The shift in retirement plans over the past decade has been __:A. From IRAs to defined benefit plansB. From defined benefit plans to 401k plansC. From retirement plans to no retirement plans offeredD. From 401k plans to Keogh plans.
The correct answer and explanation is:
The correct answer is:
B. From defined benefit plans to 401(k) plans
Explanation:
Over the past decade, there has been a significant shift in the landscape of retirement planning in the United States and many other countries, moving away from traditional defined benefit (DB) plans towards defined contribution (DC) plans, particularly 401(k) plans.
Defined Benefit Plans are employer-sponsored retirement plans where the employer guarantees a specific monthly benefit upon retirement, often based on salary and years of service. The employer assumes the investment risk and is responsible for funding the plan. These plans used to be the norm in many industries, offering retirees a predictable and stable income.
However, over the last decade or more, companies have increasingly moved away from DB plans due to the high cost and financial risks they pose to employers. The volatility of investment markets, longer life expectancies, and the requirement for companies to maintain large reserves to cover future payouts make DB plans expensive and difficult to manage.
In contrast, 401(k) plans are a type of defined contribution plan where employees contribute a portion of their salary into an individual account, often with employer matching contributions. The retirement income depends on the contributions made and the investment performance of those contributions. The risk is shifted to employees, as their retirement income depends on how well their investments perform.
The rise of 401(k) plans has been driven by their flexibility, portability (employees can take their 401(k) accounts with them when they change jobs), and lower financial risk for employers. Employees now have more control over their retirement savings but also bear the risk of market fluctuations and the responsibility to plan and save adequately.
Other options such as IRAs (Individual Retirement Accounts) have always been available but haven’t replaced employer-sponsored plans at a large scale. Keogh plans mainly serve self-employed individuals or small businesses and have not surpassed 401(k)s in popularity.
In summary, the shift from defined benefit plans to 401(k) plans reflects broader changes in the economy, labor market, and financial risk management, fundamentally altering how retirement savings are accumulated and managed today.