Comparing Costs and Risks of Retirement Plans for Sponsors

24 Pages Posted: 18 Jun 2010 Last revised: 22 Sep 2012

See all articles by Gaobo Pang

Gaobo Pang

Mark J. Warshawsky

Towers Watson; Mercatus Center at George Mason University

Multiple version iconThere are 2 versions of this paper

Date Written: April 12, 2012

Abstract

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.

Keywords: defined benefit, defined contribution, pension equity, cash balance

JEL Classification: J32, J26, G32, G17

Suggested Citation

Pang, Gaobo and Warshawsky, Mark J., Comparing Costs and Risks of Retirement Plans for Sponsors (April 12, 2012). Available at SSRN: https://ssrn.com/abstract=1626826 or http://dx.doi.org/10.2139/ssrn.1626826

Mark J. Warshawsky

Towers Watson ( email )

Arlington, VA
United States

Mercatus Center at George Mason University

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

No contact information is available for Gaobo Pang

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