Risk Allocation in Retirement Plans: A Better Solution

Abstract

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.

Financial Economics Principles Applied to Public Pension Plans

“…Employees, however, may be offered the opportunity to exchange their fixed denominated benefits for variable unit benefits, and plan assets are invested to reflect these choices. Such a plan has been dubbed a Retirement Shares Plan (Fuerst, 2006).…”

United States Pension Benefit Plan Design Innovation: Labor Unions as Agents of Change

“…At the normal retirement age, the employee receives an annual retirement income based on the number of retirement shares accumulated over his working life. During retirement, annual income also varies with investment performance (Fuerst 2006). The RSP risk sharing approach became a model for the UFCW benefit design project.…”