As the historic drop in the worlds financial markets bruises the balances of defined contribution plan participants across the country, critics are questioning the fundamental nature of such plans. Some are calling for a complete overhaul of the employer-sponsored retirement plan system. Others are questioning whether DC plans can deliver adequate retirement income.
Headlines and rhetoric aside, well-designed DC plans, including the popular 401(k) plan, have served American workers well for the past three decades despite occasional and inevitable stock and bond market turmoil. Indeed, DC plans have been broadly embraced by American businesses and their employees. There are some 65 million active participants in DC plans holding nearly $3 trillion in assets.
Critics have compared DC plans unfavorably to defined benefit pension plans. DB plans have many positive attributes and remain a vital component of the total benefits package for a shrinking, but still significant, number of private- and public-sector employers. But the fact remains that most participants, now and in the future, will rely on defined contribution plans for their employment-based retirement savings.
Thanks to the Pension Protection Act of 2006, some of the most important characteristics of DB plans universal participation and professional investment management are now available to an increasing number of DC plan participants. Continued innovation by plan sponsors and providers will further enhance the DC plan as a retirement savings vehicle that is portable, secure and capable of generating sufficient retirement income.