The Defined Benefit Plan System: What Does the Future Hold?

 In the year 2005 we saw a national debate on the nation's most important defined benefit plan, Social Security. The nation overwhelmingly expressed its sentiment that the system of work-related, guaranteed lifetime benefits provided the security that people wanted for themselves, members of their family, and the nation as a whole.

But the private defined benefit plan system has been withering away without any great public debate. Whether for reasons of cost, competition, volatility or other business reason, employers have been steadily and increasingly choosing to move away from defined benefit plans. The recently enacted Pension Protection Act is not likely to reverse this trend, and in combination with new accounting rules, we are likely to see this trend accelerate. In their place, we have defined contribution plans that place the risk on the individual. These risks include the risk of not contributing, of not investing well, of prematurely tapping funds, and of taking a distribution that does not last a lifetime. These risks will affect millions of families, and my guess is that many more will have retirement incomes lower than previous generations.

Had this trend been brought up for public debate, how would the American public have responded? And should we change course, or is it too late? Perhaps more importantly, is the choice simply between retaining the old defined benefit plan system, and moving to 401(k)-type plans?

Most benefit professionals seem to believe that 401(k) plans simply shift too much risk onto employees, and simply are not going to provide the retirement security of the old defined benefit plan. But employers do not want to assume all the cost and risk associated with traditional defined benefit plans. But must a plan have the risk assumed entirely by the employer OR the employee? Are there not arrangements where part of the investment and volatility risk and/or longevity risk are better shared? Is there a next generation of pension plan on the horizon, one that better meets the needs of both employers and employees?

Unfortunately, these changes are happening largely outside the great public debate. We will need to address these private pension plan issues in the larger context of long-term retirement security if we are to get a better handle on the direction we want for this country.

And in the meantime, long live Social Security -- it may increasingly be all that most people have.