Monday, January 09, 2006

A Death Knell for Defined Benefit Retirement Plans?

Announcements last week by Verizon and IBM that they would be going strictly to 401[k] plans instead of traditional defined-benefit plans drew attention from the financial world. John Holz of the Pension Rights Center angrily denounced the move[s] as a hidden pay cut but IBM's stock price went up, leading analysts to conclude that Wall Street approved on the act, in part because of the estimated $2-3 billion in cost savings. In general, employees 50 and over are at greatest risk of losing, while savvy younger employees may come out ahead. The announcements continued a trend since 2001 of either eliminating defined-benefit pension plans or making new employees after a set date use defined contribution plans.

It should be no surprise to most readers that defined benefit plans are on the way out--they add an element of risk to corporate finance and complicate accounting with little direct gain. The IBM and Verizon announcements make it all the more likely that only large companies with VERY strong unions will have defined benefits plans ten years or so from now. As a concurrent Forbes article points out (, a major effects of these changes is a greater emphasis for retirees and near-retirees to take charge of their finances, sometimes in painful belt-tightening ways. Increasingly, personal financial planning will become important not only for upper-middle income and wealthy Americans, but for the large number of middle-income Americans as well.

An additional interesting question is a political one--in effect, the Bush personal retirement plan would move from Social Security's blend of defined contribution and defined benefit features to one more closely aligned with a pure defined contribution. Although the trend in business (and even education through TIAA-CREF) is defined contribution, political fears created by the business movement toward defined contribution may increase pressure to limit changes to Social Security.


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