DB vs DC Plans

Recently, IBM announced that it was changing its retirement plan approach to shift toward a hybrid DB/DC model and reopening its pension plan rather than providing the matching contribution to employees’ 401(k)s. The fact that IBM has recently halted 401(k) matches to return to a DB focus has shone a spotlight on the defined benefit versus defined contribution plan issue. Many lawmakers have suggested that the government should shift its focus toward providing additional tax incentives to encourage employers to move back toward the defined benefit plan model.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether the government should shift its focus toward encouraging employers to return to the defined benefit plan model.

Below is a summary of the debate that ensued between the two professors.

Their Votes:



Bloink



Byrnes



Their Reasons:

Bloink: Defined benefit plans are a tried-and-true way of providing Americans with access to secure and continuous retirement income for life. Individuals who have access to defined benefit plan payments are much less likely to live in poverty during retirement than those whose only option is funding their own retirement. We should be doing everything possible to encourage employers to give their employees’ access to this type of valuable retirement income security.

Byrnes: Defined benefit plans are an antiquated way of providing for retirement income security. Now more than ever, individuals move between jobs multiple times throughout their career. Back when defined benefit plans were popular, that wasn't necessarily true—people historically were much more likely to stay with their employer throughout the course of their entire career, so that the DB model made sense.

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Bloink: With the defined contribution plan structure, we have to remember that plan participants must cover fees and administrative costs. While these fees may seem incidental, they aren’t nothing when you’re talking about lower and middle-income Americans whose retirement accounts are often woefully underfunded. The defined benefit plan model allows participants to direct more of their savings toward their actual retirement.

Byrnes: With defined contribution plans, individuals have control over their own retirement. They can move their retirement assets from employer to employer as many times as they see fit over the course of their careers. Moreover, individuals should have control over how their retirement funds are invested--something that's generally only available with the DC structure.

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Bloink: With the typical defined contribution plan model, participants don't always understand the necessity of looking toward long-term investment goals when they're making their own investment allocation choices. DB plans are managed with a view toward longevity, making them more stable. DB plans are also subject to strict funding requirements designed to require the modern DB plan to satisfy their obligations and avoid the historical problem where the DB plan would run out of money. In reality, the modern DB plan would look very different than the one we knew in the past and would be much more workable than the DC model that simply isn’t serving lower-income taxpayers well.

Byrnes: Returning to the days when defined benefit plans were the norm simply isn’t realistic. Over the years, defined benefit plans have gotten an extremely bad reputation—both as being expensive and unworkable. The bottom line is that the vast majority of employers would never even consider the employer-funded DB model as something that’s workable in this day and age.