The Benefit of Defined Benefits

David Madland compares defined benefit and 401(k) plans, and shows that in uncertain times, defined benefit plans are the safer bet.

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The recent economic downtown and stock market decline have damaged many Americans’ plans for retirement and clearly demonstrated that 401(k) plans place significant risks on workers. In just the past year, the value of stocks in 401(k) plans and individual retirement accounts, or IRAs, fell by $2.0 trillion according to new research from the Center for Retirement Research at Boston College. Younger workers may have time to recover their losses, but those near retirement, or already in retirement, often don’t have the luxury of time and may be forced to make unattractive choices to meet day-to-day living expenses—working more, turning to family or public assistance, or living in poverty.

Defined benefit retirement plans have also lost significant value, but people with defined benefit plans are more cushioned from Wall Street’s volatility. Defined benefit pension plans are not risk free and are not always better than 401(k) plans for every worker. In fact, the ideal plan would combine elements of both 401(k) plans and defined benefit plans. But the current financial crisis illustrates some of the strengths of defined benefit pensions.

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David Madland

Senior Fellow; Senior Adviser, American Worker Project