Comparing Costs and Risks of Retirement Plans for Sponsors
Mark J. Warshawsky
Social Security Advisory Board; Towers Watson
April 12, 2012
This stochastic simulation analysis compares funding costs and volatilities for private sponsors of traditional defined benefit (DB), pension equity (PE), cash balance (CB), and defined contribution (DC) retirement plans. Plan provisions of equivalent benefit generosity in the different plan types are determined. The modeling includes current funding requirements and practices as well as a comprehensive set of uncertainties in asset and labor markets. The results show that costs and risks for sponsors vary significantly with plan types, investment and funding strategies, and participant demographics. The hybrid PE and CB plans exhibit characteristics of cost efficiency, as in the DB plan, and risk reduction, as in the DC plan, for plan sponsors under conventional investment strategies. These features are more saliently observed in the CB plan but it is also more difficult to implement effective asset-liability management strategies for it.
Number of Pages in PDF File: 24
Keywords: defined benefit, defined contribution, pension equity, cash balance
JEL Classification: J32, J26, G32, G17working papers series
Date posted: June 18, 2010 ; Last revised: September 22, 2012
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