Friday, September 30, 2011

Defined-Benefit Pension Plan v. Defined-Contribution Savings Plan

Defined-Benefit Pension Plan:

 Your defined-benefit pension plan is more cost efficient than the defined-contribution savings plan
 Your defined-benefit pension plan offers predictable, guaranteed monthly benefits for life
 Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies
 The large-pooled assets reduce asset management and miscellaneous fees
 Your defined-benefit pension plan provides spousal (survivor) financial benefits
 Your defined-benefit pension plan provides disability benefits
 The state is responsible for funding, investment, inflationary and longevity risks
 Your defined-benefit pension plan is a more effective protection than the defined-contribution savings plan
 Your defined-benefit pension plan provides you with self-sufficiency in retirement; it is associated with far fewer households that experience food privation, shelter adversity and health care hardship
 Your defined-benefit pension plan is less expensive for taxpayers than Social Security – a reason why legislators, et al had negotiated for Illinois teachers to not pay into Social Security
 Your defined-benefit pension plan has an economic impact of over $4 billion on Illinois; the effect on Gross Domestic Product is $2.38 billion; jobs that are created: 30,448 (Teachers Retirement System of Illinois, TRS)
 The Teachers Retirement System of Illinois is the 39th largest in the U.S. with 378,288 members (TRS)
 The average investment returns for TRS: 9.3% (over 30 years), 8.8% (over 25 years), 8.3% (over 20 years) (TRS)
 Defined-benefit pension plans contribute over $100 billion to annual local, state, and federal revenue in the U.S. and provide capital to financial markets (National Institute on Retirement Security, NIRS)

Defined-Contribution Savings Plan (401k):

 With a defined-contribution savings plan (401k, 403b, 457), only your contributions are defined
 A defined-contribution savings plan shifts all the responsibilities and all of the risk from the employer to you (unless negotiated otherwise); thus, your benefit is not guaranteed for life
 Your benefit is based upon individual investment earnings
 You assume all funding, investment, inflationary and longevity risks
 A defined-contribution savings plan does not have the pooled investments, professional asset managers, and shared administrative costs that a defined-benefit pension plan provides
 There are no survivor or disability benefits and guarantees
 Though you bear no portability risks, accounts are not always rolled over when you change jobs
 Your employer (state) will have to bear the administrative costs of both defined-benefit pension and defined-contribution savings plans when you switch over
 Though not your problem, “payments to amortize unfunded liabilities for the defined-benefit pension plan may be accelerated” (NIRS)
 The Governmental Accounting Standards Board “requires [an] acceleration of unfunded liability payments when the defined-benefit pension plan is closed to be recognized on financial statements” (NIRS)
 When changing from a defined-benefit pension plan to a defined-contribution savings plan, “new members do not start with any unfunded obligation” (NIRS)
 “Projected defined-benefit savings contributions for new members are worth more than the projected defined-benefit pension costs for those members” (NIRS)
 “No unfunded obligations [liabilities] for existing members are reduced when new members go into a defined-contribution savings plan” (NIRS)
 “The loss of new members make it difficult to finance the unfunded obligations of the defined-benefit pension plan” (NIRS)

Sources: the National Institute on Retirement Security (NIRS), the Teachers Retirement System of Illinois

1 comment:

  1. From the IEA website:

    “Teachers and those employed at our Universities receive NO Social Security benefit in retirement for their years of employment in those areas. This means that under a defined-contribution plan their sole retirement would be reliant upon a tremendously volatile stock market. This is a huge distinction between public school teachers and private sector employees.

    "The [IEA] believes that the correct approach is to have a retirement package that includes all of the following:

    --Defined benefit retirement plan(s) – current state retirement plan and/or social security.

    --Optional defined contribution plans – current tax-deferred annuity plans.

    --Post-retirement Health Insurance.”