Possible Implications of Mandating Choice in Corporate Defined Benefit Plans

Olivia S. Mitchell and Janemarie Mulvey

Abstract — Defined benefit (DB) plans have been applauded as the mainstay of the US pension system for many years, but increasingly such plans have been replaced with defined contribution (DC) pensions. One exception to the downward DB spiral has been the development of “hybrid” plans. Technically, these are pensions where the benefit accrual is communicated as a lump sum and not in the form of an annuity as is done with traditional pensions. In the transition to this new plan structure, some employees at some firms have contended that they would have accumulated retirement benefits more quickly under the old DB plan — assuming they remained employed — than under the new hybrid design. In response, some legislators have attempted to force companies transitioning from a traditional DB to a hybrid plan to offer all workers the open-ended choice of remaining in the old DB plan, versus switching to the new hybrid plan. In this paper we explore some of the possible consequences of mandating plan choice in this fashion. We conclude that regulators seeking to mandate pension choice should take into account the potential undesirable outcomes of such a law.