An October 2013 paper, Equivalent Cost for Equivalent Benefits: Primary DC Plans in the Public Sector, issued by TIAA-CREF refutes the belief that defined benefit plans provide better benefits at lower costs to public sector employees than defined contribution plans. The paper contradicts a report published in 2008 by the National Institute on Retirement Security (“NIRS”).
The TIAA-CREF report details the underfunding that is common in public-sector defined benefit plans, stating that due to increasing plan costs and declining tax revenues, only 80% of the estimated annual required contributions are being paid. As a result, states and local governments have been exploring options to reform public pensions. The paper asserts that a risk-managed defined contribution plan can, in fact, provide cost advantages over traditional defined benefit plans. These types of defined contribution plans are not analogous to private company 401(k) plans, but are instead more similar to 401(a) and 403(b) plans sponsored by universities.
The NIRS report claims that, for a given level of retirement income, defined benefit plans have 46% lower costs than defined contribution plans. The cost savings is attributed to:
• Longevity risk pooling through annuitized payouts (15%)
• Maintenance of a constant asset allocation mix (5%)
• Low-fee, professional management of plan assets (26%).
The TIAA-CREF report maintains that each of these efficiencies can be incorporated into best-practice, risk managed defined contribution plans. The report concludes that best-practice defined contribution plans “are a viable, sustainable option for providing retirement security to workers.”