WASHINGTON, D.C., August
23, 2017 - A new study
finds that public sector employees with retirement plan choice overwhelmingly
choose defined benefit (DB) pension plans over 401(k)-type defined contribution
(DC) individual accounts.
Among the eight states
studied that offer employees such a choice, the DB pension take-up rates in
2015 were 80 percent or higher in six states. Two of the plans studied had
pension take-up rates higher than 95 percent, while Florida and Michigan had
take-up rates of 76 percent and 75 percent, respectively.
Importantly, the
research finds that even when the retirement plan default option favors a DC
plan, most employees still select a DB pension plan. For example, in Washington
the default retirement plan is a combination DB/DC plan. Employees must
affirmatively act to elect to participate in the DB pension plan instead, and
they do. The majority of newly-hired employees - six out of every ten new hires
- actively choose a pension plan.
These
findings are contained in a new study, Decisions, Decisions" An Update on
Retirement Plan Choices for Public Employees and Employers, available here. The
research is co-authored by Jennifer Brown, manager of research for the National Institute on Retirement
Security (NIRS) and Matt Larrabee, principal and consulting actuary
with Milliman.
"When
employees have a choice, pensions continue to win in a landslide," says
report co-author Jennifer Brown.
"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."
"Our
findings also suggest that the public sector is unlikely to mimic the trend
away from pensions as seen in the private sector for two reasons. First, there
is strong employee support for pensions. Second, DB pensions remain the most
cost-effective way for public employers to provide a modest and secure
retirement benefit for employees who typically earn less than
comparable private sector employees," Brown explained.
Some
states started to offer public employees a choice between DB pension plan or an
individual DC account for their primary retirement plan as far back as 18 years
ago. Today, seven statewide pension systems give new hires the choice between
participating in a DB pension or a DC-only plan - in Colorado, Florida,
Montana, North Dakota, Ohio (two systems) and South Carolina. In two states -
Utah and Michigan - some or all employees have a choice between a combined
DB/DC plan and a DC only plan. Washington offers a choice between a DB pension
and a combined DB/DC plan.
Across
the board, the experience of these systems indicates that public employees
overwhelmingly choose the DB plan. In 2015, North Dakota's DB plan had the
highest take up rate at 98 percent; the lowest DB take up rate was in Michigan,
which still saw 75 percent of employees opting for the DB pension. As such, the
percentage of new employees electing DC plans currently ranged from two percent
in North Dakota to 25 percent in Michigan.
Over
the last decade, employee election patterns remained consistent for each state.
However, a noticeable spike in employees choosing the pension occurred after
the 2008- 2009 stock market collapse… The research also indicates that
employees directing their own investments typically tend to earn lower investment
returns than that of state pension plans.
The
investment advantage in public DB pensions can be attributed to three factors: lower
expenses, professional asset management and an optimal investment allocation
used by the DB plan over decades. DB pension plans also benefit from longevity
risk pooling.
Also,
the research examines the issue of states eliminating DB pensions and moving
new hires into DC accounts in the hopes of lowering costs or addressing funding
shortfalls often caused by states skipping their full actuarial contributions.
But, the experience of states shows that such a change has the opposite impact
with a DB to DC switch increasing
retirement costs for employers and taxpayers in the immediate
future.
The
new research is an update to a 2011 study
with similar findings. To conduct the study, NIRS and Milliman requested
information directly from the retirement systems that allow new hires to choose
between DB, DC, and combination plans. These systems provided statistics on
members that have selected each option. The authors also requested other
important provisions relating to benefits and contributions. This primary
source material provides a valuable insight into what really happens when
public employees are allowed to choose between DB and DC.
Download
the full study here.
The National Institute on
Retirement Security is a non-profit, non-partisan organization
established to contribute to informed policy making by fostering a deep
understanding of the value of retirement security to employees, employers and
the economy as a whole. Located in Washington, D.C., NIRS' diverse membership
includes financial services firms, employee benefit plans, trade associations,
and other retirement service providers.
