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Defined Contribution Plans: Version 2.0

Pioneers overhaul their 401 (k) plans to net employees more money for retirement and perhaps guaranteed lifetime income like pensions.

By Beth Karlin | Updated on September 01, 2008

When Verizon Communications created a defined contribution (DC) plan for non-union employees, it followed conventional wisdom and offered an optional, do-it-yourself 401(k) replete with a wide choice of retail mutual funds. After all, since their inception in the 1980s, DC plans have been considered a convenient, tax-free savings vehicle that shifted risk from the employer to the employee. They were not meant to be the primary replacement for defined benefit plans (DB) payouts and other retirement income. That was then.

Now, in the face of regulatory changes, diminishing personal savings rates, soaring credit card debt, massive foreclosures, Social Security concerns and soaring healthcare costs, most traditional DC offerings are showing their age. “They outgrew their old skin,” says Robert Collie, investment strategy director for Russell Investments. The first step, he says, is to determine the best features of DB, or pensions, that are missing from 401(k)s and then figure out ways to reinterpret and repackage DC plans. “It’s important to start thinking of all retirement plans as pension plans, not just for the wealthy but for the masses,” explains Collie.

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