Why Are Companies Freezing Their Pensions?
The shift in pension coverage from defined benefit plans to 401(k)s has been underway since 1981. This shift was the result of three developments: 1) the addition of 401(k) provisions to existing thrift and profit sharing plans; 2) a surge of new 401(k) plans in the 1980s; and 3) the virtual halt in the formation of new defined benefit plans. Shutting down a defined benefit plan and replacing it with a 401(k) plan was an extremely rare event, particularly among large sponsors. Today, however, large healthy companies are closing their defined benefit plans, and the pathway to that closure is a ‘freeze.’ This paper examines why companies are freezing their plans, what factors affect their decision, and what the results mean for the future of defined benefit plans.
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