Public sector employees given a choice of either a defined benefit (DB) or a 401(k) plan overwhelmingly prefer the DB plan, the National Institute on Retirement Security (NIRS) found in a study of eight states that offer employees such a choice. In those states in 2015, the take-up rate was 80% or higher in six states.
Two of the plans had take-up rates higher than 95%, while Florida and Michigan had take-up rates of 76% and 75%, respectively. North Dakota’s DB plan had the highest take-up rate, of 98%. Conversely, the percentage of new employees electing defined contribution (DC) plans ranged from 2% in North Dakota to 25% in Michigan.
The research also indicates that employees directing their own investments in a DC plan typically tend to earn lower returns than state pension plans. NIRS attributes this to four factors: lower expenses, professional management, an optimal investment allocation used by the DB plan and the benefit of longevity risk pooling.
NIRS also found that rather than lower costs by moving from a DB to a DC plan, states actually experience increased retirement costs for themselves and taxpayers. Thus, NIRS says in its report, “Changing from DB to DC does not solve the underlying funding problems a state may be experiencing.”
NIRS also notes that DB plans still remain largely prevalent in the public sector: “A comparison of a 2008 report from the Bureau of Labor Statistics with the 2016 National Compensation Study shows that private sector participation in DB plans dropped substantially from 76% of full-time employees in 1986 to 15% in 2016, yet public employee participation in DB plans only dropped from 93% of full-time employees in 1986 to 75% in 2016.”
“When employees have a choice, pensions continue to win in a landslide,” says Jennifer Brown, who co-authored the report, “Decisions, Decisions: An Update on Retirement Plan Choices for Public Employees and Employer.” “These findings indicate that public employees highly value their pension benefits, which is consistent with NIRS’ polling that finds Americans strongly support pensions for providing economic security in retirement. Notably, our polling also indicates that public employees strongly agree that all Americans should have a pension.”
NIRS’ full report can be downloaded here.