The regulatory landscape for corporate pensions in the U.S. has undergone rapid change in the past six months. Congress passed pension reform legislation that will impose more restrictive funding requirements for defined benefit (DB) pension plans. The FASB adopted a rule that will require companies to list their pension assets and liabilities on the balance sheet. And a court ruling will make it easier for companies to convert from a DB plan to a cash balance plan.

The consequence of this regulatory activity is a potential shift away from DB pension plans toward either a defined contribution (DC) plan or to some type of hybrid plan. Two articles from the Journal’s Winter 2006 issue examined some of the issues involved with each alternative and suggested key properties that any optimal plan should have.

How Behavioral Finance Can Inform Retirement Plan Design offers valuable insights into why, in DC plans, employees save too little, manage their investments poorly, and draw down their assets to quickly in retirement. Building on these insights, a better DC plan is proposed that includes automatic enrollment, scheduled annual savings increases, and default investment options that represent optimal portfolio choices.

All pension plan designs allocate three primary risks—investment risk, interest rate risk, and longevity risk—between the plan sponsor and the employees. Risk Allocation in Retirement Plans: A Better Solution describes a hybrid pension design, Retirement Shares Plan (RSP), which combines many of the best features of DB and DC plans by allocating investment and interest rate risk to the employees, but keeps the longevity risk with the sponsor.

To purchase each article in its entirety, or to subscribe to the Journal of Applied Corporate Finance, click here or on the titles above.