Question

Why are defined benefit pension plans disappearing in the United States? Is this a good thing or bad thing for participants, sponsors or society?

Answer 1

The defined benefit pension plan is where the employer contributes and manages the pension plan for the employee and upon retirement paid a fixed amount of money for a certain year or until his death. The major benefit of this type of plan is that the asset management of pension fund is taken care by the employer and the employee does not have to worry about that but of late many employers have stopped the defined benefit and moved to defined contribution plan and the major reason for this is that it becomes difficult for companies to manage pension funds, they have to meet the regulator guidelines regarding and often it is not cost effective for them so they simply choose to contribute the amount to the employee and they can manage it themselves. The companies also want to focus more on their core areas rather than managing the non-core activities. From the company point of view this is definitely a good thing, they are not burdened with the task of fund management however from the employee standpoint if they can manage their fund efficiently this is very good and are able to hire a fund manager who can manage fund for them in a cost efficient way but from those who can not manage or can not hire a good fund manger might face issues in managing these funds and what happens is that they will spend those money and not save for the retirement.