A new way of looking at the risk in defined benefit pension plans

Article Abstract:

Portability aspect of a defined contribution pension considerably lowers the risk to the accumulation of pension wealth. Identical defined contribution and defined benefit pensions with identical benefit accrual rates and retirement income streams are entirely different sources of retirement income security. The defined contribution pension is not subject to these risks and consequently is much more valuable. The calculations suggest that the lack of portability of defined benefit plan result in risk premiums on defined benefit pension bonds. Uncertainty with regard to the future confers significant value on the option to retain and rollover the assets in a defined contribution plan. However, the option is also valuable for older employees. Older employees who are already vested in defined benefit plans face significant losses of pension wealth if they change jobs and also face the possibility that their employers may convert their defined benefit plans to hybrid plans. Exercising the rollover option in a defined contribution plan allows employees of all ages to continue building pension wealth, helping to secure a comfortable retirement.

Retirement Benefits, Statistical Data Included, Defined contribution plans

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Affordable retirement: light at the end of the tunnel

Article Abstract:

The 2004 Replacement Ratio Study from Aon consulting/Georgia State University suggests a method of planning for an optimal retirement income. Innovative options for retirement plan sponsors are also suggested by the study. It may be noted that today's workers need more income on retirement to maintain their standard of living.

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