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Yes, Defined-Contribution Pensions Have Been a Horrible, Terrible, Dangerous, No-Good Idea

Felix Salmon:

Occupy defined-benefit pension funds!: Arjun Appadurai… has an excellent short chapter entitled “A Nation of Business Junkies”….

Look at the serious talk shows, and chances are that you will find a CEO describing what’s good about his company, what’s bad about the government, and how to read his company’s stock prices…. Turn to the newspapers and things get worse….

I thought of Appadurai’s chapter earlier today when I was talking to a fund manager at a conference in DC. He was talking about the move from defined-benefit to defined-contribution pension plans, and was bemoaning the fact that people who invest in defined-contribution plans have seen returns not only below the returns in the stock market or the bond market, but even below the level of inflation. The solution, he said, was more education…. My feeling was that such attempts would never work. The investment returns of people with defined-contribution pensions are woefully low… [because of] rents being extracted by the financial-services industry. That’s the industry which does all of the educating…. Besides, as Appadurai says, the US population has never been more educated about matters financial than it is now. We can try to improve the level of education even further. But a little financial education can be a dangerous thing, if it instils overconfidence….

Much better, I think, to allow people to invest alongside the defined-benefit scheme of their employer, and accept the returns of that scheme. Most employers still have some kind of legacy defined-benefit scheme, and those schemes, as a rule, tend to be invested pretty sensibly. Those pension funds should accept defined-contribution money alongside their defined-benefit money: it would beef up their AUM and thereby their negotiating power, while at the same time delivering higher returns to the company’s employees…