Private businesses could learn a few lessons about effective pension plans from state government, said the director of a national retirement institute.
Businesses gradually have been substituting employer-funded pensions for 401(k) plans, while those in public pensions, like many Louisiana state employees, enjoy the security of a professional investment team and guaranteed benefits, said Beth Almeida, executive director of the National Institute on Retirement Security.
Retirement experts talk about stable retirement as a stool with three legs — Social Security, pensions and 401(k)s, Almeida said.
In Louisiana, state employees do not receive Social Security. And if they earned Social Security at some point through a job in the private sector, that benefit will be reduced because of federal regulations.
Private pensions are similar to state systems in that employee benefits are based partly on time with the company and their earnings, and the benefit lasts a lifetime, Almeida said.
Defined contribution plans, such as 401(k) — where employees have a certain amount for their retirement years, not a defined benefit that lasts their lifetime — are meant to supplement pensions, Almeida said. “They don’t work well when they’re the only egg in your basket,” she said.
A survey commissioned by the institute, a nonprofit based in Washington, D.C., shows about 55 percent of workers without a pension said having one would ease their anxiety, and 65 percent of workers with a pension are confident in it.
The institute also researched how defined-benefit plans, such as state pensions, performed in the stock market compared with defined-contribution plans. Almeida said defined-benefit plans consistently did better by 1 percent to 2 percent per year.
That may not seem like a lot, Almeida said, but the name of the savings game is time and compounding. Over a lifetime, that small variance compounds to a 25 percent difference, she said.