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Do defined contribution plans create value for shareholders?

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  • Chaudhry, Neeru
  • Kattamuri, Rohit

Abstract

The enactment of the Employee Retirement Income Security Act of 1974 led many firms to stop offering defined benefit pension plans to employees and replacing them with defined contribution plans. Even though the number of firms offering DC plans are on rise worldwide, literature on how DC plans affect corporate behavior is sparse. This study is the first to examine whether defined contribution (DC) plans offered by private sector employers in the United States benefit shareholders by creating value for them. We find that firms that offer DC plans (DC-firms) have higher firm value relative to firms that do not offer any employee pension plan (Non-DC firms), and that firm value increases as employer contributions to DC plans increase. Employee productivity is higher in DC-firms than that for Non-DC firms, and it increases as employer contributions to DC plans increase. Higher employee productivity in DC-firms explains the positive effect of DC plans on firm value.

Suggested Citation

  • Chaudhry, Neeru & Kattamuri, Rohit, 2024. "Do defined contribution plans create value for shareholders?," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 616-633.
    • Handle: RePEc:eee:reveco:v:91:y:2024:i:c:p:616-633
    DOI: 10.1016/j.iref.2024.01.060
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    More about this item

    Keywords

    Defined contribution pension plans; DC plans; 401K plans; Pension benefit plans; Employee plans; Firm value;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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