Defined Contribution Pensions: Plan Rules, Participant Choices, and the Path of Least Resistance
By James J. Choi, David Laibson, Brigitte C. Madrian & Andrew Metrick
Over the last 20 years, defined-contribution pension plans have gradually replaced defined benefit pension plans as the primary privately sponsored vehicle to provide retirement income. At year-end 2000, employers sponsored over 325,000 401(k) plans with more than 42 million active participants and $1.8 trillion in assets.1
The growth of 401(k)-type savings plans and the associated displacement of defined benefit plans have generated new concerns about the adequacy of employee savings. Defined contribution pension plans place the burden of ensuring adequate retirement savings square on the backs of individual employees. However, employers make many decisions
about the design of 401(k) plans that can either facilitate or hinder the employees’ retirement savings prospects. Although the government places some limits on how companies can structure their 401(k) plans, employers nonetheless have broad discretion in their design.