/valueAlthough the effect of pension plan designs is widely studied in other countries, such as the United States and United Kingdom, the authors are unaware of a national empirical research that seeks to understand how different arrangements affect an individual choice through an experiment.

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