Public sector employees prefer defined benefit pensions over 401(k)-type defined contribution individual accounts, according to a study released Thursday by the National Institute on Retirement Security and Milliman Inc.
The study also found that defined benefit pensions are more cost efficient than defined contribution accounts because of 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.
The study, "Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers," looked at seven state retirement systems that offer a choice between defined benefit and defined contribution plans. What it found is that "when given a choice, between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan."
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When states consider shifting from a DB pension to DC accounts to close funding shortfalls, the report found that such a shift doesn't close the funding shortfalls and can instead increase retirement costs.
Nebraska and West Virginia chose to put new hires in a DC plan and then later changed to a DB plan, said Mark Olleman, consulting actuary and principal with Milliman, Inc. "Nebraska offered some employees hired between 1964 and 2003 only a DC plan, but also maintained a DB plan for other employees. Over 20 years, the average investment return in the DB plan was 11 percent, and the average return in the DC plans was between 6 and 7 percent," he said.
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, suggest that public employers are unlikely to mimic the trend away from pensions that has occurred in the private sector."
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