DB to DC Switch Negatively Affects Public Work Force

November 15, 2012 (PLANSPONSOR.com) – Switching from a defined benefit (DB) pension plan to defined contribution (DC) individual accounts or cash balance plans would have negative effects on the work force, a study found.

The National Institute on Retirement Security (NIRS) examined the effect of existing DB public pension plans on the work force to assess the likely effects of a switch to DC individual accounts or cash balance plans. The brief, “The Great Recession: Pressures on Public Pensions, Employment Relations and Reforms” found public employers would attract a different labor force if they switched from pensions, and public employees would be less committed to employers.

Employee turnover would increase under individual DC accounts and cash balance plans. These types of retirement benefits no longer defer compensation into the future and offer fewer economic incentives for employees to stay with public employers. Research showed that DB coverage increases tenure by four years compared with no plan and by a little more than one year compared with a DC plan.

Moving from a pension structure would result in higher cost for public employers and employees because of higher investment and administrative costs for alternative retirement plans.

Public employers and employees overwhelmingly choose to stay with pensions rather than moving to alternative benefits when faced with a choice. Sixty-nine percent of employees with DB plans say retirement plan is an important reason to stay, versus 37% with DC plans.

“State and local budgets are under intense scrutiny,” Christian Weller, study co-author and public policy professor at the University of Massachusetts, said. “Spending on public employee retirement benefits in particular is caught in the crossfire of these fiscal and political debates. There are some proposals for a radical switch from pensions to individual savings plans. Our research suggests that policymakers understand the value of existing pensions as recruitment and retention tools. They also are worried about the substantial costs of switching retirement plans.”  

Click here for the full study.