Hybrid Retirement Plans: Acceptable Compromises and Long-Term Solutions

Abstract

Americans are rapidly losing their pensions — replaced by savings plans disguised as retirement plans. Many sponsors view defined contribution (DC) plans as the best option for retaining some of the features of a pension plan without bearing all of the costs and risks of DB. This paper explores how hybrid plans offer a more flexible approach to retirement plans by bringing together the best features of both DB and DC. This paper explores how: • Hybrid plans offer a flexible third option — taking advantage of the best features of DB and DC plans, including: • A shared-risk approach • Stable cost • Guaranteed lifetime benefits • Professional management • Hybrid plans — and how they balance sponsor and beneficiary responsibilities — differ materially and hence provide flexibility. • A hybrid plan can limit participant biases and may help increase contributions and reduce investment risk. • Hybrid plans use professional management that can look beyond short-term volatility to focus on maximizing return potential (e.g., greater exposure to equities and higher yielding bonds). • Hybrids pool individual participants’ assets, helping counter longevity risk.