>Take the employer out of the equation once they're no longer relevant.
Not exactly, if the company is willing to go so far as bankruptcy / reincorporation... how will any previous contracts with whatever insurance company last through that?
Not exactly, if the company is willing to go so far as bankruptcy / reincorporation... how will any previous contracts with whatever insurance company last through that?
It’s true that 401(k)s also have this feature, however many employees prefer the defined benefit a pension provides over managing their own returns and the temptations associated with managing money. The core issue is really poor US regulation over any specific issue with pensions.
PS: The swap to 401k’s in the US is mostly about cost savings. Companies can simply reduce their contributions without much if any backlash. Meanwhile, third parties profit from managing 401k’s and therefore market them heavily.
The employer pays into the account at whatever rate is required to fully fund retirements. The insurance company manages those funds. If the employer goes bankrupt, the funds are not accessible by raiders/PE firms.
A defined benefit plan is (nominally) funded by the employer with little or no input from the employee at time of investment or distribution.
A 401k is funded by the employee, with the employee managing contribution level, fund investment, and eventually distributions.
They're only the same, if by same you mean "retirement plans". The details are substantially different.
The only bit that's different is the self-management of assets, of which many companies are happy to do, increasingly for lower and lower fees. 0.2-0.3% being common which I bet goes toe-to-toe with good pension managers.
They really aren't that different.
If the insurer can earn 6%, and takes 1% of that, then if an employer wants to offer an employee a $50k/year pension, they need to pay in $1M before the employee's retirement to fully fund it. Over an expected 40-year career, if that employee was basically making $50k/year in take-home pay the whole time, adjusted for inflation, the pension cost would add $25k/year.
Actually, the cost to fund it would be a bit less, as the pension usually ends when the pensioner and their spouse die, so not a true perpetuity. The insurer calculates the expected time from retirement to death, and discounts the up-front cost by the current value of all those payments that won't be made after the beneficiaries die. This works out better the more pensioners can be averaged out in a big pool, which is why big insurers have an advantage in offering these sorts of financial products.
But no matter how you slice it, defined-benefit plans, if fully funded by incremental contributions with each paycheck, add significantly to labor costs, especially when the insurers can't get good investment returns. The lower the return, the more the plan costs. And the higher the return, the more the insurer tends to take for itself.
The 401(k) reduces the pension cost to the employer by capping it at a lower percentage of employee take-home pay, and furthermore dumping all the market risk onto them.
Completely different. Defined benefit has always been better for the laborer, insofar as the company can keep its promises. Defined contribution is better in cases where the employer is untrustworthy or the employee can invest wisely such that they can get the same returns as the insurer, but without taking a cut off the top--as one might get with no-fee, broad-market index funds.