September 4, 2012 (PLANSPONSOR.com) - A report for the Teachers Retirement System (TRS) of Texas shows a move from the current defined benefit plan will result in increased costs or decreased benefits, or both.
In conducting the study, TRS modeled the alternative plans using two different approaches: the "Targeted Benefit Approach" and "Targeted Contribution Approach." The TRS benefit, as currently designed, replaces roughly 68% of a career employee's pre-retirement income before a loss of purchasing power. Therefore, TRS modeled the plans in the "Targeted Benefit Approach," to provide the same level of benefit as the current plan regardless of cost. The study found the alternative plans would be 12% to 138% more expensive than the current plan (not including the cost to pay off any unfunded liability) to provide the same level of benefit.
Conversely, under the "Targeted Contribution Approach," TRS modeled the alternative plans to cost the same as the current plan regardless of the benefit level provided. Under this approach, the study found the alternative plans would replace 27.7% to 59.7% of pre-retirement income for a career employee retiring at age 62.
The study noted that in any plan with a self-directed defined defined-contribution component, TRS members would make their own investment decisions, and the resulting difference between individual returns would likely be very wide. TRS modeling has shown that under a defined contribution plan, 92% of retirees will ultimately receive less than the current defined benefit. Two-thirds would receive no more than 60% of the current benefit. Only a handful (about 8%) would receive more than the current benefit. The study report says the estimated underperformance is attributable to lower investment returns from a shorter investment period, access to fewer asset classes, less disciplined investment approaches, and potentially higher fees.