Coverage of employees by traditional defined benefit plans has been declining for almost three decades. Initially, the shift was away from traditional defined benefit plans to greater coverage by defined contribution plans, especially 401 (k) plans. This trend was most prominent among small employers (Clark and McDermed, 1990). Beginning in the 1980s, many large employers began converting their traditional defined benefit plans to hybrid plans, primarily cash balance plans. Interestingly, the conversion to cash balance plans has generated a major policy debate while the more comprehensive shift to defined contribution plans has continued with relatively little controversy.
This testimony addresses key aspects of the plan conversion process and why changes in pension plans are being made. In addition, Professor Clark reviews the policy issues associated with these conversions and places them in the broader context of labor market policies in the U.S. Two questions seem paramount. First, should federal regulations allow traditional defined benefit plans, defined contribution plans, and cash balance plans to continue to exist? Second, are new regulations needed to deter plan conversions for workers covered by an existing defined benefit plan or at least to compensate these workers for potential loses incurred by the plan conversion? Given the current discussion in Congress and the on-going judicial review, it is important to understand the pros and cons of each type of pension plan and to determine whether these plans help working Americans to achieve an adequate retirement income.
