Do Public Plans Provide the Model for Retirement Offerings?

While defined benefit plans have been getting a bad rap lately, a panel of industry leaders at PLANSPONSOR's DB Summit last month said DB plans contain elements that are too valuable to discard, and offered an idea for what the best retirement offering should look like.

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All members of the panel titled Do DB Plans Still Make Sense?” agreed that defined benefit plans are a good, and perhaps the best, way to retain talented workers. Jeannine Markoe Raymond, Director of Federal Relations at the National Association of State Retirement Administrators (NASRA), suggested they are also the most economic means for sustained income after retirement. Employers are better able to shore up retirement funds than employees themselves, Raymond added. She also pointed out that economies of states are helped by maintaining the income – and spending – of workers after retirement.

Panel members agreed that DB funding, the issue front and center in the Pension Protection Act of 2006 (PPA), is not the problem. Media coverage of the situations in the airline, auto, and steel industries has made the DB situation seem dire, but in reality, most DB plans are well-funded (see Collateral Damage ). Panel member Kenneth Friedman, Consulting Actuary at Milliman, said there would have been no “perfect storm” if companies had put into their DB plans in the 1990’s what they are willing to put into DC plans – and what they are now promising in DC enhancements as they move to freeze their DB programs.

The best solution is a DB/DC combination, noted Raymond. A retirement offering that is DB-based with a DC supplement is a good marriage that takes pressure off the DB offering in bad times, and Raymond points out DC elements have been part of the public sector’s DB offerings since inception. In government DB plans employee contributions are mandated, as is enrollment, she noted. In terms of plan design, public sector plans currently offer a portability that is not available within the private sector. Moreover, public sector plans contain forced annuitization of benefits upon retirement, though there is a movement to partial lump sums, she added. Also, female public workers enjoy more equality within their retirement plans than female employees of the private sector, according to Raymond.

Public plans also face one less risk than private plans. There is no need for public DB system insurance such as provided for the private sector by the Pension Benefit Guaranty Corporation (PBGC) because, as Raymond pointed out, governments are perpetual, there is no realistic threat of them going out of business (see Myth Information , also The Public Good ).