Pension coverage is stagnating while the share of employees with a defined contribution savings plan is growing. (Defined contribution plans include 401(k) plans [about 80% of participants in DC plans are in 401(k) plans]; profit sharing plans; money purchase plans; individual retirement accounts; and 403(b) plans, which are 401(k) plans for employees in the public sector.) That paradox is explained largely by DC plans replacing traditional DB plans. The disappointing lack of growth in pension coverage (discussed and documented in chapter 3) is not the only consequence of the shift from DB to DC pensions. Other consequences include
It's ironic that employees seem to prefer the new species of retirement
plan although it might not be as good for them.
—Michael Clowes,1 conservative writer and editor of the influential
pension industry publication, Pensions and Investments, regarding
workers' irrational preferences for defined contribution savings plans
|•||inefficiency (the nation is not getting the most retirement income security out of each dollar saved for retirement),|
|•||inadequate retirement savings, and|
|•||inequality of income and risk-bearing between employers and workers, as well as between upper- and middle-class workers.|
These three consequences—the three “i's”—stem partly from the nature of defined contribution and defined benefit plans and partly from how they are used.
Defined benefit plans are a form of insurance. Workers pool the risk of retiring without income from their main job. Those who move on to another employer without significant pension credits subsidize those who don't. In