Pension Protection Act

Let's say you're a businessman who has two options for providing your employees with a pension benefit. One way you guarantee the benefits and take all the risk that you are putting enough away to meet the guaranteed benefits. The second way, you promise to set aside a certain amount each year and provide an investment company for your employees to use. But otherwise the employees take all the risk.

If you're following along, you'll already see that the scales are tipping in favor of plan number 2. But there are some real benefits for the employer who picks number 1. One advantage is that once a plan is completely or nearly completely funded, an employer can significantly reduce pension contributions. Another allows a significant investment in the company's stock.

Now add government intervention and oversight - mainly on the first type of plan - mandating accelerated funding and disallowing investments in the company. The result can reasonably expected to be a stampede of companies away from defined benefit plans (number 1) to defined contribution plans (number 2)

An article in the Sacramento Bee on July 12 described how the move from defined benefit to defined contribution pensions is accelerating. And this somehow comes as a "surprise" to the Employee Benefit Research Institute and many government officials. Don't make me laugh! As explained above, the Pension Protection Act of 2006 was designed to do exactly that. Why should we be surprised when a new law does exactly what it was planned (perhaps unwittingly, but planned anyway) to do? Simultaneously, there has been a big PR push to explain why defined contribution plans are so much better for employees (even though they now have all the risk).

I'm not opposed to defined contribution plans as they have several advantages. In my opinion portability is probably the greatest. And if they're adequately funded (it's more difficult to tell if they are) the resulting benefit can be as good or even better than a defined benefit. But let's not be surprised at the effect of this law.