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Yesterday, Alcoa Inc., the top aluminium maker in the world, announced that they would eliminate their defined benefit pension plan ^[3] to their new U.S. salaried employees and instead offer a 401(k) defined contribution plan for new employees, current employees and retirees aren’t affected. Alcoa would make a 3% contribution of the employee’s salary and bonus regardless of their own contribution and it would also match the first 6% of salary that an employee contributes to the 401(k), for a total of a 9% match on a 6% contribution.

Without knowing the former benefits of their pension plan, the 9% match on 6% contribution looks pretty good. What it effectively does is limit the long term liability on Alcoa by paying retirement funds now, i.e. putting it in the 401(k), and having the market control, i.e. how they decide to invest, how much retirees will be able to withdraw in retirement.

This is a better situation for both the employer and the employee because if Alcoa hits a rough patch and is forced to enter bankruptcy protection, it is likely that the defined benefit pension plan would be a target. United Airlines recently received court approval to dump four pension plans to the Pension Benefit Guaranty Corp., which already runs at a deficit. When a defined benefit pension plan is terminated and given to the PBGC, employees get mere cents on the dollar which is bad for everyone.

With a 401(k), the money is in your possession and not in the hands of your employer. If Alcoa goes under, the 401(k) should be nestled away safely with a brokerage and thus not subject to termination. Anything you lose, would then be your fault because you chose a poor investing direction – that’s something everyone is willing to accept (compared to the alternative of your company going bankrupt, which you conceivably have little control of). Alcoa joins a lot of other notable companies who have terminated their defined benefit pension plans such as IBM earlier this year and Hewlett-Packard in 2004 (though effective this year).