The freezing of the IBM pension plan might have signaled the beginning of the last inning of the defined benefit plan in corporate employee retirement provision.
IBM has always been a leader, and the closing of its defined benefit plan will probably influence many other companies that have considered but hesitated freezing their DB plans.
In some ways this is lamentable. Defined benefit plans clearly are superior to 401(k) and other defined contribution plans for long-term employees, and for lower-income or less-educated workers. They are more efficient than 401(k) plans in marshalling retirement savings and directing them into the capital markets, especially high-risk, high-return sectors.
But the business world has changed dramatically since defined benefit plans were widely adopted after World War II. Increased global business competition and rapidly developing technology are changing traditional career patterns. Job tenures are likely to continue to shorten, as may the life spans of corporations. Given that, a new form of retirement provision was inevitable.
The rise of the 401(k) plan and the decline of the defined benefit plan can be seen as a change in pension technology that has occurred to match retirement provision with the needs of both employer and employee and with the new economic environment.
The defined benefit plan was the pension technology of the 20th century. Perhaps the 401(k) plan is the pension technology of the 21st century. At present that seems likely, but something new and different could supplant it before the end of this century.
The defined benefit technology was appropriate for the 20th century when many workers stayed with their employers for long periods, especially in the final 20 years of their careers.
Think of the defined benefit plan as a bus or a train, where everyone rides together by the same route to the same ultimate destination — retirement. Anyone who gets off early by breaking the career into several steps subsidizes those who stay on to the end. Think of the 401(k) plan as an automobile, giving more flexibility to the individual. Driving a car might be riskier than riding the train or bus, but the payoff is that one may choose a different route and stop and start as one chooses, often without forfeiting too much.
Or think of the DB plan as a '60s or '70s mainframe computer that everyone in an organization used. With that mainframe computer, the choice of programs was limited. If you wanted something different from what the company provided, you had to write your own program, or have the IT department do it. The mainframe computer was expensive to buy and maintain, often requiring constant attention of two or three technicians to keep it running. And it had limited power.
The 401(k) plan is the equivalent of the personal computer. Just as more people have the power of a computer at their beck and call in the PC era than in the mainframe era, more workers will eventually receive some retirement benefits from a 401(k) plan than they ever did from a defined benefit plan. Participants who properly use 401(k)s have far more freedom, flexibility and control over their financial destinies than those covered only by defined benefit plans in the 20th century ever had.
The 401(k) plan is not perfect, just as the first personal computers were not perfect. Like the PC, the 401(k) plan will be improved over time. And remember the first DB plans were not perfect either. DB plans evolved over time under the influence of employee demand, competition for employees, and legislation.
As DC plans continue to evolve they may ultimately provide most of the good features of the DB plans without the rigidities.
