The National Institute of Retirement Security released a study on Thursday that found defined-benefit plans are strongly preferred over defined-contribution plans in the public sector.
The study, “Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers,” analyzed seven retirement systems in six states that offer a choice between pension-style plans and 401(k)s. It found that pension-style plans were selected between 75% and 98% of the time.
The report notes, though, that much like high 401(k) participation rates among private sector workers due to automatic enrollment, many public sector employees are defaulted into their employers’ pension plan. “The overwhelmingly high take-up rates, then, could be at least partially driven by inertia on the part of employees, a large number of whom do not make an affirmative choice,” according to the report.
The public sector hasn’t seen the same level of defection from pension-style plans that the private sector has. Private sector DB coverage fell from 76% of full-time employees in 1986 to 24% in 2008, while participation in DB plans among public employees only dropped from 93% of full-time employees in 1987 to 88% in 2008, according to the Bureau of Labor Statistics.
The report found pension-style plans typically earn higher investment returns than 401(k)s because assets are pooled and professionally managed. Research from Boston College found that asset management fees in pension plans average 0.25% of assets, compared with fees that range between 0.6% and 1.7% in 401(k) plans.
Pension plans also tend to use broadly diversified portfolios and managers who follow a long-term investment strategy. Employees in 401(k)s, though, are less likely to make good investment decisions on their own, say the study’s authors.
States that consider moving from a defined-benefit plan to a defined-contribution plan in order to address unfunded pension liabilities find that such a shift does not close funding shortfalls and can increase retirement costs, according to the study.