Public Sector Employees Prefer DB over DC Plans

The study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers , was conducted by the National Institute on Retirement Security (NIRS) and Milliman. It analyzes seven state retirement systems that offer a choice between DB and DC plans to find that the DB uptake rate ranges from 98%-75%. The percentage of new employees choosing DC plans ranges from 2%-25% for the plans studied.

The study also finds that:

•  When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.

•  DB pensions are more cost efficient than DC accounts due to higher investment returns and longevity risk pooling.

•  DC accounts lack supplemental benefits such as death and disability protection.These can still be provided, but require extra contributions outside the DC plan which are therefore not deposited into the members’ accounts.

•  When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.

•  A “hybrid” plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.

The seven plans offering DB and DC choices that were analyzed for the study include: Colorado Public Employee’s Retirement Association, Florida Retirement System, Montana Public Employee Retirement Administration, North Dakota Public Employees Retirement System, Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, and South Carolina Retirement Systems.

“Beyond the seven states analyzed that offer DB-DC choice, the experiences of Nebraska and West Virginia offer additional insight,” said report co-author Mark Olleman, Consulting Actuary and Principal with Milliman, Inc., in a press release. “Both states chose to put new hires in a DC plan, and then later changed to DB. Nebraska offered some employees hired between 1964 and 2003 only a DC plan, but also maintained a DB plan for other employees. Over 20 years, the average investment return in the DB plan was 11%, and the average return in the DC plans was between 6 and 7%.”

Olleman continued, “West Virginia closed their Teachers’ DB plan to new hires in 1991 in response to funding problems and put all new hires in a DC plan. Unfortunately, this did not solve the funding problem, and many teachers found it difficult to retire when relying only on the DC plan. West Virginia performed a study, found a given level of benefits could be funded for a lower cost through a DB plan, and put all teachers hired after July 1, 2005, in the DB plan as a cost-saving measure (see WV Teachers Get More Time to Make DB Switch). So both Nebraska and West Virginia found a DC plan did not achieve their goals and changed from DC to DB.”

Ilana Boivie, report co-author and economist with the National Institute on Retirement Security, said, “The research is clear that public employees highly value their pension benefits and will choose this retirement plan over an individual DC account. These findings are not surprising and are consistent with NIRS’ recent opinion polling earlier that found 83% of Americans believe those with pensions are more likely to have a secure retirement.” (See Americans Want Pensions Back).

The full study is available at www.nirsonline.org.