Report: DB Plans Needed for Retirement
Security
May 19, 2006 (PLANSPONSOR.com) - A report released
by the Center for American Progress points out ways defined
benefit pension plans provide better retirement security for
American workers than defined contribution retirement
plans.
The report by Teresa Ghilarducci, Professor of
Economics at the University of Notre Dame, lists three
major problems in the pension landscape:
-
Many private sector employees are not covered
by a pension plan.
-
Retirement wealth creation has proceeded
unequally, leaving many low and moderate income
families with too few savings.
-
Increasingly families are exposed to more and
more risks when saving for retirement.
The report says DB plans better address these
problems than DC plans.
For one, DB plans automatically cover every eligible
employee - a trait that Ghilarducci says can not be
duplicated by DC plans unless the employer is required to
contribute for every eligible employee. She notes that
participation rates by employees in DC plans have hovered
around 50% for years.
Another advantage of DB plans is their efficiency.
The author points out that DC plan participants pay
retail administrative fees, whereas DB participants pay
wholesale, which means more of their savings actually
goes toward retirement income. DB plans also better
secure retirement wealth by prohibiting pre-retirement
withdrawals.
As far as risks, the advantages of DB plans
are:
-
DB assets are professionally invested, as
opposed to participant-directed, which reduces the
risk of unwise or unlucky investment choices.
-
DB plans have a long time horizon, which also
reduces market risk.
-
DB plans typically pay a monthly lifetime
benefit upon retirement, reducing the risk that a
participant will run out of savings.
Advantages of DB plans to employers are also
pointed out in the report. Employer tax advantages for DB
plans are higher than for DC plans, and DB plans are a
better employee attraction and retention tool, the report
said.
Ghilarducci also rebuffs the notion that DB plans
contribute to employer bankruptcies. Pointing out that
recent headlines concerning airline employers dumping
pension plans (See
PBGC Takes Over Three US Airways Pension
Plans at $2.3B Cost
) make it seem that DB plans hurt companies financially,
she said that instead, pension obligations get dumped
because they are easier to avoid than other
obligations.
Ghilarducci points out the recent rash of DB plan
freezings by corporations (See
Two More Companies Join DB Plan Freezing
List
) seems to imply DB plans are dead (See
Editorial: Barry's Pickings: DB
Plans-Dead or Alive?
). However, according to Ghilarducci, "Quite the
contrary, many employers continue to offer these plans.
Most Fortune 500 employers, public sector employers, new
small professional firms schools, and hospitals all
maintain DB plans."
She also points out that a few public plans that
made the switch from DB to DC have decided to switch
back, including Nebraska and Indiana. A West Virginia
system has also recently made the decision to reinstate
its former DB plan, but is facing opposition (See
Court Blocks W.Va. Pension Merger
).
The report, "Future Retirement Income Security
Needs Defined Benefit Pensions," is
here
.
Rebecca Moore
editors@plansponsor.com