The report asserts that defined benefit savings come from three sources:
• Superior investment returns. The pooled nature of assets in a defined benefit plan result in higher investment returns, partly based on the lower fees that stem from economies of scale, but also because the assets are professionally—not individually—managed. The New York City plans’ enhanced investment returns save from 21% to 22%, according to the report.
• Better management of longevity risk. Because pensions pool the longevity risks of a large number of individuals and can determine and plan for mortality on an actuarial basis, New York City’s defined benefit plans save between 10% and 13% compared to a typical defined contribution plan.
• Portfolio diversification. Unlike defined contribution plans, pension assets can be invested for optimal returns. Individuals using 401(k)s, by comparison, are advised to rebalance their investments, downshifting into less risky and lower-returning assets as they age. This ability to maintain portfolio diversity in New York City’s defined benefit plans saves from 4 to 5%.
“These findings are consistent with our national study on the cost efficiencies embedded in pension plans,” said Diane Oakley, NIRS Executive Director. “The analysis clearly indicates that the qualities inherent in DB plans – particularly the superior investment returns and pooling of risks and assets – fuel their fiscal efficiency. The report provides important insight for policymakers, employers, and employees, who are struggling to ensure adequate retirement income with the fewest dollars possible,” Oakley added.