If you haven’t checked it out yet, see “The 401(k) Myth” at https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2017/05/25041618/OpinionsArticle.aspx_.jpg?id=6442479195.
This week, I asked readers if your workforce would rather have a defined benefit plan or a defined contribution plan – and which YOU would rather have. You might think you know how this one turned out, but… Before we get into the survey results, the verbatim responses turned up some interesting perspectives on the whole DB vs DC “thing”. Apparently a lot of folks see a primary advantage of defined benefit (DB) plans being that they are solely, or largely, funded by employers. True enough as a generalization in the private sector, but many public sector plans have a significant employee contribution element (which, IMHO, makes some of the funding “abuses” we cover all the more shameful). Secondly, a real problem for those counting on DB plan benefits, particularly in the private sector, is service/tenure – take it from someone who worked 9 years at one employer and 13 at another, with nil and little more than nil to show for it in his accumulated DB benefit in those two final average pay plans. So, in considering the “real” world, I always encourage folks to think about things like average workforce tenure, and what kind of benefits are actually accumulated – not what WOULD be accumulated if you worked for a single employer for your entire career. As one reader/respondent noted, “DB plans are great in a world where you went to work at one company for your entire career. Nowadays, a few years here, a few years there, you are left with a lot of small pieces that don’t add up to much. With a DC plan, at least I have some control of what I have in the end.” Finally – I heard most “vigorously” from folks who challenged the whole notion that private sector workers were “sold” on the DC design to the exclusion of DB. As one reader/respondent noted, “Nobody ever gave me the ability to choose a DC plan over a DB plan. Companies simply made the switch to DC plans to save money and some just did away with their DB plans without adding a DC plan.” Anyway, with those introductory points out of the way, let’s take a look at what you told us.
This week, I asked readers if your workforce would rather have a defined benefit plan or a defined contribution plan – and which YOU would rather have. You might think you know how this one turned out, but…
Before we get into the survey results, the verbatim responses turned up some interesting perspectives on the whole DB vs DC “thing”.
Apparently a lot of folks see a primary advantage of defined benefit (DB) plans being that they are solely, or largely, funded by employers. True enough as a generalization in the private sector, but many public sector plans have a significant employee contribution element (which, IMHO, makes some of the funding “abuses” we cover all the more shameful).
Secondly, a real problem for those counting on DB plan benefits, particularly in the private sector, is service/tenure – take it from someone who worked 9 years at one employer and 13 at another, with nil and little more than nil to show for it in his accumulated DB benefit in those two final average pay plans. So, in considering the “real” world, I always encourage folks to think about things like average workforce tenure, and what kind of benefits are actually accumulated – not what WOULD be accumulated if you worked for a single employer for your entire career. As one reader/respondent noted, “DB plans are great in a world where you went to work at one company for your entire career. Nowadays, a few years here, a few years there, you are left with a lot of small pieces that don’t add up to much. With a DC plan, at least I have some control of what I have in the end.”
Finally – I heard most “vigorously” from folks who challenged the whole notion that private sector workers were “sold” on the DC design to the exclusion of DB. As one reader/respondent noted, “Nobody ever gave me the ability to choose a DC plan over a DB plan. Companies simply made the switch to DC plans to save money and some just did away with their DB plans without adding a DC plan.”
Anyway, with those introductory points out of the way, let’s take a look at what you told us.
Well, there might not be a direct connection, but I did ask readers to share what kind of plan their workforce had currently.
Just over half (50.4%) said they had only a defined contribution plan, though 28.1% said they had both defined contribution and defined benefit – and about one-in-five said that SOME had both defined benefit and defined contribution.
As for preferences…
Nearly half – 43.4% - said that, overall, their workforce would rather have a defined benefit plan, well ahead of the 18.6% that said their workforce would rather have a defined contribution plan.
Now, 7.0% admitted they didn’t have a clue what their workforce would rather have.
But nearly a third (31%) said that it was their workforce themselves that didn’t have a clue.
I also asked readers what kind of plan YOU would prefer.
Here the margin was 2-to-1 – in favor of defined benefit plans. That’s right, a full two-thirds said that overall they would rather have a DB plan, compared with 33.6% who weighed in in favor of a DC option.
And yes, 3.1% admitted that they really didn’t have a clue.
Now as for those verbatims – well, here’s a sampling… on both sides of the issue:
The majority of our employees are low-paid factory workers that cannot afford to contribute to our DC plan, and those that do participate are contributing much less than they should.
IF IF IF the formula was based upon the last 5 yrs highest earnings vs a 10-yr or career average.
