Why are Firms in the United States Abandoning Defined Benefit Plans?
Joshua D. Rauh
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
Federal Reserve Board, Washington D.C.
October 13, 2009
Rotman International Journal of Pension Management, Vol. 2, No. 2, Fall 2009
This article investigates why many publicly listed corporations in the United States reduced or terminated the availability of defined benefit plans during 1998-2007. Firms limited benefit accruals in a variety of ways, including standard and distress terminations, freezes, and conversions to cash balance plans. While the decision to change the pension plan is related to the financial health of the sponsor, total benefit costs do not immediately decline when pension plans are frozen, as contributions to defined contribution plans increase almost immediately. However, we find that ‘freeze firms’ experience significant reductions in their projected benefit obligations of their defined benefit plans. This implies that most of the cost savings are generated from avoiding defined benefit plan accruals relating to future salary increases for current plan participants.
Number of Pages in PDF File: 9
Keywords: Benefit Accruals, Cost Savings, Defined Benefit Plan, Pension Conversion, Pension Freeze
Date posted: October 30, 2009 ; Last revised: February 17, 2011