Cost of "Free" Choice

This Goldman Sachs graph illustrates the explosive growth of movement from Defined Benefit plans to Defined Contribution plans.

In my first post (IBM Freezes Pension Plan), I commented that employees have never understood the tremendous benefits that Defined Benefit plans provide. Just as a teenager underestimates the benefits of living at home, so too do employees underestimate their Defined Benefit plan. I would guess it to be a factor of three.

And just as parents are financially relieved to see these freedom-seeking teenagers go off on their own, so too are companies financially relieved to see employees get control of their money by moving from Defined Benefit plans to 401(k) Defined Contribution plans.

This movement illustrates a powerful force not accounted for in economic theories describing "rational" participants. "Freedom" is a powerful elixir. Individuals would rather control their own outcome to suit their own desires than take a prescribed outcome with generally higher benefits. Recently, Alan Greenspan himself had to intercede as Americans were clamoring to use their own retirement plans rather than the benefits of the Social Security system.

Another fascinating chapter in the story of this principle is about to shape the healthcare world as participants move towards the Consumer-Directed Health Plan approach.