Report: DB Plans Needed for Retirement Security

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 .