A basic and increasingly nostalgic assumption in the private pension world has long been that the financial payouts of defined benefit plans are much better than those of defined contribution plans, and its too bad that defined benefit plans seem to be heading for extinction.
Now an Employee Benefit Research Institute study has cast doubt on the conventional wisdom.
The study compared the tens of thousands of 401(k) plans in EBRIs long-term database with two current defined benefit plan models a standard three-year, final-average-pay pension and a cash balance plan. Institute researchers found that the 401(k) benefits were better for almost every age and income cohort. The median differences ranged from about even to 44 percent, with higher earners and those with longer tenure generally doing best with defined contribution plans.
How could that be?
Conventional wisdom always made defined benefit plans more advantageous than they really are, says Jack VanDerhei, EBRIs research director and the author of the study.
Not so fast, retort critics, arguing that the study makes a lot of assumptions that are biased toward 401(k)s. In its day, a defined benefit pension was a better way of delivering benefits, says Alicia Munnell, director of the Center for Retirement Research at Boston College. What the paper is doing is looking at the effect of an institution in a world that no longer exists.....