Offering a retirement plan, whether DB or DC, is neither trivial nor inexpensive! Thank you to the sponsors of these plans who are looking out for their employees (and our society)! Unfortunately, a wide swath of the US population (mostly those in small companies) don’t have access to a retirement vehicle of any kind.
Since the founding of KCS, I have been an outspoken critic of what is transpiring in the US with regard to the retirement industry. I much prefer DB plans to DC plans, but as most know, the DB plan is nearly extinct in the private sector, while public and Taft-Hartley plans continue to maintain their offerings, but are struggling in many cases to adequately fund them.
Why do I favor DB relative to DC? First, in many cases the employer is making the contribution or certainly the yeoman’s share of the contribution. Second, these plans are professionally managed. Since we don’t do a great job of providing our students with adequate financial literacy, why should we expect them to manage these plans effectively? Third, the cost of administering / managing a DB plan is lower than that of a DC plan, although DC costs have come down. Importantly, DB plans insulate the participant from market shocks that might alter one’s ability to retire with a DC balance and not a monthly check, if that balance has seen significant market losses (2007-2009).
In addition, DC plans have features that just don’t support the average participant. If DC plans were truly retirement vehicles we wouldn’t allow loan features. We would eliminate premature withdrawals when employees move from one job to the next. Finally, we would insist that every 401(k) / 403(b) provide annuity features to minimize the use of lump sum distributions that come with significant management responsibility in retirement.
DC plans were initially used as supplemental savings plans for high income earners, and they are well suited for that use, but they are not retirement plans! I have never been a participant in a DB plan. Boy, do I wish that I had been. I have only participated in DC plans since the early 1980s. Fortunately, as an investment professional for the last 35 years I have been able to handle this responsibility, but we are asking too much from those that haven’t spent their careers in the investment industry.
I know that many participants like the portability that comes with investing in a DC plan, but regrettably about 50% of the premature withdrawals from DC plans are related to movements among jobs in which the participant fails to rollover their balance.
We can do better as an industry, and we must! We are on the verge of having a significant percentage of our population retire without the means to remain participants in our economy. The economic and social consequences of this development are potentially quite grave. We must do a better job of preserving DB plans for the masses in both the private and public sector. This can happen, but they need new thinking with regard to how they are managed. The time has come!!