Reference no: EM133613404

Question: In your grandparents' generation, workers often stayed with one firm for the majority of their career and companies typically offered workers a Defined Benefit (DB) pension plan. With a DB plan, the employer invests money each month in a well-diversified set of investments. For the employee, there is a formula for what they will receive in monthly benefit once they retire. That amount is typically a function of years worked, the highest three consecutive annual salaries, and age. The beauty of a DB plan is that the company assumes responsibility for both investment risk and longevity risk. If investment returns are lower than expected, the company needs to invest more money into its DB plan. Similarly, if retirees live longer than expected, the company needs to invest more. All of this works well if the company is healthy. However, if the company suffers from competition or can't keep up with technological change, then its ability to keep its end of the DB bargain is compromised. In a worst case, a company goes bankrupt and current employees as well as retirees can no longer count on the promised DB retirement formula.