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Employers may find that pensions are less expensive than 401(k) plans.
With a few noteworthy exceptions, the era of pensions in the United States is mostly finished, with conventional defined benefit plans being substantially supplanted by defined contribution retirement vehicles such as 401(k) plans. However, a recent analysis from the National Institute on Retirement Security suggests that the termination of pensions may not be as helpful to businesses as previously imagined. In fact, providing employees with a typical pension plan may be less expensive than running a 401(k) or other defined contribution plan.
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Why Are 401(k) Plans More Expensive Than Pensions?
The reasoning for organizations wanting to transition to defined contribution plans is straightforward. In a standard pension plan, the firm is obligated to make a specified payment each year until the employee dies. If they have a very long life, this might become costly. However, in a defined contribution plan, such as a 401(k), the payment is solely decided by how much an employee saved over their working years — and if they run out, the employer is unaffected.
