Creating Secure Retirement Solutions for Employers and Employees

In this article, we examine the history of the DB to DC transition, and explore how the benefits of each plan might combine to create a secure retirement solution for employers and employees alike.

In 1980, 46% of Americans working in the private sector participated in a defined benefit (DB) pension plan. Today, that number has reduced to 11%. The shift from DB pension plans to defined contribution (DC) plans is no secret. DB plans became associated with high costs and volatility, leading employers to shift to DC savings programs.

However, those programs are only working for some Americans. In this article, we examine the history of the DB to DC transition, and examine how the benefits of each plan might combine to create a secure retirement solution for employers and employees alike.

What is a Secure Retirement Solution?

A secure retirement solution delivers better benefits to employees while remaining sustainable for employers. Security comes from meeting the needs of both parties. At October Three, we define secure retirement solutions based on our four pillars of a modern retirement program:

  • Efficiency: Does the plan provide a flexible, transparent, and reliable retirement solution?

  • Engagement: Are the benefits of the plan easy to communicate to the organization?

  • Workforce Management: Does the plan enhance talent acquisition and retention by offering modern, comprehensive benefits?

  • Financial Risk Management: Does the plan provide predictable expenses and long‑term sustainability for the employer.

The Shift from Defined Benefit to Defined Contribution

For decades, pension plans were built around the promise of a lifetime benefit calculated using a formula. They were poorly understood and opaque, resulting in volatile financial impacts for the plan sponsor. Still, they provided participants with stable, predictable lifetime income security while requiring very little involvement. At the same time, the costs are untethered and can fluctuate as investment returns, interest rates, and other vital factors change.

As concern about the financial impacts of pension plans pushed employers to demand an alternative, the pension and corporate worlds decided that the answer was to reverse the model entirely. Instead of promising a benefit, the idea was to provide a fixed contribution amount, making the value transparent and dependent on participant actions while completely untethering the benefit side. The benefit would no longer be paid as a pension but simply as a single lump sum value of the accumulated contributions.

Rather than trying to manage the fluctuations or the risks inherent in a long-term pension promise, the promise was simply eliminated, resulting in fixed costs but with outcomes that are unpredictable and unsuited to supporting people's need for lifetime income. The most common of these plans in the U.S. are named for the Internal Revenue Code section that defines them, section 401(k).

The Strengths of Both Plans

The strange thing about the shift is that some aspects of DB programs were very successful – particularly their ability to deliver high levels of pooled invested returns and efficiently convert assets into guaranteed lifetime income without resorting to expensive insurance products. Similarly, some features of defined contribution plans work very well – the clear line of sight to the value being provided, fixed employer costs, portability and flexibility in retirement.

Each plan type is well suited to support specific aspects of retirement and poorly suited to others. But the discussion about pension design has devolved into DB or DC dichotomy, with no room for anything in between.

Combining the Benefits of DB and DC

Partially due to recent legislative fixes in SECURE 2.0, we see growing interest in a model that takes advantage of the best features of each type of pension plan to produce something new - Market-Based Cash Balance plans (MBCBs). These plans effectively blend the best of both worlds to deliver better outcomes for employers and employees.

What Is a Market-Based Cash Balance Plan?

MBCBs are registered as defined benefit plans. Participants accumulate individual account balances based on employer and sometimes their own participating contributions. These accounts grow based on the investment returns of the underlying assets similar to DC plans, but those assets are professionally overseen and invested collectively, more like DB plans typically producing higher long-term returns.

As members approach retirement, employers can incent loyalty by providing additional value at critical points in an individual's employment. At retirement, these plans pay their benefits as a guaranteed lifetime income from within the plan. They take advantage of defined benefit plans' greatest strength – the ability to cost-effectively convert assets into guaranteed lifetime income by leveraging asset and risk pooling rather than resorting to expensive insurance products. In addition, they offer participants the flexibility to split their benefits, so that some are paid as efficient, guaranteed lifetime income. At the same time, some are retained to be spent flexibly as needed.

It should be noted that MBCBs are distinct from their less efficient cousins, traditional cash balance plans, which credit a significantly lower fixed or bond-yield-based return on accumulated assets. For more information, feel free to read our complete guide on Market-Based Cash Balance Plans.

Looking for a Secure Retirement Solution for Your Organization?

O3 PRIME unlocks the untapped potential found in your current retirement program, creating a sustainable solution that works better for everyone involved. Designed to meet the needs of both employers and employees, it balances income security and flexibility without higher costs. Modernize your approach and discover how O3 PRIME could work for your company. Schedule a complimentary, 30-minute personalized consultation today.