"In my past career life I've had both types of plans. When 401(k)s first came out, I knew they were selling us (employees) a bill of goods. The hype wasn't really even that too-good-to-be true to most employees - it just didn't stand up to a defined benefit plan that they already had in place. Believe me, we weren't lured - I agree with a lot of what Gary Findlay had to say in his article, but I definitely don't agree with ""It was a fairly easy sell to convince employees that defined benefit plans were antiquated and not going to provide anywhere near what would be available from 401(k) plans where they could control their own destiny and reap the benefits of the double digit returns that were there for the taking."" I always felt the whole idea was a crock. Me...having to decide by myself where to put my money? Are you kidding me? And...even with the matching dollars, my salary wasn't enough to invest the kind of money I'd need to retire - even with the matching funds (when they decided to actually match the funds). This whole new focus on public pensions is aimed at pitting middle class taxpayers against each other. It has worked brilliantly so far - it's taken focus off of the wealthy citizens enjoying more tax exemptions, saving their money, creating no jobs and making their employees work harder for less. I knew we were in deep trouble when they went after school teachers' salaries and benefits. Another OMG moment.
BTW, I've worked for a high tech company ... they make a hell of a lot more money than public employees and still have pretty darn good benefits - at least for now. Engineers have very little concept of what it's like to be in the lower and middle class. Meanwhile, the big wigs lay off people and make 6 and 7-digit bonuses at the end of the year. The wealthy have a very skewed idea about what it's like to live paycheck to paycheck. And yet, they still got the tax breaks."
With a young, transient workforce, who is highly engaged in their investment strategies (e.g., they take risks in order to try to reap bigger rewards), my workforce would definitely prefer the flexibility of a DC plan.
Our employees almost universally take a lump-sum from the DB plan, and very few elect an annuity option. It is very difficult to get employees to see the advantages of guaranteed lifetime income. People seem to prefer the freedom of the 401(k) plan instead.
I had a DC at my previous employer; my current offers both a DB and a DC, which I find amazing.
Employees do not want to invest their future in a faltering economy that fuels a volatile stock market, and they can't afford to accept lower returns in more conservative investments. The solution, get a job with the government or run for public office!!!
How could anyone prefer and investment portfolio over an annuity, especially after 2008. The annuity will always be there as long as the fund is sound. If I am going to account for my retirement I would like to know what I will have not what I may have.
I've lost out in past DB-plan situations by leaving the job or industry too early to get vested. I'd be more willing to support a DB plan if I get to roll over all my contributions if I leave the job too early for vesting.
From what you can see employers doing with DB plans would anyone want one....
Well, for me personally, since I have 25 years with my company, and for most of that time the DB benefit provided was more generous than the 401k match, I would have to go with the DB. I'd like to think I would have saved on my own, even if my employer didn't match my contributions or even sponsor a DC plan at all. I feel fortunate to have both plans and to have been able to save in the 401k throughout my career.
In the trend to move everyone out of DB and into DC plans, I have been amused over the years at the ways in which typical DC plan features have been modified because DC plan participants apparently haven't been using them. We now regularly see features such as auto-enrollment, target date funds, automatic contribution increases, offering investment advice, etc. All of these features, in my opinion, are allowing DC plans take on many of the best characteristics of having a DB plan, i.e. automatically forcing savings for retirement along with professional investment advice and/or management.
It's a no brainer. DB plans are far superior.
Please do not connect the results of this survey to the questionable opinions sets forth by Mr. Findlay. Asking people today their preferences, when many have never even experienced a DB plan, is hardly comparable to the results you would get had you been able to ask at the time their long standing DB plans were eliminated. I have worked in the field for 30 years and have never once seen an employee group rise up and demand their DB plan be replaced with a DC plan. Yes there are always some small groups, short tenured employees and/or younger people who state that preference, but that was not the broad view. There was virtually universal interest in having a matching 401(k) or other DC plan on top of their DB plan and I would agree with his view that the financial services sector pushed DC plans, but those are different points altogether. Mr. Findlay's suggestion that large numbers of private sector employees wanted their DB plans to be replaced by DC plans while their public employee counterparts stayed the course due to their "greater wisdom" is not only an unsupported fabrication, it is also offensive to millions of people who have had their pensions frozen or reduced through no choice of their own. My point is that it is one thing to publish any and all opinions, it is quite another thing to implicitly endorse such views by having them drive a survey
From an employee standpoint, DB pays a specific benefit for life or a specified period of time and often covers the life of your spouse. DC may provide a better benefit but is subject to market fluctuations that you have no control over. As we have seen recently, a DB for an employer can lead to bankruptcy and elimination of the plan or in the public sector, large underfunded plans the "public" can not and eventually will not pay for.
