An Expert Explains Why Companies Have Moved Away From Pensions and Toward 401ks

Pensions have almost disappeared from most companies; instead, many companies now utilize 401(k)s. But it hasn’t always been that way.

As a tactic to retain workers, companies often provide their employees with a defined-benefit (DB) retirement plan (known as a pension) or a defined-contribution (DC) plan, the most common of which is a 401(k).

Many companies have moved away from pension plans in lieu of DC plans over the past 30 years. In 1989, the majority of workers were under a DB plan. Yet, in 2022, 83% of workers in a DC plan vastly outnumbered a fifth of workers in a DB plan, according to research from the Federal Reserve Bank of St. Louis released this week.

Although many companies have moved away from DB retirement plans, some workers still want a pension. Boeing union members asked for the restoration of their DB plans during a strike that ended in November 2024. However, Boeing workers were not granted the pension request and instead received an increase in company matching contributions for 401(k) plans.

Investopedia asked Mark Wilson, president of MILE Wealth Management and accredited pension administrator, about the difference between retirement plans and why companies are moving away from pensions. The interview has been edited for brevity and clarity.

INVESTOPEDIA: What are the main differences between a DB plan and a DC retirement plan?

MARK WILSON: A lot of the information is in the names themselves. We think about actually what the words mean. So, a DB plan is a company-sponsored retirement plan, where the benefit, the amount that retirees get out of the plan, is set by definition. DC plan is the opposite, where we’re just defining what goes into the plan. We’re not defining what comes out or what we’re targeting to come out at the end. They’re very different in that respect.

INVESTOPEDIA: Why are companies moving away from DB plans?

WILSON: In the late ’90s, there was far more money in DB plans than there was in DC plans. And that trend started moving in that opposite direction, even back 25 years ago.

If a company has started up in the last 20 years, they’re offering a 401(k) plan. They’re not offering a pension plan almost 100% of the time. But the old legacy companies still have those, and governments still have those old legacy-defined benefit plans. The reason for the change is, I think the two main reasons—costs and [liabilities].

So in DB plans, the company itself is really doing 100% of the funding and has 100% of the liability if the investments don’t do well because they’re promising a benefit at the end of the day.

[With DC plans] the companies have been able to say, ‘Oh, you put in, we’ll put in a little bit. And whatever you invest, that’s on you, not on us.’ So the costs go down because now they’re sharing the contributions, or maybe not even contributing at all, into the 401(k). The liability goes down almost 100% because whatever you end up with is whatever you end up with, not the employer’s problem. 

INVESTOPEDIA: Are pensions ever going to make a comeback?

WILSON: I wouldn’t have high hopes that pensions are coming back to large companies. There’s just too much liability and costs involved.

401(k) type plans are often better than the more typical pension plan for today’s employees who don’t stay in the same spot forever. So when someone goes to work for the factory or Boeing or the car company or the airline, they work there for their whole career, and that’s just not today’s employees. The pension plan needs people to stay there for a long time for it all to work out best, and the 401(k) is typically going to be a better option for someone who stays four or five years at five different jobs throughout their career.