DC Plans Not a Sufficient Alternative to DB

April 16, 2007 (PLANSPONSOR.com) - Defined contribution plans do not manage retirement risks and fall short of being a sufficient replacement for defined benefit plans, which employers have been abandoning in droves, the preliminary results of recent report suggests.

The report – Building the Foundations for New Retirement Systems – by The Society of Actuaries (SOA) and the SOA Pension System Council argues that old pension models are becoming irrelevant as the retirement landscape in the U.S. changes.

“Fewer companies are able to offer the 50- or 80-year commitment of a defined benefit plan, so that burden is increasingly transferred to employees through defined contribution plans,” said Emily Kessler, author of the report, in a news release. “But defined contribution plans are just savings vehicles, and they are inefficient in terms of managing retirement risks and difficult for many people to manage successfully on their own.”

According to the news release, the report is the product of SOA’s Retirement 20/20 project that brings together pension and retirement actuaries, corporate benefits managers, attorneys, public policy advocates and academics to discuss retirement-related topics.

The report lays out six issues that participants in SOA’s initiative say must be addressed when designing a new retirement system:

  • Revisit work and retirement norms: For instance, rather than looking at retirement as an event that happens at 65, those redesigning the systems should view retirement as a “process,” where some may go in and out of the work force or a phased retirement that means reduced hours and more flexibility for older workers.
  • Individuals should not be expected to be experts in investing their retirement savings.
  • Retirement systems should change as workers change: Systems should be designed to self-adjust, because people are living longer, working longer, and family structures are changing – all of which can affect income in later years.
  • Systems should be better aligned with financial markets: The current system means that most of the financial risk lies either with employers (DB) or individuals (DC), and neither method is as sophisticated as it should be. Kessler argues that new systems should look to the financial markets to more effectively pool and hedge these major risks.
  • Systems should clarify the role of the employer in preparing workers for retirement.
  • Retirement systems will not succeed without improvements in the health and long-term care systems.

The first of these reports, on self-adjusting systems, will be available later this year, according to the news release.