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Hybrids and Other Alternatives to the Traditional Pension

This PPI research report by Sandy Mackenzie finds that the diminished role of traditional pensions and the dominance of 401(k) plans threaten the retirement security of older Americans. The 401(k) plan encourages improvident behavior by leaving the choice of contribution rate to members, and it provides neither protection from investment risk nor longevity insurance. Alternative pension arrangements can mitigate the 401(k) plan’s shortcomings.

Hybrids like the cash balance plan fix the contribution rate and assign investment risk to plan sponsors, although they provide no longevity insurance. Two relatively new financial products, add-ons to 401(k) plans—one with a minimum guarantee and one that annuitizes contributions as they occur—give 401(k) plans some of the features of traditional pensions and do provide some longevity insurance. Measures to reduce unnecessary obstacles to annuitization of retirement plans would also help compensate for the decline in the availability of longevity insurance.