I think employees just don't want to have to worry about what will happen to them when they retire.
I don't think that the switch to DC plans was done because of demand from lower paid workers but was done instead to reduce or eliminate the costs of a DB plan. The problems of the DC plan are many; participant's lack of interest or involvement, due in no small part to their lack of knowledge about investing, etc. I seem to recall seeing studies that indicate that most workers would prefer a DB plan or at least a 401k that was essentially the same as a DB plan. Workers have now had to assume all the risks of their investment choices while the employer only has to contend with the fiduciary duties of a DC plan sponsor.
Employees would rather have a DB plan. That way, they get some retirement even if they don't make contributions.
Because I am a saver, it gives me extra money to put away for retirement. But if the employer gave me the equivalent of the pension paid into a 401K additionally, I'd take it.
While I still think the preponderance is toward DC plans, I am getting more people say they would value the guarantee of a DB plan.
I think if most people were educated in the operation of both plans they would choose a DB. I think a DC plan should be more of a supplement to Social Security and DB. I think that is how it started but the economy drove companies to drop DB plans and sponsor DC plans to have more control over costs. This will certainly have a negative impact on retirement rediness (too much responsibility on the participant in a DC plan) in the future as I don't see the industry moving back to DB plans anytime soon.
I think I would rather have a DB plan (preferably cash balance) because overall I would end up with a greater contribution from the company than what has been my 3% match and I would still have the wherewithal to contribute enough into another savings vehicle (because I wouldn't expect the pension to be enough)
If I had to choose between the two types of plans, I'd rather have a DB plan. As an employee, I'd get a better bang for my money and future with a guaranteed annuity for my lifetime - pretty much paid by the company. I can still have an IRA/ROTH IRA account that would provide me with some features of a DB plan (albeit without the matching contributions).
Having worked for one of the major brokers who found themselves in trouble because of illegal activities, my 401(k) took at least a 50% hit when their behavior was made public. Assets were invested 100% in company stock and I was unable to diversify because the service requirement was 15 years and they didn't credit participation with a prior employer when they acquired a company. Oh, yes,--after the stock tanked, they graciously agreed to waive the service requirements for diversification.
I entered the workforce in the 1980's when DC was coming into vogue. Most of my employers did not offer a DB and frankly, I didn't stay with them long enough to earn a vested right to a pension. In today's mobile workforce, I think DC is a better fit for its portability, but there is still too much access to the money during a person's working career to ensure that there will be a benefit at the point of retirement. Most employees lack the discipline to save and invest over the long haul and believe that any amount with 6 figures will ensure the retirement of their dreams. They are woefully unprepared and DB is one of the few things that might save them from themselves. This is a train wreck about to happen to our next generation.
Over the past 2 or 3 years, the shortcomings of the DC approach to retirement (and the DB plan as a potential solution) have started to work its way into the fringes of our collective consciousness. However, I fear the awakening will be too late for the baby boomers who need it the most.
Non-management workers don't really understand either fully and can't evaluate one versus the other. But with DB at least all of them get something at retirement theoretically and can't use it all up ahead of time in loans or hardships - at least not in the DB plans we maintain. If asked and told that a DB plan is all company money, though, they probably would choose a DB plan.
In a stable economic environment, I would prefer a DB plan, as the onus is on the employer to fund the plan and to restore any underfunding caused by poor fund performance. However, in a hyper-inflationary period, as I believe we are about to witness, a DC plan is perhaps preferable, particularly if one is close to retirement, as you can try to shelter the funds from the ravages of inflation and hopefully retain some semblance of purchasing power.
I thank God everyday for my husband's DB plan. My father-in-law lived to be 98 years old. He'd have run out of money 15 years before he died if he'd had a 401(k).
Prefer a quality final pay average not a cash balance type with early retirement subsidy.
In my organization, a large non-profit health care system, employees place much higher value on a DB plan. Most have no acumen for interest in managing a DC plan.
Nobody ever gave me the ability to choose a DC plan over a DB plan. Companies simply made the switch to DC plans to save money and some just did away with their DB plans without adding a DC plan. Mr. Findlay should be advised that not all private sector jobs offer the luxury of any kind of retirement plan. I don't begrudge public employees their plan but don't disparage people in the private sector for their lack of foresight, sometimes you just need to take the job that you are offered. We need to strengthen Social Security and have real public health coverage so that private employers can compete with the rest of the world on an even footing.
I've had both....13 years in a DB plan was great...if I job hopped or had a great 401(k) match, I'd answer differently. As a Benefits Manager, I understand 'the company line.'
