Overview of Retirement Plans

Retirement planning has undergone significant changes over the past few decades. Traditionally, companies offered defined-benefit (DB) plans, commonly known as pensions, to their employees. However, many organizations are now favoring defined-contribution (DC) plans, with the 401(k) being the most prevalent.

Decline of Pensions

Data from the Federal Reserve Bank of St. Louis highlights a dramatic transition in the type of retirement plans employees have access to. In 1989, a majority of workers participated in DB plans. Fast forward to 2022, and a staggering 83% of employees were in DC plans, while only around 20% were enrolled in DB plans.

Employee Demands for Pensions

Despite the decline in pension plans, there remains a desire among certain employees for their revival. For instance, Boeing union members requested the reinstatement of their DB plans during a strike in late 2024. However, their demands were primarily met with an increase in company matching contributions to their existing 401(k) plans.

Understanding the Differences

We spoke with Mark Wilson, president of MILE Wealth Management and an accredited pension administrator, to gain further insights into the differences between these retirement plans.

Mark Wilson: “A DB plan guarantees a specific benefit at retirement, funded entirely by the employer. In contrast, a DC plan, like a 401(k), defines the contributions but does not guarantee the amount at retirement. Simply put, DB plans promise benefits, while DC plans are about contributions.”

Reasons for the Shift

Wilson explains that the migration from DB to DC plans began in the late 1990s when the financial dynamics shifted. Companies began to face substantial liabilities associated with funding pensions. DB plans require the employer to shoulder the entire risk and funding responsibilities.

Mark Wilson: “Newer companies typically opt for 401(k) plans, while legacy companies still may have DB plans. The transition is primarily driven by the reduction of costs and liabilities associated with pensions.”

The Future of Pensions

The outlook for the return of pensions to large firms appears dim. Wilson suggests that the high costs and associated liabilities make it unlikely that major corporations will reinstate DB plans.

Mark Wilson: “Pensions are unlikely to make a resurgence at large companies due to their inherent liabilities and costs.”

Long-Term Employee Considerations

With modern job dynamics, many employees change jobs often. For these individuals, 401(k) plans present a viable alternative, offering flexibility that aligns with the realities of today’s workforce. As Wilson states, “401(k) plans fit better for employees who frequently transition between jobs compared to traditional DB plans that benefit those with long tenures at a single company.”