Benefits October 31, 2008

NIRS Warns DB to DC Move Can Increase Costs

October 31, 2008 (PLANSPONSOR.com) - A new research brief issued by the National Institute on Retirement Security (NIRS) suggests freezing a defined benefit pension plan in favor of a defined contribution plan will involve increased costs, reduced benefits, or a combination of both.
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“Look Before You Leap: The Unintended Consequences of Pension Freezes,” specifically says that freezing a DB plan and moving to an individual defined contribution (DC) plan can:

  • Increase costs to employers and/or taxpayers due to higher costs of operating two plans, erosion of economic efficiencies, and front-loaded contribution requirements; and
  • Further exacerbate retirement insecurity concerns, which in turn can hamper worker recruitment and retention effort, result in higher turnover rates, create labor shortages, increase training costs, and lower productivity levels.

Additionally, the brief indicates that the replacement DC plan typically provides reduced benefits. As a result, fewer and fewer workers will receive adequate income in retirement.

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The brief cites the case in West Virginia, where the state, concerned that insufficient retirement income would require some form of governmental assistance-such as increased retirement benefits, welfare, or Medicaid-“unfroze” the DB plan to ensure adequate, secure retirement income. Reopening the DB plan is estimated to save the state $22 million (see WVA DC to DB Migration Could Mean Big Savings ).

The full research brief can be accessed at www.nirsonline.org .

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