Understanding the Defined Benefit versus Defined Contribution Choice

Defined benefit (DB) plans and defined contribution (DC) plans are the two main types of retirement pensions sponsored by US employers. This paper explores the choices made by employees in a non-profit firm when offered the option of switching from a DB to a DC plan. Overall, half of the employees switched into the DC plan and half stayed with the DB. We find that both demographic and economic factors affected an employee’s plan switch decisions. We also find that the default option – by making no active election an employee remained in the old DB plan – had an important impact on some employees’ retirement savings. Surprisingly, half of the employees under age of 40 who could potentially benefit more from the DC plan defaulted to the DB plan, and the DB defaulters were more similar to the DC switchers than DB choosers. According to the employer’s calculation, altogether the defaulted employees with positive opportunity costs have forgone $7M, or 37 percent of their annual salary. Among those who switched to the DC plan, the contribution rates were affected by the DC plan match formula, the employee’s age, salary, and other saving. Given the actual behavior of those who switched, there was virtually no change in employer pension expenses after the switch

Public Pension Governance, Funding, and Performance: A Longitudinal Appraisal

Pension plans covering US public sector employees now face the twin challenges of poor asset returns and rapid increases in liabilities, producing the worst pension funding outcomes in decades. This paper explores how public pension plan investment performance and funding is related to several structural and pension design features. Using a new longitudinal dataset on state and local public pension plans, we evaluate how investment performance is tied to stock funding ratios and how stock funding ratio in turn affects flow funding efforts. We find that particular governance structures can enhance public pension plan investment performance and funding status, and we suggest ways in which public plan design might be improved

Turning Workers into Savers? Incentives, Liquidity, and Choice in 401(k) Plan Design

We develop a comprehensive model of 401(k) pension design that reflects the complex tax, savings, liquidity and investment incentives of such plans. Using a new dataset on some 500 plans covering over more than 740,000 workers, we show that employer matching contributions have only a modest impact on eliciting additional retirement saving. In the typical 401(k) plan, only 10 percent of non-highly-compensated workers are induced to save more by match incentives; and 30 percent fail to join their plan at all, despite the fact that the company-proffered match would grant them a real return premium of 1-5% above market rates if they contributed. Such indifference to retirement saving incentives cannot be attributed to liquidity or investment constraints. These results underscore the need for alternative approaches beyond matching contributions, if retirement saving is to become broader-based

Dimensions of 401(k) Plan Design

This paper explores why plan sponsors design their 401(k) plans the way they do. Employing a unique, rich dataset of over five hundred 401(k) plans, we find that these plans are principally a form of tax-motivated compensation under the restriction of federal non-discrimination rules. In other words, to appeal to better-paid workers, employers offer more generous monetary and non-monetary plan design features. At the same time, complex federal tax rules restrict pay discrimination in favor of the highly-paid employees