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The corporate world is reconsidering the cost-effectiveness of defined benefit pension plans while contemplating a change to defined contribution plans. This article begins by examining the three primary risks faced by sponsors of most DB pension plans-investment risk, interest rate risk, and longevity risk-and shows how shifting these risks to employees through a DC plan would affect both the corporation and the individual. Although DC plans clearly help companies manage risks, they provide at best an incomplete solution for individual participants. 2006 Morgan Stanley.

Investment risk and longevity risk are borne by the plan sponsor in a defined benefit (DB) plan or by the plan participant in a defined contribution (DC) plan. By contrast, our proposed Retirement Shares Plan (RSP) allocates the longevity risk to the plan sponsor and investment risk to the plan participant. The RSP allows the participant sufficient control over the investment risk to tailor that risk to his specific circumstances. This allocation of risk provides predictable and stable cost to the plan sponsor with little chance of unfunded liabilities. The retiree receives lifetime income and potential inflation protection.