Why are Healthy Employers Freezing their Pensions?

Alicia H. MunnellFrancesca N. Golub-SassFrancis M. Vitagliano Mauricio Soto

IB#44

Introduction

The shift in pension coverage from defined benefit plans to 401(k)s has been underway since 1981. This shift is the result of three developments; 1) the addition of 401(k) provisions to existing thrift and profit sharing plans; 2) a surge of new 401(k) plan formation in the 1980s; and 3) the virtual halt in the formation of new defined benefit plans. A conversion from a defined benefit plan to a 401(k) plan was an extremely rare event, particularly among large plans. Historically, the only companies closing their defined benefit pension plans were facing bankruptcy or struggling to stay alive. Now the pension landscape has changed. Today, large healthy companies are either closing their defined benefit plan to new entrants or ending pension accruals for current as well as future employees. Why are healthy employers taking this action? And why now? …