The freefall of Defined Benefit (DB) Pension Plans / by kevin murray

Some retired workers are covered by a Defined Benefit (DB) pension plan which behaves as a lifetime annuity for that workers' service, in which the payment of those benefits is based upon the length of service in years as an employee for that company, as well as taking into its calculations the average salary over the last few years of employment.   Over the last two generations, though, DB pension plans have been frequently replaced by many corporations and institutions with the Defined Contribution (DC) plan, which is an investment plan owned by the employee, of which the employee invests in authorized mutual funds as permitted by the company during the employee's term of employment, in which, the DC account, may have employee contributions matched, up to a certain percentage, by the employer.


As reported by, in 1980, DB plans covered "38% of the workforce" but by 2008, only covered "13% of the workforce", whereas DC plans covered "14% of the workforce" in 1980, and by 2008, covered "46% of the workforce".  The primary difference between these two plans is that in DB pension plans, the employee will after finishing their service, of, for instance, thirty years, receive from their DB pension plan, a fixed annual annuity payment, which typically, but not always is adjusted for Cost-of-living adjustments (COLA).  That is to say, DB pension plans, have a specific amount of money that will be paid out yearly to the recipient of such, and frequently, this annuity will adjust to a higher amount, based on COLA.  On the other hand, DC plans, are ultimately controlled by the individual, of which, that individual, upon having finishing their service, for instance, of thirty years, will have accumulated within that plan, their lifetime retirement savings, typically designated as a 401K, which has been matched according to the specific corporate policy during their tenure at the company, of which, whatever total amount that 401K now entails, is the complete retirement monies that the employee will have accumulated, so that this is the retirement money that must now generate the income needed for the balance of that employee's life, in lieu of an actual annuity plan.


While, it is true that some people upon retirement with 401K plans can and do have over $1,000,000 in their account, so it also true, that far more have not even $100,000 in their 401K plan, and often times have considerably less.  According to the average DB pension plan amount for the college educated worker is as:  "computed from the Current Population Survey, is $33,281 a year."  In order, for those that have a DC plan, to have a retirement income of $33,281 a year without drawing down upon their principle, they would need $550,000 of money saved up within their 401K, assuming that their investments would actually make a steady 6% a year, in which, if for some reason, that performance was considerably worse in a particularly bad year or a series of years, this would then devastate their lifetime retirement savings and the amount of money that they could subsequently prudently withdraw from their retirement account.


The bottom line is that corporations and institutions have in recent decades placed the burden of taking care of employees after their retirement onto the shoulders of the employees themselves, in which, even when these corporations match such at a high percentage for these DC plans, this costs them considerably less than a corresponding DB pension plan, leaving the corporation with not only more financial flexibility and less commitment, but also with considerable savings in money, allowing such the opportunity to compensate at a higher level those at the very highest positions within the company.