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Why are Firms in the United States Abandoning Defined Benefit Plans?

9 Pages Posted: 30 Oct 2009 Last revised: 17 Feb 2011

Joshua D. Rauh

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Irina Stefanescu

Federal Reserve Board, Washington D.C.

Date Written: October 13, 2009

Abstract

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.

Keywords: Benefit Accruals, Cost Savings, Defined Benefit Plan, Pension Conversion, Pension Freeze

Suggested Citation

Rauh, Joshua D. and Stefanescu, Irina, Why are Firms in the United States Abandoning Defined Benefit Plans? (October 13, 2009). Rotman International Journal of Pension Management, Vol. 2, No. 2, Fall 2009. Available at SSRN: https://ssrn.com/abstract=1493324

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Irina Stefanescu

Federal Reserve Board, Washington D.C. ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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