Monday, June 18, 2007

AFSCME- 'The Truth About Public Employee Retirement Plans'

The American Federation of State, County, and Municipal Employees (AFSCME) has developed a useful fact sheet on Defined Benefit (DB) and Defined Contribution (DC) pension plans.

The Truth About Public Employee Retirement Plans explains numerous ways in which DB plans are superior to 401k-style DC plans, and indentifies the myths that it says lead people to believe otherwise.

For example, the fact sheet tackles the misconception that public DB plans are funded entirely, or even mostly, by taxpayers' dollars:

Q: Aren’t defined benefit pensions
a financial burden to taxpayers?

A: No. Employee contributions and investment
earnings cover the bulk of defined benefit
costs while government contributions only
cover 26 percent of the total costs.
The truth is
that the median pension contribution rate of
public employees covered by Social Security is
5 percent of their pay, while the median pension
contribution rate of public employees not
covered by Social Security is 8.6 percent of
their pay. In the private sector on the other
hand, 90 percent of plans don’t require any
employee contribution.
And as AFSCME points out, contrary to popular belief, DC plans are actually more expensive to administer.

Q: Aren’t defined contribution plan
fees and expenses lower than those
of a defined benefit plan?

A: No. For a defined contribution plan, you
have to deal with an average of $1.35 mutual
fund charge for “load” and administrative
expenses on every $100 invested, plus additional
record keeping and participant education
costs. This amounts to an annual cost of
2 percent of your assets. In reality, this is ten
times higher than the cost of administering a
defined benefit plan.
So even if defined contribution
plan participants earn the same rate as
defined benefit plan participants, they’d still
receive a smaller benefit! Where does that
extra money go? Wall Street.
Read more here, at