Why DB funds are eating your 401(k)'s lunch

[SumDay]

Stern Advice-Why pension funds are eating your 401(k)'s lunch | Reuters

Interesting article, but this was what really caught my eye. For a myriad of reasons, I hope this happens:

-- Don't rule out the return of pensions. The bottom line of the Towers Watson research is this, in Suchsland's words: "For a plan sponsor to provide a certain level of benefit, it is cheaper to finance through the defined-benefit plan." Even though traditional pensions present more accounting challenges(because they are carried on company balance sheets), Suchsland says he believes some employers who switched to defined-contribution plans in the past few decades may switch back because of pension efficiencies and "workforce issues."

 

[JoeWras]

Stern Advice-Why pension funds are eating your 401(k)'s lunch | Reuters

Interesting article, but this was what really caught my eye. For a myriad of reasons, I hope this happens:

Yeah, but for your "hope" to be fully realized, it would also mean companies would respect their employees and make an effort to keep them long term.

That's not happening. At least in the non-public, non-union world.

Even if you have a DB pension, you are shown the door after, say, 15 years. So your DB amount is bogus. Then you go to anther company and get another bogus DB amount. Oh, and in neither case you qualify for their health care benefit. And did I mention than many non-public, non-super-mega-old-school companies don't COLA their DB?

So, yeah, maybe companies will go back to DBs, but it won't benefit the workforce which is considered nothing but a bunch of plug in units that can be thrown out with the trash when required.

 

[ziggy29]

If businesses go back to DB pensions, it will probably be because they don't vest for about 10 years, and businesses don't plan to retain many employees for that long. In that scenario, it may well be cheaper than providing a 401K match which usually has shorter vesting periods.

 

[Independent]

First, be aware that Towers Watson is a consulting firm with a substantial financial interest in DB pension plans. So take their opinions with a grain of salt.

I've seen many claims that 401k participants don't maximize their investment potential due to conservative investment decisions. That's irrelevant to me as an individual, because I can make my own decisions.

401k participants also lose money due to fees. The link says that the comparison between DB and DC returns is clouded by the fact that DB sponsors don't include their investment expenses when reporting their returns. I can believe that a big fund is going to pay lower fees than a bunch of 401k participants. My general observation is that fees in 401k plans are generally going down, with more plans offering low fee index options. (I don't have a source for that.)

I'm skeptical of the claim that DB managers can/should "always be investing for the long haul". That assumes they will always have positive participant cash flow, we can certainly find plans that discovered they didn't. In addition, in the US short term market gains/losses find their way into financial reports. I don't think investment managers can ignore that.

I don't see the support for the "bottom line" in the link. I can see that if the "certain level of benefits" that an employer wants to provide is skewed toward higher income employees who tend to get late-career raises, a DB plan could be a cheaper way to fund them.

As an individual, the employment, manangement, and inflation risks of a DB plan are just too large. I'd recommend to my kids that they put more value in a DC plan.

 

[Hamlet]

I think that it is extremely unlikely that we will see a shift back towards DB plans. Companies hate dealing with them, and in a world with high employee turn-over, they don't work all that well for the employee either.

 

[growing_older]

I've seen many claims that 401k participants don't maximize their investment potential due to conservative investment decisions. That's irrelevant to me as an individual, because I can make my own decisions.

It's also a strange argument, because DB benefits are not usually set at levels equivalent to maximizing the investment you could have made if you had control of the funds either.

 

[Khufu]

DB pension plans became established through the power of labor unions, which has diminished greatly over the the last 40 years. Unless that trend is reversed, it's pretty hard to see companies shouldering the open-ended liabilities of DB plans again.

 

[SumDay]

From yesterday's CFO.com:

For Performance, 401(k) Plans Can’t Touch Pensions

But companies are not so concerned about their employees’ retirement funding that they’ll contribute as much money to a defined-contribution (DC) plan, like a 401(k), as they did to their former defined-benefit (DB) pension plans. “Our research shows that over the last 17 years, at least, DB plans have consistently outperformed DC plans,” says Dave Suchsland, senior retirement consultant for Towers Watson. “DB plans are actually a less-costly way to provide the same benefit, because the better investment returns mean a company would need to contribute fewer dollars to offer that benefit. But generally when a company moves from DB to DC, it doesn’t provide the same benefit.”

 

[Big_Hitter]

I can see that if the "certain level of benefits" that an employer wants to provide is skewed toward higher income employees who tend to get late-career raises, a DB plan could be a cheaper way to fund them.

Yes, that is essentially correct.

 

[Big_Hitter]

Interesting article, but this was what really caught my eye. For a myriad of reasons, I hope this happens:

thanks for posting this

I hope so too