A new study has found that public sector employees who have the choice of participating in a defined benefit plan or a defined contribution plan overwhelmingly prefer defined benefit pension plans over 401(k)-type defined contribution individual accounts.
The survey, from the non-profit National Institute on Retirement Security (NIRS), and actuarial and consulting firm Milliman, found that among the eight states studied in the survey that offer employees a choice between defined benefit and defined contribution plans, at least 80% of employees in six states chose the traditional defined benefit option. In 2015, North Dakota’s defined benefit plan had the highest take-up rate, at 98%, and although Michigan had the lowest take-up rate of defined benefit plans, it was still chosen by 75% of employees. This means the percentage of new employees opting for defined contribution plans ranges from a mere 2% to 25%.
“When employees have a choice, pensions continue to win in a landslide,” said report co-author Jennifer Brown, manager of research for the NIRS. “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.”
Brown said the survey’s findings also suggest that the public sector is unlikely to mimic the trend away from pensions as seen in the private sector for two main reasons. “First, there is strong employee support for pensions,” she said. “Second, [defined benefit] 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.”
The research also found that employees who were in charge of their own investments tend to earn lower investment returns than those in state pension plans. The investment advantage in public defined benefit pensions was attributed to lower expenses, professional asset management, and an optimal investment allocation used by the defined benefit plan over decades. Unlike defined contribution plans, defined benefit pension plans also benefit from longevity risk pooling. The survey cited research from Boston College that found that asset management fees average just 43 basis points for public sector defined benefit plans, while average defined contribution plan expenses were 97 basis points.
Additionally, the results from the study question the effectiveness of states eliminating defined benefit plans in favor of defined contribution accounts in order to lower costs or address funding shortfalls. According to the report, the experience of states shows that such a change has the opposite impact with a move to defined contribution plans increasing retirement costs for employers and taxpayers in the immediate future.
“Making a complete shift from a [defined benefit] to a [defined contribution] structure does nothing in and of itself to close any existing [defined benefit] funding shortfalls,” said the report, “and can actually increase near-term costs.”