Defined Benefit Plans vs. Defined Contribution Plans: An Evaluation Framework Using Random Returns
19 Pages Posted: 18 Apr 2017
Date Written: April 17, 2017
This paper analyzes a tentative defined contribution plan, and compares it to the extant defined benefit plan. The analysis uses a general framework with different employee service assumptions and random investment returns to generate distributions for defined contribution plan accumulations and compare these with present values of the defined benefit plan. The results indicate no clear dominance for one structure over the other. Employees, in general, should find it beneficial to be offered the choice of both structures and be able to choose one or the other depending on one’s expected longevity with the employer and personal risk tolerance.
Keywords: Defined benefit; Defined contribution; Retirement; Pension plans; Random returns
JEL Classification: G17; H24; H75; J32; J33
Suggested Citation: Suggested Citation