The Shift to Defined Contribution Plans
While many people are unfamiliar with the term Employer-Sponsored Retirement Plan, it is likely that most of us are familiar with the term defined contribution (DC) plan, more familiarly known as 401(k) or 403(b). In the early years of DC plans, many employers provided them as a supplement to traditional defined benefit (DB) plans. Only a limited number of employers offered DC plans as the only option to help employees achieve their savings and retirement goals. However, over the past 30 years, the trend in employer-sponsored retirement plans has drastically changed. As the chart below illustrates, the change from the traditional DB plan to the DC plan has been dramatic.
The Retirement Plan Participant Savings Shortfall
For the employer sponsoring the retirement plan (Plan Sponsor), the main reason for the shift from DB to DC plans was to reduce the long-term liability and financial commitment of the sponsoring firms. While the shift from traditional DB plans has provided the intended reduction in long-term financial liability to the employer, it has increased the retirement and savings responsibility on the individual employee (Plan Participant).