On your first day as a FreeERISA employee, one of the things you learn is the difference between a defined benefit plan and a defined contribution plan. Since I've trained dozens of new employees over the past 10 years, I'd like to think I've gotten very good at explaining this.
One thing I've missed in my training, though, is really providing an impact of what the market looks like. So here's an unvarnished look that pits the two retirement heavyweights against one another.
Defined Benefit
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Responsible Party: The Plan Sponsor. When your employer says: "work here for 30 years, and you'll get 50 percent of your final salary when you retire," then it's up to that employer to make sure they keep enough money in the plan to make good on their promises, with the plan actuary playing referee.
2010 Average Assets: $22.4 million
2010 Average Active Participants: 227
Assets per Participant: $92,000
Defined Contribution
Responsible Party: You, the plan participant. You could have zero dollars or a million dollars saved up for retirement – it's really no sweat off the sponsor's back.
2010 Average Assets: $7.5 million
2010 Average Active Participants: 206
Assets per Participant: $34,000
The Title Fight
I'm a big fan of taking on personal responsibility, but the numbers above suggest that it seems like plan participants need to be coddled a bit more. Of course, most people will admit that it's a bit more complicated than that. Or maybe we need a PBGC for defined contribution plans, too. Who's paying?
In the end, though, I'm going to have to give the edge to defined contribution. Not only do they have the star power that comes with the 401(k), they also outnumber DB plans by about 30 to 1. That's like Mike Tyson fighting two hippopotami.
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