Ideally, you'd have both, but for any employee, having a DB is a complete no-brainer. Have someone else pay for my retirement plan, or have me pay for it.....DUH?!?!
From an employee's perspective, it's a no brainer-a DB plan is much preferred. You get a guaranteed benefit courtesy of your employer (not subject to market fluctuations) as a percentage of income. Then, for those that want to energize their retirement, as they are not committing any money to a 401k, they can fully fund an IRA and the best part yet (for now under current tax rules) buy quality stocks, hold for the long term and incur only a 15% tax rate (also not subject to mandatory distributions at age 70 1/2) compared to all other (except Roth) that are taxed at their full marginal rate. A much better plan than only having a 401k fully exposed to market, fully taxable, fully subject to required distributions and fully funded by the employee-unless they receive matching contributions.
You assume "real data" on job tenure, vesting and funding. But the big issue is benefits. If they are assumed to provide the same level actuarially, then I would take the DB any day. Why would an individual want to take the investment risk alone...all historical and behavioral data says you will lose. Of course, one has to assume that those managing the DB fund know what they are doing and make rational decisions, that the entity sponsoring the fund stays viable throughout your working career(s) and the government doesn't get in the way. In other words, "real data"...NOT!
At this stage, it would be nice to supplement my 401(k) balance with the steady income from a DB plan. However, given the choice of one or the other as the only potential retirement plan, the DB plan keeps looking better (as long as it is and stays funded).
The issue with DC plans is a lack of comprehension of the basics of intelligent, long-term investing. Most people, even very intelligent and otherwise highly educated people, just don't get it. To make a DC really work, you have to invest heavily in education and sound advice. If you do that, people will learn and will do well and, unlike most DB plans, will actually comprehend and appreciate what they have.
DC plans get positive PR as "equitable". That might be true in the "build-up" stage, but only DB plans provide truly equitable payout: that is, if the goal is to provide lifetime retirment income, and not provide an estate to succeeding generations, only a DB plan can accomplish that goal.
The best solution in my opinion is to have the DB plan with access to a DC plan for employee contributions to the max allowed by law. We had that but because of all the pressures on the DB plan we closed the DB plan to new participants.
DB plans are great in a world where you went to work at one company for your entire career. Nowadays, a few years here, a few years there, you are left with a lot of small pieces that don't add up to much. With a DC plan, at least I have some control of what I have in the end.
It seems that many workers would rather "have control of their own money" and opt for a DC plan. Unfortunately, they find out too late that they know nothing about investing for the long haul and realize, again too late, that they don't have enough to live on and have no idea how to manage what they do have for their unknown future lifetime
It would be nice to have the company taking the risk, and contributing to the plan, not me. As it is, I am totally responsible for my decisions. While I have been a good saver, many of my employees, a lot of whom are highly paid professionals, will end up working forever because they didn't take advantage of the DC plan.
Portability is key. No one stays with one employer for their entire career anymore. And employers can't be counted on to stay in business for an entire career anymore.
"Let's see -- having professionals manage money better than I can for a lot lower fees than I pay, or the freedom to do it myself. Lifetime income or trying to guess how much I can afford to spend. And the studies show that it costs 46% less to provide the same standard of living with a DB plan.
Tough call, but I will go with DB"
I would rather have a DC plan as I think job longevity is not typically what it was in the past. DC plans tend to be more rewarding with less service and when you move you take it compared to most DB plans reward the length of service. Most are not in a job 20 -30 years for a career anymore.
"...perceptions of their relative value." Yes, I would presume that there are those still hoping to be the favorite heir of their valuable relative.
DC plans are easier to administer force people to save on their own or have no retirement except social security. DB plans are great but are not appreciated by employees. It became an entitlement and not a benefit. Audit costs are considerably less with a DC plan and usually less complicated.
Of course defined benefit plans are better... no comparison. I find it appalling how little people care or understand about how these things work. Of course, employers have stepped into the void with happy faces to say what heroes they are to be bringing employees a shiny new 401k plan. Even without market meltdowns, 401k plans are completely ineffective at providing retirement money (easy examples: people blowing distributions they get when changing jobs, lower paid workers not making deferrals.... I could go on for a while).
But this week’s Editor’s Choice goes to the reader who noted, “If you are asking for the top of the wish list, I'd like a DC plan funded richly by my employer. Practically, I'd like my employer to resume the measly match that was suspended indefinitely and declare profit sharing which has gone by the wayside as well.”
Thanks to everyone who participated in our survey!
« Survey Shows a Couples Disconnect over Finances