Living with Defined Contribution Pensions: Remaking Responsibility for Retirement - Review

Monthly Labor Review, Feb, 1999 by William J. Wiatrowski

Living with Defined Contribution Pensions: Remaking Responsibility for Retirement. Edited by Olivia S. Mitchell and Sylvester J. Schieber. Philadelphia, University of Pennsylvania Press, 1998, 299 pp.

Even before reading Living with Defined Contribution Pensions, I learned two things: First, the volume was going to go beyond the often-quoted statistics about shifts from defined benefit to defined contribution plans; and second, that this book offered a little something for everyone. The University of Pennsylvania Press whets the reader's appetite right on the book jacket: "Gone are the days when Johnny began working for Company A at age eighteen and retired forty-five years later with a gold watch and a defined benefit pension that the firm had been socking away since his arrival." The jacket concludes by indicating that the book is "for both the benefit specialist and the lay person seeking to become informed." The publisher is correct.

Living with Defined Contribution Pensions is a series of articles on defined contribution plans, taken from various perspectives. It is one of many volumes on the subject of retirement income to come out of The Wharton School's Pension Research Council, whose Executive Director, Olivia S. Mitchell, is also an editor of the volume. Professor Mitchell is no stranger to the Bureau of Labor Statistics and the pension statistics produced by the Bureau's compensation programs. She makes frequent use of these data in her writings, including this volume. Co-editor Sylvester J. Schieber is Vice-President of The Wyatt Company, a compensation consulting firm, and Director of the Research and Information Center in Washington.

The book begins with an overview chapter by the editors, designed to set the stage for what's to come. They use Department of Labor data to track increases in the number of defined contribution plans and participants, then proceed to analyze these increases. Flexibility in plan design is considered one reason for the move to defined contribution plans, and that flexibility is demonstrated using data from the Bureau's Employee Benefits Survey. The growth in provisions allowing greater investment options, withdrawal of funds, and options for final payments are all cited as examples of plan flexibility. They also use Employee Benefits Survey data on employer matching contributions to make the argument that employers are trying to encourage certain behavior, specifically savings.

As a point of contrast, the authors list concerns about defined contribution plans as well as advantages. These concerns include voluntary participation, which does lead to cases where employees don't participate, even when offered tax advantages and employer matching funds. In addition, poor information on investment options and the potential for loss of assets due to poor investment decisions are cited as concerns. The authors conclude that more education is needed and point to signs that employers are moving toward increasing their education efforts.

The remainder of the volume is divided into three parts. Part one, "The New Responsibility of Defined Contribution Plans," looks in detail at many of the issues the editors introduced in their opening chapter: why workers choose to participate or not; reasons behind contribution amounts and investment choices; and investment education initiatives. Notable in this section is B. Douglas Bernheim's chapter, "Financial Literacy, Education, and Retirement Savings," in which he uses the results of a 1993 Merrill Lynch study of economic knowledge to question the financial decisionmaking ability of many defined contribution plan participants. Consider the following data reported by the survey:

* nearly two-thirds of those surveyed could not even guess at the level of the Dow Jones Industrial Average;

* more than 90 percent answered questions on the unemployment and inflation rates, but frequently overestimated both statistics.

Similar results were found when individuals were questioned about compound interest rates and differences in earnings between mutual funds and bank certificates of deposit.

Bernheim performs some sophisticated math to "score" individuals based on their economic knowledge, which he then uses to compare different groups. His results indicate that males score higher than females, whites score higher than blacks (although the author cautions about a small sample of blacks); and scores rise with education and earnings levels. In contrast, there was no variation by age. The author then uses these data to consider the relationship between economic knowledge and retirement savings behavior. Bernheim's data show a clear relationship between extent of retirement savings and economic knowledge, although the author ponders: "These results do not, however, establish that individuals save more in response to the acquisition of economic knowledge. They are equally consistent with the possibility that individuals acquire economic knowledge after accumulating significant wealth, in order to manage their resources with greater competence." The author then looks at new efforts undertaken by employers to provide more investment education for their workers.