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Retirement Savings Policy by Michael P. Barry

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Chapter 13 The Rise of the 401(k)

The charts with which we began Part I tell the story of a shift from defined benefit to defined contribution plans as “the way American workers save for retirement.” That shift can largely be explained by the greater transparency of the DC benefit, in two respects. For the employer, the DC design makes the DB “valuation issue” (which we discussed at length in Chapter 3) go away. With respect to DC benefits, the employer knows precisely the cost of the DC “compensation” it is providing its employees—a radical advance in transparency over DB plans.

For the participant, DC plans provide a flatter and more intuitive benefit that does not depend on the expectations-payoff for older, full career employees that DB plans ...

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