Defined Benefit Plan Freezes: Who's Affected, How Much, and Replacing Lost Accruals

Abstract:     
This paper quantifies how workers are likely to be affected by pension freezes, and how much they would have to save in a 401(k) plan - whether provided by their employer and/or saved by themselves - to offset the loss of accrued benefits from the pension freeze. The analysis notes that how an individual worker might be affected by a pension freeze varies widely, based on the unique nature of each pension plan and the terms of each plan that is frozen; the variation in workers' age, and tenure; and future investment results. The analysis presents its findings in terms of additional compensation (in a 401(k) plan, whether provided by an employer or worker) needed to cover the accruals lost to a pension freeze. In some cases, the pension plan sponsor offsets the pension freeze by increasing its match in the workers' 401(k) plan, but each case is different, and in some cases the lost pension benefit is not replaced.

Keywords: Defined benefit plans, Employment-based benefits, Pension plan assets, Pension plan contributions, Pension plan freezes, Retirement income, Savings

JEL Classifications: D91, J33

Accepted Paper Series