Defined Benefit Plans vs. Defined Contribution Plans: An Evaluation Framework Using Random Returns

19 Pages Posted: 18 Apr 2017

See all articles by V. Sivarama Krishnan

V. Sivarama Krishnan

University of Central Oklahoma - College of Business

Julie Cumbie

University of Central Oklahoma

Randal Ice

University of Central Oklahoma

Date Written: April 17, 2017

Abstract

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

Krishnan, V. Sivarama and Cumbie, Julie and Ice, Randal, Defined Benefit Plans vs. Defined Contribution Plans: An Evaluation Framework Using Random Returns (April 17, 2017). Available at SSRN: https://ssrn.com/abstract=2954196 or http://dx.doi.org/10.2139/ssrn.2954196

V. Sivarama Krishnan (Contact Author)

University of Central Oklahoma - College of Business ( email )

100 North University Drive
Edmond, OK 73034
United States

Julie Cumbie

University of Central Oklahoma ( email )

100 North University Drive
Edmond, OK 73034
United States

Randal Ice

University of Central Oklahoma ( email )

100 North University Drive
Edmond, OK 73034
United States

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