Part I:The Defined Benefit Plan Legacy

This is a book about retirement policy: how we as Americans provide for “old age”—that period after we stop working and earning money through our labor. Our focus will be, first, the primary “tool” that we have developed to address this challenge—employer-sponsored retirement savings plans—what they are, how they work, and how they have changed over time. Second, we will consider the regulatory framework that we have developed to address the issues—of, e.g., fairness and prudent investment—that this retirement savings project presents. And, third, we will discuss the underlying factors—securities markets, interest rates, and demographics—that drive much of our decision making in this area.

In Part I, we begin this expedition into the complexities of retirement savings policy with an in-depth look at defined benefit (DB) pension plans—the “traditional” solution to the retirement challenge. “DB plan” is kind of a technical term. To explain (very briefly): a DB plan provides a formula-based benefit, that is, a plan formula determines what a DB plan participant is entitled to. Financing that benefit is generally the employer’s biggest challenge.

DB plans are one of the two main types of employer-provided retirement savings plans. The other type is the “defined contribution” (DC) plan. In contrast to DB plans, DC plans provide an account-based benefit. Contributions and investment earnings go into a participant’s account, and the participant is, and is only, entitled to what is in the account. 401(k) plans, for instance, are DC plans.

In the pages that follow we will have a lot to say about these two types of plans, DB and DC: how they, in different ways, deal with the retirement challenge. Before we begin with a detailed discussion of DB plans in Part I, let’s consider briefly the prevalence of these two types of plans and how it has changed over time.