The vast majority of public employees choose defined benefit pension plans over 401(k)-type defined contribution individual accounts when given a choice, the National Institute on Retirement Security reported Wednesday.
In 2015, DB pension uptake rates were 80% or more in six of eight states that offer employees a choice and about 75% in the other two, the NIRS study showed.
Not only that, but most employees still select a DB pension plan even when the retirement plan default option favors a DC plan.
NIRS, a research group that favors pension plans, pointed to Washington state, whose default retirement plan is a combination DB/DC plan. Employees must affirmatively act to elect to participate in the DB pension plan instead, and six out of every 10 new hires do.
“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,” the institute’s director of research and report co-author Jennifer Brown said in the statement.
“Notably, our polling also indicates that public employees strongly agree that all Americans should have a pension.”
Brown said the findings further suggested that the public sector is unlikely to mimic the trend in the private sector away from pensions. Why?
“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.”
According to NIRS research, DC plans are less cost efficient than DB plans because of lower investment returns and the lack of longevity risk pooling.
The new study also showed that employees who direct their own investments typically tend to earn lower investment returns than that of state pension plans.
It attributed public DB pensions’ advantage to lower expenses, professional asset management and an optimal investment allocation used by the DB plan over decades.
DB pension plans also benefit from longevity risk pooling, it said.
Some states have considered moving employees from a DB-only to a DC-only structure in the hope of lowering costs or addressing funding shortfalls, which are often caused by states failing to make their full actuarial contributions.
The NIRS found that making this shift does nothing to close any existing funding shortfalls, and can increase retirement costs.
The new research is an update to a 2011 study that had similar findings.
To conduct the study, NIRS and Milliman, an actuarial and consulting firm, requested information directly from the retirement systems that allow new hires to choose between DB, DC, and combination plans. Those systems provided statistics on members who had selected each option.
In addition, the authors requested other important provisions relating to benefits and contributions, which, they said, provided insight into what really happens when public employees are allowed to choose between DB and DC.