Why are Healthy Employers Freezing their Pensions?
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? ...
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Alicia H. Munnell is the Director of the Center for Retirement Research (CRR) and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management. Francesca Golub-Sass is a research associate at the CRR. Mauricio Soto is an Economics graduate student at Boston College and a senior research associate at the Center. Francis Vitagliano is the Director of Retirement Education at the Center. The authors would like to thank Peter Diamond for helpful comments.