Why Employers Prefer a Defined Contribution Plan Over a Traditional Defined Benefit Pension
Why have so many employers gone to this Defined Contribution Plan instead of the traditional Defined Benefit Plan?
Cost and Risk.
Here is how our Defined Benefit (traditional) Pension is calculated: the highest average monthly salary during 5 consecutive years of service in the last 10 years X # years of service X 1.45% = your monthly pension. Kaiser guarantees you that amount until death or you could take a lump sum.
Cost: It is much, much, much more cost effective for Kaiser to pay 6 to 9% of your yearly salary for 40 years rather than pay for a traditional pension. Plus, Kaiser would not have to pay a financial services company to manage those millions of dollars in the pension fund. More importantly, it has to manage the risk.
Risk: In a Defined Benefit (traditional) Pension, the employee bears NO risk in the fluctuations of the stock market. In a Defined Contribution (401k type) Plan, the employee bears ALL the risk.
There are three areas of risk:
• Risk in how much to invest.
• Risk in what to invest.
• Risk in how much to take out each month after retirement so that you don't outlive your savings.
Do you really want to gamble with your retirement savings in the stock market? We have seen terrific returns in the stock market recently, but remember, in 2000 the stock market dipped 36% and in 2008, the market dipped 53%.
Please also remember, it takes a 16% contribution (not 9%) for a Defined Contribution Plan to equal a Defined Benefit Plan. That estimate is based upon a guaranteed yearly wage increase between 2 to 4% AND a guaranteed yearly return in investment between 5 to 7% with NO negative returns in ANY years. As pharmacists, are we trained and skilled enough in investing to generate those types of returns? We would much rather have Kaiser take that risk.
If you have an hour, please watch the Frontline documentary on PBS: The Retirement Gamble.