Recently we responded to a reporter who clearly didn't know the difference in U.S. retirement law between a defined contribution plan and a defined benefit plan — and who assumed that a defined contribution plan could somehow be unfunded. This makes defined contribution plans like ESOPs and 401(k)s come across as another ploy to cheat workers out of guaranteed benefits. It helps convince people that everything should be guaranteed so that everyone can be a dependent in some degree on the State or on a private employer.
The reporter had no comeback, but a defined contribution plan cannot be unfunded for the simple reason that a participant in such a plan is due 100% of the vested balance in his or her accounts. There is no question of being unfunded: the money is either there, or it isn't. If it's not there, you don't get it. If it is there, you do.
In a defined benefit plan, a participant is due whatever the sponsoring company promised. Whether the plan actually has the ability to make good on that promise is another matter altogether. A defined benefit plan — like the U.S. government plan and Social Security, has made promises, but may not have any assets behind those promises.
A defined contribution plan cannot go bust by definition, but defined benefit plans go bust all the time because they don't have the assets to pay the promised benefits. Social Security, for instance, has no assets (and you don't own what's in your account, either — Flemming v. Nestor, 1960).
All those "assets" are government bonds that represent the money you paid in that the government lent to itself. In other words, you gave the government money, and the government gave itself an IOU and spent the money. Now the government has to collect more money to pay you out, or issue more bonds to go deeper into debt.
This used to be called "thimblerig" or "the old shell game." Today it's called "Modern Monetary Theory." It's an application of Keynesian economics derived from Georg Friedrich Knapp's "chartalism." Chartalism is a socialist theory developed in the 1880s (hence the need to convince people that it's "modern") that assumes the State owns everything, and can issue money at will against the wealth of society . . . none of which it owns.
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