Building a Better Pension Plan

Albert B. Crenshaw [Business, Jan. 29] lamented the demise of defined-benefit pension plans and proposed laws to force all employers to adopt this bad idea.

A fundamental problem with defined-benefit plans, which promise a certain annual payout in retirement based on years of service, is that they generally assume long-term employment with the same company, culminating in retirement. In the private sector that model is increasingly rare. Difficulties flow from this mismatch, including the difficulty in projecting whether funding is adequate for the promised benefit, keeping adequate records for decades after employees leave and the inability to tailor investments to individual risk preferences.

A better alternative is defined-contribution plans, such as 401(k) plans. These plans are portable and more suitable for people who will have multiple employers over their working lives. They are funded on a pay-as-you-go basis (usually by employer and employee contributions), the accumulations are vested and visible, and the investments are managed by organizations separate from the employer.

It is possible to outlive your money under a defined-contribution plan, but that risk can be avoided by purchasing an annuity during retirement. In contrast, under a defined-benefit plan, it is increasingly likely that a person will outlive the former employer or the pension plan. That risk can only partly be mitigated by the government's insurance plan, which has limited payouts, is close to insolvency and is subject to revision.

EDWARD PORTNER

Silver Spring