I'm an IBM retiree and my pension's been frozen for years. Depending on the plan, the 401k approach, while perhaps not as secure (read fixed) could have some benefits the defined plan doesn't, in that it's not fixed and easily transportable.

On the other hand, the once famed IBM company loyalty would probably go the way of the defined benefit plan ... down the chute.

Not T.J. Watson's company anymore. Gone with the monopoly, but still a great company trying to survive with the times and survive the mistake of making the P.C. operating system public domain ...its gift to the world.

Much of the problem with defined benefits plans came about because of how the tax laws for them were strung.

In a DB plan, the employer consults an actuary every year. The actuary does calculations, consults mortality tables, reviews investment performance, does present value calculations, reads tea leaves, e-mails questions to the Oracle of Delphi, rolls twenty-sided dice, polls Sumerian sheep-liver omens, or whatever it is actuaries do--it's a dark art, and I've never really understood it--and tells the employer how much has to be put into the plan today to provide the defined benefit required for the present workforce at the projected dates of their individual retirement, assuming current models of investment performance and life expectancy, et cetera et cetera. The law requires the employer to contribute this much, and there's a penalty tax imposed if you fail to make the required contribution.

Next year, you do the same; and of course, since all of the factors that go into the actuarial determination change, and because nothing ever completely lives up to actuarial projection, the amount of the actuarially-determined contribution changes from year to year. It's the nature of the beast that the amount of the actuarially-determined contribution will likely be greater when investment performance is worse, during down years in the business cycle, and that this will probably coincide with years when the employer's business is not so good.

So, you might think, what if the employer puts away more than the required amount in good years so as to build up a safety margin and reduce future liability? Sounds like a good idea, right?

The problem with that is that there's also an "excess contributions" penalty tax imposed on an employer who contributes more than the actuarially-determined contribution. Why is that? you may ask. Remember, the earnings of plan assets are not subject to income tax until they are paid out to the retiree--and, under the Howard Metzenbaum theory of economics, it wouldn't be "fair" for large corporations to have all these assets growing tax-free! (Part and parcel of the same thinking, there also was at one time another penalty tax on individual retirees who accumulated "excess" assets in their IRAs and retirement plans--which you could fall into just by having above-average investment performance! It has since been repealed.)

None of these pitfalls exist with a defined contribution plan such as a 401(k). In other words, thanks to Congress, a DB plan has so many pitfalls and traps for the unwary, and is so much harder to administer, that no employer in their right mind would use it--unless required to by the terms of a collective bargaining agreement.

Mike:

The other problem is that, rather than consulting the Oracle, they play shennagains with the contributions to smooth out earnings, or worse, to hide their true expenses. And it gets worse - there's a whole S&L-type fiasco coming down the line with federally-backed pension insurance, but the details are pretty arcane.

Mr. Judd;

On the contrary, the less private companies do it the more the Progressives will insist that the government do so, to "solve" the "market failure".

Mike E.:

Point taken. I was trying to illustrate that DB plans are a world-class headache even when you do everything by the book in perfect good faith. Add "creative accounting" to the mix and it only gets worse.

AOG -

Just so. The idea that if the IBMs of the world find it difficult then the government will find it doubly so will not even enter their worldview.

AOG:

Yes, it just becomes harder for them to argue that.

Defined benefit plans are dead.