DC Plans Evolving in the Public Sector

October 11, 2012 (PLANSPONSOR.com) – As state and local governments have reformed pension plans to address economic concerns, the use of defined contribution (DC) plans is evolving.

A joint research project of the Arthur N. Caple Foundation and the National Association of Government Defined Contribution Administrators conducted by the Center for State and Local Government Excellence finds pension plan changes fall into five categories:  

  • Increasing current and/or new employee contribution levels; 
  • Increasing the age and/or length of tenure required to be eligible for normal retirement; 
  • Reducing or eliminating cost-of-living adjustments (COLAs) for new and/or current employees; 
  • Changing the way pension formulas are calculated to reduce pension benefits; and 
  • Offering a hybrid and/or defined contribution plan instead of a traditional defined benefit plan. 


The research paper says the current environment within which public sector retirement plans are operating suggests that changes will continue to occur with the responsibility for financing retirement benefits shifting more toward employees.  

According to the report, managing long-term risk and cost are the primary drivers for a shift toward more dependence on defined contribution plans. Governments are looking for ways to reduce costs to overcome the short-term impacts of the recession, reduce investment risk and provide long-term financial stability. Many public officials are concerned with the long-term costs of their current defined benefit programs and will continue to redesign these plans and consider alternative retirement arrangements.   

However, the report notes, most of the changes implemented to date, including switching to hybrid and core defined contribution plans, usually affect new employees.

A proposed summary of recommended core defined contribution plan components based on research and responses from the people interviewed for the report includes: 

  • Employee contributions are mandatory and begin immediately. A state or local government may want to have a brief waiting period (less than three months) before starting contributions due to turnover. 
  • Total contribution level is 12% to 15% with Social Security and 18% to 20% without Social Security. 
  • The employer contributes half or approximately the amount contributed to the defined benefit plan for employees. 
  • Employee contributions are set at the full amount immediately so that auto-escalation is not needed. 
  • Contributions are defaulted into a target-date fund.  
  • A 10 to 15 fund menu is offered (excluding target-date funds) and includes all major asset classes and varying levels of risk. 
  • A limited brokerage window is allowed for employee contributions only. A minimum balance must be kept in the main account. 
  • There is one recordkeeper. 
  • Loans from employee contributions are allowed only for hardships and at the discretion of the employer. No loans are available from the employer portion. A dollar limit on the amount of loan may also be appropriate. 
  • Vesting in employer contributions is one year or less. 
  • An option to annuitize part or all of the fund balance is allowed at or near retirement and/or offer a deferred annuity investment option. 
  • Availability of plan-sponsored, objective retirement counseling and education to help employees make informed retirement (versus investing) decisions. 


The report points out that investment portfolio and recordkeeper selection are extremely important fiduciary roles for plan sponsors and can have serious financial affect on participants. Considerations are discussed.  

The report can be downloaded from www.nagdca.org/.