I recently wrote, in The question of portability (part 1), about how portable defined contribution (DC) retirement plans, such as the 401(k), aren t always the best option for employees. Now let's look at how the urge to create a portable benefit by converting to a 401(k) may not necessarily always be working in the best interests of employers.

The chicken or the portable nest egg

Since the idea of portability entered the retirement plan arena, academics have looked closely at the question of employee mobility. One study stated the question very directly: Which came first mobile employees or plans that encouraged employee mobility? Did the plans altruistically provide a solution to a changing demographic, or did the mobility solution actually open a door to problematic mobile employees?

The research indicated that employee mobility picked up only after 401(k) plans became widespread. Aside from the business reasons for retaining good employees, the portable 401(k) also raises questions about unintended consequences for the plan itself.

Spreading the wealth

More monies tend to be accumulated by the young and recently hired employees in 401(k) plans than in pension plans. This is balanced out in later careers as long-service employees eventually tend to receive more annually from pension plans compared to 401(k) plans.

The irony for some employers is that even if a career-average structure is adopted for portability's sake, the benefit often could have been delivered much less expensively in a defined benefit (DB) pension plan than via a DC plan. Even if benefit levels established under the benefit policy are kept constant in order to maintain competitive and adequate income levels, a DB plan could cost the company less and increase shareholder returns.

There's no doubt that the 401(k) plan has a place in tomorrow's retirement landscape, as long as people understand the real intrinsic differences of DC and DB plans. It's fair to say that portability is not actually one of those differences. Plan sponsors are in a position to reverse this misconception, and should not be swayed from pursuing an effective DB strategy only in the name of portability.