IBM recently announced its intention to begin offering a cash balance pension plan.

A cash balance pension plan is a form of defined contribution pension plan. IBM is not alone as there is a distinct trend in favor of defined contribution pension plans.

Required:

a. Describe the ramifications for analysis of the level and variability of both earnings and cash flows for defined benefit versus defined contribution pension plans.

b. Why do you think managers prefer the defined contribution pension plan?

c. Under what circumstances would employees favor defined benefit versus defined contribution plans?