5 ms·

This already exists. It's called a 401(k).

thatfrenchguy 7y ago
Except 401(k)s are crazy underfunded: https://www.marketwatch.com/story/this-is-the-average-401k-savings-by-age-2019-01-31 https://www.marketwatch.com/story/this-is-the-average-401k-s... (look at the median)
alistairSH 7y ago
Not sure if serious.meme A defined benefit plan is (nominally) funded by the employer with little or no input from the employee at time of investment or distribution. A 401k is funded by the employee, with the employee managing contribution level, fund investment, and eventually distributions. They're only the same, if by same you mean "retirement plans". The details are substantially different.
- eldavido 7y ago
  A 401k is an account, funded by a mix of employer and employee contributions, that's beyond reach of bankruptcy. That part is the same. The only bit that's different is the self-management of assets, of which many companies are happy to do, increasingly for lower and lower fees. 0.2-0.3% being common which I bet goes toe-to-toe with good pension managers. They really aren't that different.
  - alistairSH 7y ago
    You're neglecting the part where a defined benefit plan pays a fixed amount until you die (assuming it remains solvent, which is a problem because corporate raiders are allowed to cash them out under some circumstances). A 401k can run out - they often do.
bluGill 7y ago
Not really. A pension you get your money until you die - there is no possibility of running out. A 401k you can live longer than expected and run out of money.
- mcv 7y ago
  That sounds like it's still lacking the life insurance aspect of it: you want it to continue paying out, even if you accidentally live longer than expected.
logfromblammo 7y ago
Defined benefit means that the employer buys a perpetuity from the insurer on behalf of the pensioner. The insurer requires the employer to pay the cost of the benefit divided by the average rate of return after operating and profit margins. If the insurer can earn 6%, and takes 1% of that, then if an employer wants to offer an employee a $50k/year pension, they need to pay in $1M before the employee's retirement to fully fund it. Over an expected 40-year career, if that employee was basically making $50k/year in take-home pay the whole time, adjusted for inflation, the pension cost would add $25k/year. Actually, the cost to fund it would be a bit less, as the pension usually ends when the pensioner and their spouse die, so not a true perpetuity. The insurer calculates the expected time from retirement to death, and discounts the up-front cost by the current value of all those payments that won't be made after the beneficiaries die. This works out better the more pensioners can be averaged out in a big pool, which is why big insurers have an advantage in offering these sorts of financial products. But no matter how you slice it, defined-benefit plans, if fully funded by incremental contributions with each paycheck, add significantly to labor costs, especially when the insurers can't get good investment returns. The lower the return, the more the plan costs. And the higher the return, the more the insurer tends to take for itself. The 401(k) reduces the pension cost to the employer by capping it at a lower percentage of employee take-home pay, and furthermore dumping all the market risk onto them. Completely different. Defined benefit has always been better for the laborer, insofar as the company can keep its promises. Defined contribution is better in cases where the employer is untrustworthy or the employee can invest wisely such that they can get the same returns as the insurer, but without taking a cut off the top--as one might get with no-fee, broad-market index funds.
mcv 7y ago
If so, then it clearly doesn't work very well, considering how often this goes wrong.

Except 401(k)s are crazy underfunded: https://www.marketwatch.com/story/this-is-the-average-401k-savings-by-age-2019-01-31 https://www.marketwatch.com/story/this-is-the-average-401k-s... (look at the median)

alistairSH 7y ago

Not sure if serious.meme A defined benefit plan is (nominally) funded by the employer with little or no input from the employee at time of investment or distribution. A 401k is funded by the employee, with the employee managing contribution level, fund investment, and eventually distributions. They're only the same, if by same you mean "retirement plans". The details are substantially different.

eldavido 7y ago
A 401k is an account, funded by a mix of employer and employee contributions, that's beyond reach of bankruptcy. That part is the same. The only bit that's different is the self-management of assets, of which many companies are happy to do, increasingly for lower and lower fees. 0.2-0.3% being common which I bet goes toe-to-toe with good pension managers. They really aren't that different.
- alistairSH 7y ago
  You're neglecting the part where a defined benefit plan pays a fixed amount until you die (assuming it remains solvent, which is a problem because corporate raiders are allowed to cash them out under some circumstances). A 401k can run out - they often do.

bluGill 7y ago

Not really. A pension you get your money until you die - there is no possibility of running out. A 401k you can live longer than expected and run out of money.

mcv 7y ago
That sounds like it's still lacking the life insurance aspect of it: you want it to continue paying out, even if you accidentally live longer than expected.

logfromblammo 7y ago

Defined benefit means that the employer buys a perpetuity from the insurer on behalf of the pensioner. The insurer requires the employer to pay the cost of the benefit divided by the average rate of return after operating and profit margins. If the insurer can earn 6%, and takes 1% of that, then if an employer wants to offer an employee a $50k/year pension, they need to pay in $1M before the employee's retirement to fully fund it. Over an expected 40-year career, if that employee was basically making $50k/year in take-home pay the whole time, adjusted for inflation, the pension cost would add $25k/year. Actually, the cost to fund it would be a bit less, as the pension usually ends when the pensioner and their spouse die, so not a true perpetuity. The insurer calculates the expected time from retirement to death, and discounts the up-front cost by the current value of all those payments that won't be made after the beneficiaries die. This works out better the more pensioners can be averaged out in a big pool, which is why big insurers have an advantage in offering these sorts of financial products. But no matter how you slice it, defined-benefit plans, if fully funded by incremental contributions with each paycheck, add significantly to labor costs, especially when the insurers can't get good investment returns. The lower the return, the more the plan costs. And the higher the return, the more the insurer tends to take for itself. The 401(k) reduces the pension cost to the employer by capping it at a lower percentage of employee take-home pay, and furthermore dumping all the market risk onto them. Completely different. Defined benefit has always been better for the laborer, insofar as the company can keep its promises. Defined contribution is better in cases where the employer is untrustworthy or the employee can invest wisely such that they can get the same returns as the insurer, but without taking a cut off the top--as one might get with no-fee, broad-market index funds.

mcv 7y ago

If so, then it clearly doesn't work very well, considering how often this goes wrong.