Why traditional pensions are now so rare
Employers prefer 401(k) types of retirement plans, rather than the traditional pensions because it shifts the risks from the company to the workers. Under those pension plans the company agrees to make contributions into the plans, and those contributions are used to buy assets such as stocks and bonds. The contributions and the return on those assets are used to pay the benefits that are promised to the retirees. If returns are good, a company might not need to make additional contributions. But if plan assets lose value, the employer needs to come up with the additional contribution to pay the promised pension benefit.
But in plans such as a 401(k), those contributions, and the pay-outs, and the risk of the market, are entirely on the individual. If the value of retirement savings and investments in a 401(k) fall in value, the worker is the one who loses out, even if they’ve made steady contributions throughout their working life. Also, a retiree can outlive their assets in a defined contribution retirement account, whereas under a defined benefit plan, the plan has an obligation to pay only as long as the recipient, or a survivor in some cases, keeps living.
One other advantage of traditional pension plans in the private sector is that if the employer goes bankrupt and the plan doesn’t have the assets to pay benefits, the benefits are guaranteed by the Pension Benefit Guaranty Corp. The PBGC is a premium-supported agency similar to the Federal Deposit Insurance Corp., which backs bank deposits for customers.