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Wednesday, September 20, 2017

Public sector employees overwhelmingly pick defined benefits over individually managed retirement accounts


By Allen Jones
TEXPERS, Communications Manager

Texas public pension plan administrators and trustees have a new study to reference in highlighting the importance of maintaining defined benefits for the state’s police, firefighters and other public workers.

Public sector employees in states with retirement plan choice overwhelmingly pick defined benefits (DB) pension plans over 401(k)-type defined contribution (DC) individual accounts, according to a new study by the National Institute on Retirement Security, a nonprofit research and education organization.
“The report makes it clear that when given a choice, public employees care about the type of retirement benefits they receive,” says Diane Oakley, executive director of NIRS.
Oakley spoke to TEXPERS about the study, “Decisions, Decisions: An Update on Retirement Plan Choices for Public Employees and Employers,” which examines new hire elections in 2015 for systems in seven states that provide public workers with a choice of DB or hybrid DB/DC and DC plans. The systems studied are located in Colorado, Florida, Michigan, North Dakota, Ohio, South Carolina and Utah.

Of the systems studied by researchers, the percentage of persons who took advantage of DB pensions in 2015 was 80 percent or higher in six states, according to the new report. Two of the state systems studied had pension take-up rates greater than 95 percent. Florida and Michigan had take-up rates of 76 percent and 75 percent, respectively. 

Although Texas public pension systems are not among the retirement plans studied in the report, the information is useful in gauging how receptive public workers here could be to a choice of benefit plans, Oakley says. The study is an update to previous research NIRS researchers conducted in 2011.
“The information really didn’t change much from our 2011 study,” Oakley says.
The report is co-authored by Jennifer Brown, manager of research for NIRS, and Matt Larrabee, principal and consulting actuary with Millman. Brown says the study’s findings are consistent with previous polling that finds American’s strongly support pensions for providing economic security in retirement.
“Our findings also suggest that the public sector is unlikely to mimic the trend away from pensions as seen in the private sector for two reasons,” Brown states in a news release announcing the new study. “First, there is strong employee support for pensions. Second, DB 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 report, published late August, also indicates that employees directing their own investments in 401(k)-like defined contribution plans typically earn lower investment returns than that of state pension plans. The report attributes the investment advantage in public DB pensions to lower plan expenses, professional asset management and optimal investment allocations used by the DB plan over decades. DB pension plans also benefit from prolonged risk pooling, says Oakley, NIRS’ executive director.

That’s not the only reason why the 401(k)-like accounts aren’t catching on when public employees or employers are given a choice, however. According to the NIRS report, DC plans typically lack supplemental benefits such as death and disability protection. Some plans have attempted to address these differences, but these provisions require extra contributions that are not deposited to the members’ DC accounts. Plus, “making a complete shift from a DB to a DC structure does nothing in and of itself to close any existing DB funding shortfalls, and can increase near-term costs,” according to the study.

The new report also examines the issue of states eliminating DB pensions and moving new hires into DC accounts in the hopes of lowering costs or addressing funding shortfalls often caused by states skipping their full actuarial contributions. However, the experience of states shows that such a change has the opposite impact with a DB to DC switch increasing retirement costs for employers and taxpayers in the immediate future, according to a synopsis of the report provided by NIRS.

DC plans would especially be less cost-efficient for small pension systems, Oakley says. Not only are DB plans the most cost-effective way to fund lifetime retirement benefits, but defined benefits also continue to help recruit and retain public employees, she adds.
“Of the small minority who choose defined contributions, they tend to leave their jobs more often than those with defined benefit retirement plans,” Oakley says.
According to the NIRS report, the public sector workforce has a median tenure rate that is twice that experienced in the private sector.

Allen Jones
About the Author:
Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.

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