DROP:The Revenge of the DB Plan

A recent innovation in defined benefit (DB) plans is providing a new form of compensation to longterm employees. Although initially implemented in public sector pension plans, the ability of private sector pension plans to replicate this new form of deferred compensation could slow or even reverse the shift from DB to defined contribution (DC) plans. A Deferred Retirement Option Plan (DROP) is a provision in a DB plan that gives long-term employees the opportunity to leave their jobs with both their traditional DB retirement annuity and a lump-sum accumulation resembling that of a DC plan. DROP is an enhancement that may be added to a DB plan but is impossible to add to a DC plan. Professionals who work in the area of compensation and benefits design need to understand this new DROP provision for DB plans so that they are prepared to help propose these plans when appropriate, assist management in understanding these plans when proposed by employees and unions and help to implement these plans.