Comparing Costs and Risks of Retirement Plans for Sponsors

23 Pages Posted: 16 Nov 2013

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: Fall 2013

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.

Suggested Citation

Pang, Gaobo and Warshawsky, Mark J., Comparing Costs and Risks of Retirement Plans for Sponsors (Fall 2013). Risk Management and Insurance Review, Vol. 16, Issue 2, pp. 195-217, 2013, Available at SSRN: https://ssrn.com/abstract=2355581 or http://dx.doi.org/10.1111/rmir.12010

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

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