Within limits, DC plans allowed an
The disparity is less severe at the medians,
employee to increase his total compensation
with the worker receiving $7,214 and $10,841
under the DB and DC plans, respectively."1 6
based on his willingness to save for the long
term. A worker who contributed to his plan
Under most DC plans, the laborer selects
had less current expendable wages than one
not only the object of his investment but (up
who did not, but a higher total of expend-
to a $10,000 annual limit) how much to
able-plus-deferred wages. He also owned the
invest. As companies converted DB plans into
accumulations of his deferrals, invested as
DCs, the higher rates of return elicited higher
capital. In effect, employees engaged in an act
levels of investment among plan participants.
of self-selection for a particular kind of raise,
In 1980, DC plans enrolled little more
based on their agreement to engage in two
than half as many workers as DB programs.
defining behaviors of the capitalist: deferred
By 1994, however, DC plans enrolled more
consumption and capital investment.
active participants and took in nearly three
The obvious reason DC plans became
times the contributions of DB plans. EBRI
popular among workers was that they sub-
calculated that DB programs held 66 percent
stantially outperformed the DB plans that
of all private pension assets in 1985, versus 34
they replaced. According to EBRI, during the
percent for DC plans. By 1993, that ratio was
Fifty-five million
five-year period ending December 31, 1994,
56.743.3 percent. ICI, think tank for the
workers are cur-
DCs had an annual inflation-adjusted return
mutual-fund industry, projects that in 1999
of 6.8 percent, compared to 6.0 percent for
DC plan holdings will exceed those of DB
rently enrolled in
the DBs.1 5 But this 13.3 percent differential
plans, 51.448.6 percent (Figure 1).
private-sector DC
According to the U.S. Bureau of Labor
understates the superiority of DC plans over
programs. Such
Statistics, DC programs covered 55 percent
the last generation. "The defined benefit plan
of all employees in establishments with 100
assumes a return that will provide the
plans held $2.2
or more workers in 1995 and 38 percent of all
promised benefit if earned during the
trillion in assets
employees in establishments with fewer than
employee's lifetime," said Profit Sharing/
100 workers in 1996. The comparable figures
401(k) Council of America (PSCA) president
in 1998.
for DB plans were 52 and 15 percent.1 7
David Wray. "To the extent that the return is
greater than the assumption, the employer's
The 1996 Retirement Confidence Survey,
contribution is reduced." Thus, if a DB plan
conducted by EBRI, Mathew Greenwald and
assumes a 7 percent rate of return to meet its
Associates, and the American Savings
benefit obligation, and the plan investments
Education Council, found that "61 percent
net 10.6 percent, the employer keeps the dif-
of workers reported that their employer
ference. In a DC plan with comparable
offered a retirement saving plan . . . that
returns, the employee would earn the full
allows pretax worker contributions to the
10.6 percent.
worker's own account. Three-quarters (74
Using 19831995 data from the Federal
percent) of workers who were offered a plan
reported making contributions to it."1 8
Reserve's Pension Provider Surveys and
Surveys of Consumer Finance, Dartmouth's
The U.S. Department of Labor's Pension
Andrew A. Samwick and Jonathan Skinner
and Welfare Benefits Administration esti-
recently computed the average and median
mates that 55 million workers are currently
pension benefits of workers in DB and DC
enrolled in private-sector DC programs. Such
plans held $2.2 trillion in assets in 1998.1 9
plans. "The workers covered only by DB
plans can expect an average of $10,533 in
Critics of the DC revolution predicted
retirement benefits annually if they continue
that the shift from defined benefits would
to work until age 65," they wrote. "If these
reduce employee security due to "leakage."
same workers with identical earnings histo-
Many workers, they warned, would cash in
ries are given randomly chosen DC plans,
their accounts when they changed jobs,
their expected pension benefits are $25,275.
endangering long-term savings. The phe-
6