Strategic Investment Group

The Value Of The Defined Benefit Plan

June 2006

Within the past year, the current rush to freeze or close corporate defined benefit (DB) plans has picked up momentum. The number of firms that have frozen or terminated their DB plans has tripled since 2001. The causes cited for the present trend are cost-cutting and global competition, but there are many other contributing factors. We view the demise of DB plans with regret, and see in their passing the loss of an important economic institution that will be sorely missed by future generations.

For employees, DB plans produce an economic benefit, through the pooling of assets and liabilities, by insuring against longevity risk, diversifying investment risk, facilitating professional asset management, and cutting investment expenses. For employers, DB plans create a currency – the untaxed compounded growth of assets – that can be used to pay and retain workers. Defined contribution plans either lack or deliver a dilute version of these advantages.

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