Risk Allocation in Retirement Plans: A Better Solution

The corporate world is reconsidering the cost-effectiveness of defined benefit pension plans while contemplating a change to defined contribution plans. This article begins by examining the three primary risks faced by sponsors of most DB pension plans-investment risk, interest rate risk, and longevity risk-and shows how shifting these risks to employees through a DC plan would affect both the corporation and the individual. Although DC plans clearly help companies manage risks, they provide at best an incomplete solution for individual participants. 2006 Morgan Stanley.