Why do employers prefer defined contribution retirement plans?

Since the mid-1980s, there has been a trend away from defined benefit pensions toward less costly defined contribution plans, especially 401(k)s. A major reason is that defined contribution plans are not linked to a specific benefit formula based on age and years of service. Workers simply receive the amount that they have been able to save with employer matching (if any), plus or minus investment earnings. Thus, the risk of workers’ longevity is not something that employers offering a defined contribution plan need to worry about.

In addition, defined contribution plan funding requirements (e.g., the dollar amount of employer matching) are generally lower than the funding required for defined benefit plans. Employer matching can also be suspended by employers, if desired (e.g., during years with declining profits and/or economic uncertainty).

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