The Retirement Plan Solution: The Reinvention of Defined Contribution

Chapter 13. Three Defined Contribution Plan Models

There are many kinds of retirement plans. We have distinguished between defined benefit (DB) and defined contribution (DC) plans. But there are also plans that are classified as hybrid in some way, and DC plans themselves can operate in different ways.

We have, for example, shown how the first American DC plans gave way to what we have called DC 2.0. We have discussed how the Australian DC system operates, in particular the areas of contrast with the American system.

It may be difficult to find semblances of order in all the activity that has taken place over the years in Australia and the United States, but we have found it much easier to understand how the pieces fit together by looking at the moving parts through three lenses, each corresponding to a model with a particular philosophy. We don't say that these models have guided a nation's approach or even an employer's approach, but the activity makes sense if one sees it through the lens of a particular model's approach (see Table 13.1).

THE BANK SAVINGS MODEL

In this model the idea is to save a little bit of money as a supplement to whatever else the participant may be doing to accumulate retirement assets. The participant is happy to see the account increase, with no risk of capital loss. No education is necessary. Reports show the progression of the account from one period to the next. At retirement the account value is taken in a lump sum.

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