For the 12 months ending March 31, 2001 the U.S. stock markets posted some of their greatest losses in history. The S&P 500 lost 22%; the Wilshire 5000 lost 25%; and the NASDAQ Composite lost a staggering 59%.

For participants in 401(k) plans nearing retirement, these losses in their individual accounts may well mean that they will not be able to retire as planned or, if they can, only at a greatly reduced standard of living.

On the other hand, participants in defined-benefit plans, such as the Central Pension Fund, are fully protected from the investment losses of the stock market. This isn't because the portfolio of the Central Pension Fund hasn't suffered losses, it has. Whereas the assets of the Fund exceeded $7 billion in September 2000, the value had fallen to $6.8 billion by the end of March 2001. But those losses are of no consequence to the Fund's participants because defined-benefit plans like CPF are required by law to maintain a funding level that takes into account the likely ups and downs of the stock market over a 30-year time horizon.

This long-term approach to funding explains why defined-benefit plans don't automatically raise benefits when times are good, and never cut benefits when times are bad. Long-term funding assures that the pension promises made will be kept, come rain or shine.

Another component of long-term funding is the broad diversification of investments that defined-benefit plans utilize. Because they are investing for the long term, the trustees of defined-benefit plans resist the temptations that entice individual 401(k) investors to pour too much money into the latest and greatest investment opportunity. The best example of this is the incredible run up in value of technology stocks from 1995 to 2000, followed by their even more incredible collapse last year.

Defined-benefit plans like the Central Pension Fund maintain rigid investment guidelines which restrict the percentage of assets that can be invested in any one particular segment of the stock or bond markets. These rigid guidelines restrict the ability to invest too much in particular market sectors when they are hot, thereby limiting the plan's exposure to losses when they collapse.

The recent experience of 401(k) participants versus defined-benefit plan participants is reminiscent of the fable of the tortoise and the hare. The slow and steady pace of defined-benefit plans will always produce a secure and predictable retirement benefit, while 401(k) plans promise much but may deliver little.

At the end of the day, while the stock markets may soar and then tumble as they have in the last five years, the retirement security of CPF participants remains rock solid--as promised.