New Public Sector Employees Overwhelmingly Select Pensions Over Individual Retirement Accounts
In recent years, a few states have offered public employees a choice between primary DB and DC plans. The new study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, analyzes the choices made by employees and finds that:
- When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
- DB pensions are more cost efficient than DC accounts due to higher investment returns and longevity risk pooling.
- DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan which are therefore not deposited into the members' accounts.
- When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
- A "hybrid" plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.
The
seven plans offering DB and DC choice that were analyzed for the study
include Colorado Public Employees' Retirement Association, Florida
Retirement System, Montana Public Employee Retirement Administration,
North Dakota Public Employees Retirement System, Ohio Public Employees
Retirement System, State Teachers Retirement System of Ohio, and South
Carolina Retirement Systems. The new hire elections for these plans are
summarized below:
System |
DB Plan Enrollments
| DC Plan Enrollments |
Combined Plan Enrollments
|
Colorado Public Employees' Retirement Association
|
88%
|
12%
|
Not offered
|
Florida Retirement System
|
75%
|
25%
|
Not offered
|
Montana Public Employee Retirement Administration
|
97%
|
3%
|
Not offered
|
North Dakota Public Employees Retirement System**
|
98%
|
2%
|
Not offered
|
Ohio Public Employees Retirement System
|
95%
|
4%
|
1%
|
State Teachers Retirement System of Ohio
|
89%
|
9%
|
2%
|
South Carolina Retirement Systems
|
82%
|
18%
|
Not offered
|
"Not offered" means enrollment in a combined DB/DC plan is not offered.
*Data for CO, NC, & Ohio PERS are for January 2010 -December 2010.
Data for FL, MT, STRS Ohio, & SC are for July 2010 - June 2011.
** One new employee out of the 63 eligible joined ND DC plan in 2010.
|
Olleman
continued, "West Virginia closed their Teachers' DB plan to new hires
in 1991 in response to funding problems and put all new hires in a DC
plan. Unfortunately this did not solve the funding problem, and many
teachers found it difficult to retire when relying only on the DC plan.
West Virginia performed a study, found a given level of benefits could
be funded for a lower cost through a DB plan, and put all teachers hired
after July 1, 2005, in the DB plan as a cost-saving measure. So both
Nebraska and West Virginia found a DC plan did not achieve their goals
and changed from DC to DB."
Ilana Boivie , report co-author and economist with the National Institute on Retirement Security,
said, "The research is clear that public employees highly value their
pension benefits and will choose this retirement plan over an individual
DC account. These findings are not surprising and are consistent with
NIRS' recent opinion polling earlier that found 83 percent of Americans believe those with pensions are more likely to have a secure retirement."
Boivie added, "Moreover, employers understand that pensions remain the most cost-effective way
to fund a retirement benefit, and that switching from pensions to
individual accounts can drive up costs for taxpayers. These economic
facts coupled with strong employee preferences for pensions suggests
that public employers are unlikely to mimic the trend away from pensions that has occurred in the private sector."
The full study is available at www.nirsonline.org .
About NIRS
The
National Institute on Retirement Security is a not-for-profit,
non-partisan organization established to contribute to informed
policymaking by fostering a deep understanding of the value of
retirement security to employees, employers, and the economy through
national research and education programs. Located in Washington, D.C.,
NIRS has a diverse membership of organizations interested in retirement
security including financial services firms, retirement plan sponsors
and service providers, and trade associations among others. More
information is available www.nirsonline.org .
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