NCPA - National Center for Policy Analysis

Defined Benefit Retirement Plans Distort Stock Prices

November 26, 2001

Defined benefit pension plans helped cause the stock market bubble of recent years, a new study suggests. And they may be depressing corporate profits and thus stock values now.

As the stock market rose, it inflated the value of traditional defined benefit pension plans, which hold a company's stock to pay set monthly retirement benefits.

Corporations withdrew the plans' excess assets -- which are treated as additional profits -- and the improved bottom line raised their stock values even higher.

But when stock prices decline, corporations have to make additional deposits of stock to their defined benefit plans -- which in effect lowers profits and reduces stock values.

  • According to Bear, Stearns, IBM took $1.24 billion out of its pension fund last year alone, accounting for 11 percent of the firm's operating income.
  • DuPont took out $469 million, 10 percent of its operating income.
  • According to the Federal Reserve, there have been substantial net withdrawals from defined benefit plans every year since 1995 -- $36 billion out last year alone.
  • By contrast, workers and employers added $55 billion to defined contribution (DC) retirement plans, such as 401(k)s.

Fortunately, a majority of workers are now covered by DC plans.

  • According to the Department of Labor, the number of workers covered primarily by a DC plan doubled between 1986 and 1996, from 12.7 million to 24.2 million.
  • Over the same period, the number covered primarily by a defined benefit plan fell from 28.5 million to 23.3 million.

With defined contribution plans, workers gain when stock prices rise and investors of all kinds benefit because workers saving for retirement don't take their profits prematurely, and don't distort corporate profits. The continuing shift from defined benefit plans to defined contribution plans therefore benefits everyone.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 26, 2001.


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