More information is available at www.nirsonline.org.
Follow NIRS on Twitter @nirsonline. Contact: Kelly Kenneally | kkenneally@nirsonline.org | 202.457.8190
Commentary:
What is the difference between a
Defined-Contribution Savings Plan and a Defined-Benefit Pension Plan?
(Posted on this blog
Sept. 30, 2011; June 10, 2013; Jan. 4, 2015; March 17, 2017):
A Defined-Contribution Savings Plan:
A Defined-Contribution Savings Plan:
1) A defined-contribution savings plan (401(k), 403(b), 457) was not initially created as a retirement vehicle but rather as a supplementary savings account;
2) A defined-contribution savings plan shifts all the responsibilities and all of the risk from the employer to you; thus, your benefit is not guaranteed for life;
3) Your benefit ceases when your account is exhausted;
4) There are no survivor or disability benefits and guarantees;
5) Your benefit is based upon individual investment earnings;
6) You assume all funding, investment fees, and inflationary and longevity risks;
7) 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;
8) Though you bear no portability risks, accounts are not always rolled over when you change jobs;
9) Changeover costs to this plan could be significant;
10) Your employer (state) will have to bear the administrative costs of both defined-benefit pension and defined-contribution savings plans when you switch over;
11) “Payments to amortize unfunded liabilities for the defined-benefit pension plan may be accelerated” (National Institute on Retirement Security (NIRS, 2011);
12) 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, 2011);
13) “No unfunded obligations [liabilities] for existing members are reduced when new members go into a defined-contribution savings plan” (NIRS, 2011);
14) “The loss of new members makes it difficult to finance the unfunded obligations of the defined-benefit pension plan” (NIRS, 2011);
15) The State of Illinois will not save money. Most of the State’s obligation to TRS is for contributions not paid during the past several decades; therefore, the deferred cost of underfunding cannot be eliminated by switching to a defined-contribution savings plan;
16) Shifting to a defined-contribution savings plan can raise annual costs by making it more difficult for Illinois to pay down existing liabilities. The plan will include fewer employees and fewer contributions going forward;
17) Even with a defined-contribution savings plan option, states and localities are still left to deal with past underfunding;
18) There is a several trillion dollar deficit between what 401(k) account holders should have and what they actually have.
A Defined-Benefit Pension Plan:
1) You cannot outlive your benefit;
2) Your defined-benefit pension plan is more cost efficient than the defined-contribution savings plan;
3) Your defined-benefit pension plan offers predictable, guaranteed monthly benefits for life;
4) Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies;
5) The large-pooled assets reduce asset management and miscellaneous fees;
6) Your defined-benefit pension plan provides spousal (survivor) financial benefits;
7) Your defined-benefit pension plan provides disability benefits;
8) The state is responsible for funding, investment, inflationary and longevity risks;
9) Because you are not affected by Market volatility, your defined-benefit pension plan is a more effective protection than the defined-contribution savings plan;
10) Because teachers understand the value of such a plan, they are willing to give up higher wages;
11) A defined-benefit plan encourages a long-term career and stable workforce;
12) 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;
13) 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;
14) The Teachers Retirement System of Illinois is the 37th largest in the U.S. with 406,855 members (TRS, 2017);
15) The average investment returns for TRS: 8.8% (for 1986-2016) (TRS, 2016) and 7.54% (for 1996-2016) (TRS, 2017);
16) 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 (TRS, 2013);
17) 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 (NIRS, 2011).
Sources: the National Institute on Retirement Security (NIRS), Center for Retirement Research at Boston College, National Conference on Public Employee Retirement Systems, Center on Budget and Policy Priorities, and the Teachers' Retirement System of Illinois (TRS)
Daniel Biss has a Pension Town Hall in the rbana Free Library on Saturday, Sep 16th at 2:30pm. I hope Glen, Fred and others can go and challenge Biss, if need be, since he was a co-sponsor of the infamous SB1 in 2013 and now wants us to elect him Governor?
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