Potential implications of mandating choice in corporate defined benefit plans

Abstract

The evolution of hybrid conversions has prompted a number of high-profile legal challenges. In response, policymakers have attempted to force companies transitioning from a traditional DB to a hybrid plan to offer all workers the open-ended choice of remaining in the old DB plan, versus switching to the new hybrid plan. This paper evaluates ‘winners’ and ‘losers’ under these plan conversions and estimates the cost to plan sponsors of such a mandate. We find that mandating choice could increase plan sponsors' pension expenses above their current cost for traditional defined benefit plans. In the end, rising costs of pensions could endanger plan sponsorship altogether. Policymakers seeking to mandate pension choice should take into account these possible undesirable outcomes of such a law.

The Impact of Scale, Complexity, and Service Quality on the Administrative Costs of Pension Funds: A Cross‐Country Comparison

“…On the other hand, costs are higher in the latter instance if expressed as a percentage of pension fund assets. Nonetheless, contrary to economic theory and observations elsewhere (Mitchell and Mulvey, 2004, p. 350), the data suggest that there is little difference in administrative costs for pension funds offering more than one type of plan. The complexity score decreases when several plans are considered offered, probably indicating that DB plans are considered complicated more than DC schemes.…”

Valuation of liabilities in hybrid pension plans

“…Some view hybrid plans as attempts by employers to reduce pension costs. Academic evidence, however, suggests that cost reduction is not the main rationale behind conversion (see Coronado and Copeland, 2004;Mitchell and Mulvey, 2004). Others perceive hybrid plans as age discriminatory, because older workers have fewer years to compound interest credits than younger ones.…”

“…Others perceive hybrid plans as age discriminatory, because older workers have fewer years to compound interest credits than younger ones. Mitchell and Mulvey (2004) interestingly point out that this concern is typically not raised in a DC context, even though the benefit accrual patterns in a DC plan are almost identical to those in hybrid plans. Moreover, most court cases have rejected claims of inherent age discrimination, and in the Pension Protection Act (PPA), the US Congress declared that cash balance plans and pension equity plans that satisfy certain safe harbour requirements will not be viewed as age discriminatory (Hill et al, 2010).…”

Valuation of Liabilities in Hybrid Pension Plans

“…Some view hybrid plans as attempts by employers to reduce pension costs. Academic evidence, however, suggests that cost reduction is not the main rationale behind conversion (see Coronado andCopeland, 2004, andMitchell andMulvey, 2004). Others perceive hybrid plans as age discriminatory, because older workers have fewer years to compound interest credits than younger ones.…”

“…Others perceive hybrid plans as age discriminatory, because older workers have fewer years to compound interest credits than younger ones. Mitchell and Mulvey (2004) interestingly point out that this concern is typically not raised in a DC context, even though the benefit accrual patterns in a DC plan are almost identical to those in hybrid plans. Moreover, most court cases have rejected claims of inherent age discrimination, and in the Pension Protection Act (PPA) U.S. Congress declared that cash balance plans and pension equity plans that satisfy certain safe-harbor requirements will not be viewed as age discriminatory (Hill, Pang, and Warshawsky, 2010).…”