Abstract
Defined benefit (DB) plans can provide guaranteed income for life; however, there is no potential for wealth accumulation. Moreover, most DB plans offer little or no death benefit. But defined contribution (DC) plans offer the potential for wealth accumulation; participants might retire quite comfortably and leave a generous bequest for their heirs. However, since the participant bears all of the investment and longevity risk in a DC plan, she also faces the possibility of outliving her accumulated wealth. In this article, we examine hybrids (combinations) of DB and DC plans. We simulate investment returns and the time of death, and we measure the hybrid plans’ performance relative to income and bequest goals. Through this analysis, we quantify the trade-offs between the income security of a DB plan and the potential for wealth accumulation in a DC plan, addressing the question, “How much income security will I forfeit by focusing more on wealth accumulation?” and vice versa. In addition, we suggest allocations between DB and DC that perform particularly well relative to given metrics.
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