Shift from Pensions to 401(k)s: Examining the Reasons and Implications

Last updated Apr 6, 2025

The Shift from Defined Benefit Pension Plans to Defined Contribution 401(k) Plans

The Transition from Pensions to 401(k)s

Traditional pensions, also known as defined-benefit (DB) retirement plans, were once the norm in many companies. However, over the past few decades, there has been a noticeable shift towards 401(k) plans, or defined-contribution (DC) plans.

Workers’ Preference for Pension Plans

Despite the shift towards DC plans, some employees still prefer the security of a pension plan. For instance, Boeing workers requested the restoration of their DB plans during a 2024 strike, but were instead offered increased company contributions to their 401(k) plans.

Insights from Accredited Pension Administrator

To better understand the shift from pensions to 401(k) plans, we spoke with Mark Wilson, President of MILE Wealth Management and accredited pension administrator.

What are the Key Differences Between a DB Plan and a DC Plan?

According to Wilson, a DB plan guarantees a set retirement benefit defined by the company. In contrast, a DC plan, like a 401(k), only defines the contributions made into the plan, not the final payout.

Why are Companies Moving Away From DB Plans?

Wilson explains that the shift away from DB plans started around the late ’90s due to costs and liabilities. Companies bear 100% of the funding and liabilities in DB plans. If the investments don’t perform well, the company is still obligated to deliver the promised benefit.

By opting for DC plans, companies share or even eliminate their contribution and largely absolve themselves from investment performance risks. The final payout is determined by the performance of the investments chosen by the employee, not the employer.

Are Pensions Likely to Make a Comeback?

Wilson doesn’t foresee a major comeback for pensions due to their high costs and liabilities. He suggests that 401(k) plans are more suited to today’s workforce, where employees tend to switch jobs more frequently than in the past. In contrast, pensions are more beneficial for employees who stay with the same employer for a long time.