Are Defined Benefit Pension Plans really better than Defined Contribution plans? Personally, I do not think so.
It has been suggested that the problems with DC plans start with the fact that employees are not educated investors? I would suggest that with DB plans, employers quite possibly are not educated investors also. (There were a lot of banks (like European banks) that got caught with mortgage-backed securities that were sold on sub-prime mortgages. You might have thought that banks being financial institutions would know what they were getting. Apparently this was not so.)
I think that one of the biggest mistakes made by most pension plans is that they took premium holidays or increased benefits or in some way used the "extra" money in pension plans when they were declared overfunded in the 1990's.
There was a big move up in the stock market between about 1982 and 1999 which is called a secular bull market. Since 2000 we have been in a secular bear market and the market has not done much for anyone. Most pension plans are underfunded or underwater, as it is generally called.
Secular markets last a long time. You will at least have one during the time you should be building up your pension plan. If you were in a DC plan, money would have continued into the plan as the secular bull market continued to play out in the 1990's. You need these markets to build up a decent pension.
The other thing I like about DC plans is that you do not need to worry about your company getting into financial trouble and having problems getting your pension money. With DC plans the money comes into your hands when your company makes a contribution.
When I had the chance to change from a DB to DC I did so. That was because I was not planning on working at the company until retirement. It is easier to move money from DC plans then DB plans. If you move money from a DB plan, you basically get little unless you are older. Everyone under DC plan gets the same amount of money each year.
DB plans are such that older employees get more money put towards their retirement than younger ones. There can be a big difference in what you get if you stop working for a company and ask for your pension to be transferred to a Locked-In RRSP. (That is someone asking for this that has worked for a company for 20 years and is 60 will get a lot more than someone who has worked for a company for 20 years and is 40.)
I think that DC plans are good for companies also. It is a pay as you go pension plan for them. They will not end up with a big pension liability. This is one of the things that brought down the auto companies.
I think that the solution is that we all need to have financial education. If you are not working for the same employer until retirement, you are better off with a DC plan. In today's employment market, how many people can count to work for one employer until retirement? I would guess very few, especially if you do not work for the government.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.