October 15, 2013 (PLANSPONSOR.com) – A best-practice defined contribution (DC) plan can provide secure retirement income at equivalent cost to a defined benefit (DB) plan, according to a new research paper from the TIAA-CREF Institute.
The paper, “Equivalent Costs for Equivalent Benefits:
Primary DC Plans in the Public Sector,” was authored by Josh B. McGee, vice
president of Public Accountability for the Laura and John Arnold Foundation,
and Paul J. Yakoboski, senior economist with the TIAA-CREF Institute.
“The sweeping generalization that DB plan designs provide
benefits at lower cost to public employers than could a DC structure is simply
incorrect,” said the authors. “Features producing the purported DB cost
advantage—such as annuitized benefit payments and low fee, professional asset
management—can easily be incorporated into the DC model, and in fact, are
inherent to the best practice, risk-managed DC design.” They said that many DC
plans already exhibit these features, such as 401(a) and 403(b) plans sponsored
by public and private colleges and universities.
According to McGee and Yakoboski, best-practice DC plans are
a viable, sustainable option for providing retirement security to workers. They
concluded that assertions a DB-type structure is more cost efficient, as
compared with DC ones, are based upon “dubious comparisons with the typical private
sector 401(k) model and assumptions that place a heavy thumb on the scale in
favor of DB plans.”
McGee and Yakoboski found that, in fact, DB plans do not
possess a structural advantage over DC plans. “Providing adequate, secure
income throughout retirement is the overriding objective of any retirement
plan, regardless of the plan design. Risk-managed DC plans accomplish this aim
by incorporating longevity risk pooling through in-plan annuities, automatic
diversified asset allocation solutions in a limited menu of professionally
managed, low-fee investment options, and objective advice for plan participants.
Best-practice DC plans are a viable, sustainable option for providing retirement
security to workers.”
More information on this research paper can be