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Are defined benefit plans going the way of the dinosaurs or simply evolving?

Over the past 30 years, the number of employees participating in defined-benefit pension plans sponsored by their employers has fallen by approximately 50 percent.  During that same period, participation in defined-contribution plans (such as 401(k) plans) has dramatically risen.  There are a number of potential explanations for this phenomenon including, (i) the fact that many employers have grown tired of dealing with the risk and volatility associated with defined-benefit plans, (ii) employees seem to better understand and favor defined-contribution plans with their individual accounts that can be easily tracked, and (iii) many manufacturing companies, the traditional sponsors of defined-benefit plans, have consolidated, closed their doors or moved their operations overseas.

Despite this obvious trend, defined-benefit plans have persevered and, in some cases, actually flourished.  During the past five years, we have seen many companies (predominately closely-held and smaller companies) adopting new defined-benefit plans, usually in the form of a Cash Balance Plan.  A Cash Balance Plan is a defined-benefit plan that looks and feels like a defined-contribution plan to most participants.  In addition, defined-benefit plans, properly managed, still offer a number of attractive perks for employers.  These include a significant increase in the benefits that can be accrued for key participants beyond what can be contributed by or for such employees in a defined-contribution plan, and potentially lower costs associated with crediting earnings at a rate that is lower than the rate defined-benefit plans have historically earned on their investments (despite the fact that investment results of late would generally suggest differently).  If you are looking for creative ways to increase retirement benefits for owners and select employees, a defined-benefit pension plan may be just the thing.

Related links for companies that sponsor a defined benefit pension plan: “Tough economy creates tough decisions for pension plans.”