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Defined Benefit plans vs. Defined contribution plans
Benefits & Compensation
Defined Benefit plans vs. Defined contribution plans
Exchange ideas about health plans, retirement, work/life benefits, and employee assistance.
Our organization(not for profit) currently has a defined benefit plan in place. While this is a great benefit for the employee, over time, this type of plan can be very costly. I'm interested in knowi
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Defined Benefit plans vs. Defined contribution plans
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Defined Benefit plans vs. Defined contribution plans
posted at 3/10/2010 12:52 AM EST
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Posts: 1
First: 3/10/2010 Last: 3/10/2010 |
Our organization(not for profit) currently has a defined benefit plan in place. While this is a great benefit for the employee, over time, this type of plan can be very costly. I'm interested in knowing how many organizations have this type of plan in place. If you do not have a defined benefit plan, what do you see as "pros" for having a defined contribution and how pleased are your employees?
Thank you |
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Defined Benefit plans vs. Defined contribution plans
posted at 3/10/2010 4:57 AM EST
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Posts: 2146
First: 2/15/2006 Last: 9/14/2011 |
Over the last 20+ years, more and more companies have moved from DB plans to DC plans. Especially with the entrance of "daily accounting" of mutual funds that moved DC plans from annual/quarterly accounting to daily accounting.
The pros to DC plans are : (1) employee controls amount they put in which makes it very easy for the employer to know the cost of the plan. Employers generally only match if the employee contributes, which puts the employee in control of their end benefit...and the employer in control of the yearly cost. Beyond basic recordkeeping/admin fees, the employer can easily stop the match to lower to cost to the plan. Many employers chose that option in 2009 when the economy started hurting so bad. Not as easy to do that in a DB plan. (2) The employee is responsible for any gains/losses based upon their personal investment choices. Puts the employer one arm's length away from that liability. (3) Generally easy to administer as long as you have a good recordkeeper and third party administrator. No real need for any other consultants/actuaries, which can get costly. (4) On any given day, the employee can access their account online (if you use a good recordkeeper) and know their account balance, how much is vested, what their contribution rate is, what investments they are in, etc. The information is very available to them. The pros to DB plans are: (1) Studies have shown that DB plans seem to get better investment returns than DC plans overall. But there is some sense that is a promised benefit....and based on case studies (such as GM), the liability can grow beyond imagination, especially if the company does not continue to do as well as expected. It is harder to stop accruing benefits for employees under a DB plan than a DC plan. (2) The employer ensures that the employee gets some benefit at retirement based upon employer criteria. Many employees will choose not to save under a DC plan, whereas there is no choice under a DB plan. That said, converting from a DB plan to a DC plan can be costly as you have to come up with a fair benefit to all employees. I was around when a lot of companies were moving from DB to Cash Balance plans. There always seems to be a group of employees (usually in the middle age wise) that end up losing in that situation. Because the older ees are grandfathered under the old plan and the younger ees will reap a larger benefit under the cash balance plan because they will have more time to earn. There was a huge court case with IBM regarding this issue. Not sure if there was ever a final resolution. Last I heard IBM was on the winning side. If anything I would suggest freezing the DB plan and starting up a 401k with a Roth feature. |
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