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How defined contribution plans and 401(k)s affect employer pension costs

Published online by Cambridge University Press:  11 May 2006

TERESA GHILARDUCCI
Affiliation:
University of Notre Dame
WEI SUN
Affiliation:
Institute for Latino Studies at the University of Notre Dame

Abstract

We investigate the pension choices made by over 700 firms between 1981 and 1998 when DC plans expanded and overtook DB plans. Their average pension contribution per employee dropped in real terms from $2,140 in 1981 to $1,404 in 1998. At the same time, the share of their pension contributions attributed to defined contribution plans was 23% in 1981 and increased to 68% in 1998. By analyzing pension plan data from the IRS Form 5500 and finances of the plan's sponsoring employer from COMPUSTAT with a fixed-effects ordinary least squares model and a simultaneous model, we find that a 10% increase in the use of defined contribution plans (including 401(k) plans) reduces employer pension costs per worker by 1.7–3.5%. This suggests firms use DCs and 401(k)s to lower pension costs. Lower administrative expenses may also explain the popularity of DC plans. Although measuring a firm's pension cost per worker may be a crude way to judge a firm's commitment to pensions, this study suggests that firms that provide both a traditional defined benefit and a defined contribution plan are the most committed because they spend the most on pensions. Further research, especially case studies, is vital to understand employers' commitment to employment-based pension plans.

Type
Research Article
Copyright
2006 Cambridge University Press

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Footnotes

We thank Peter Diamond, William Evans, David MacPherson, Michael Orszag, Leslie Papke, and Jack VanDerhei and two anonymous reviewers for their helpful comments. The Retirement Research Foundation, Chicago, Illinois provided financial support.