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Defined-Contribution Pension Plans

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For 25 years, employers increasingly have turned to defined-contribution (DC) pension plans, partly because they are cheaper to administer and reduce their risks of funding pension coverage. But DC plans benefit employees as well. In nominal terms they provide a less stable replacement of pre-retirement earnings than do defined-benefit (DB) plans, but they offer more flexible funding methods— for example, they can protect against real-income erosion through inflation-hedged portfolios. Because DC plans are fully funded and have simpler benefit-payout rules, they make annual pension wealth accrual more transparent and predictable than do DB plans. In addition, DC plans can more easily allocate assets according to workers’ desires to make bequests and buy annuities.

Suggested citation: "Defined-Contribution Pension Plans," Federal Reserve Bank of Cleveland, Economic Trends, no. 01-01, pp. 15, 01.01.2001.

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