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Pensions have almost disappeared from most companies; instead, many companies now utilize 401(k)s. But it hasn't always been that way.
As a tactic to retain workers, companies often provide their employees with a defined-benefit (DB) retirement plan (known as a pension) or a defined-contribution (DC) plan, the most common of which is a 401(k).
Over the past 30+ years, many companies have shifted away from pensions to DC plans. In 1989, DB plans were the most common. According to a report released by the Federal Reserve Bank of St. Louis this week, in 2022 83% of workers will be covered by a DC Plan, compared to a mere 5% of those who are covered by a DB Plan.
Despite the fact many companies no longer offer DB retirement plans for their employees, some still want a pension. Boeing union members requested the restoration of DB plans in a strike which ended in November 2024. Boeing workers did not receive the pension request, but instead received a higher company matching contribution for 401(k).
Investopedia interviewed Mark Wilson, president and pension administrator of MILE Wealth Management, to find out the differences between retirement plans, and why companies are moving from pensions. The interview was edited for clarity and brevity.
INVESTOPEDIA : What are some of the differences between a DB and a DC retirement?
MARK WILSON Many of the names themselves contain valuable information. We consider what the words actually mean. A DB plan is a retirement plan sponsored by a company, and the benefit, or the amount that retirees receive, is defined. DC plan is the opposite, where we're just defining what goes into the plan. We're not defining what comes out or what we're targeting to come out at the end. They're very different in that respect.
INVESTOPEDIA : Why are companies moving towards DB plans?
WILSON: In the late '90s, there was far more money in DB plans than there was in DC plans. Even 25 years ago, the trend started to move in the opposite direction.
If a company has started up in the last 20 years, they're offering a 401(k) plan. They're not offering a pension plan almost 100% of the time. The old legacy companies and governments still offer these old defined benefit plans. The reason for the change is, I think the two main reasons—costs and [liabilities].
So in DB plans, the company itself is really doing 100% of the funding and has 100% of the liability if the investments don't do well because they're promising a benefit at the end of the day.
[With DC plans] the companies have been able to say, 'Oh, you put in, we'll put in a little bit. And whatever you invest, that's on you, not on us.' So the costs go down because now they're sharing the contributions, or maybe not even contributing at all, into the 401(k). The liability goes down almost 100% because whatever you end up with is whatever you end up with, not the employer's problem.
INVESTOPEDIA Is it possible that pensions will ever make a return?
WILSON: I wouldn't have high hopes that pensions are coming back to large companies. There's just too much liability and costs involved.
401(k) type plans are often better than the more typical pension plan for today's employees who don't stay in the same spot forever. So when someone goes to work for the factory or Boeing or the car company or the airline, they work there for their whole career, and that's just not today's employees. The pension plan requires people to stay for a long period of time to make it work. A 401(k), on the other hand, is a better option if you have a career that spans four or five jobs.
