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Potential implications of mandating choice in corporate defined benefit plans

Published online by Cambridge University Press:  21 December 2004

OLIVIA S. MITCHELL
Affiliation:
The Wharton School, University of Pennsylvania, 3620 Locust Walk, 3000 SH-DH Philadelphia, PA 19104-6302 (e-mail: mitchelo@wharton.upenn.edu)
JANEMARIE MULVEY
Affiliation:
Watson Wyatt Worldwide, 1717 H. Street N.W. Washington, DC 20006-3900 (e-mail: janemarie.mulvey@watsonwyatt.com)

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.

Type
Articles
Copyright
© 2004 Cambridge University Press

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Footnotes

Support for this research was provided by the Watson Wyatt Worldwide and the Pension Research Council of the Wharton School at the University of Pennsylvania. Research assistance was provided by Brendan McFarland and Gifford Sommerkamp. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated. © 2004 Mitchell and Mulvey. All Rights Reserved.