Issues & Perspectives

Cautionary Tales: Case Studies Show How States Face Funding, Debt Challenges After Switching to Defined Contribution Retirement Plans

POSTED 3360 DAYS AGO

Case studies just released by the National Institute on Retirement Security (NIRS) highlight the challenges that three states have faced in their switch from defined benefit (DB) to defined contribution (DC) retirement plans for their public employees. Rather than saving money, Alaska, Michigan, and West Virginia exacerbated their funding problems and increased their pension debt. Together, these states offer a cautionary tale for those who might believe that DC plans are less costly and are better suited for managing a public sector workforce.

From the report:

Overall, certain trends appear common to all three states, such as:

Changing from a DB plan to a DC plan did not help an existing underfunding problem, and, in fact, increased pension plan costs.
Workers under the DC plan face increased levels of retirement insecurity.
The best way to address a pension underfunding problem is to implement a responsible funding policy of making the full annual required contribution each year and to evaluate and adjust assumptions as well as funding over time.

Defined benefitAlso known as a pension, this is a type of pooled retirement plan in which the plan promises to pay a lifetime benefit to the employee at retirement. The plan manages investments on behalf of members, and the retirement benefit is based on factors such as age at retirement, years of employment and salary history.Defined contributionA type of individual retirement plan in which an employee saves a portion of each paycheck (along with a potential employer match) and invests that money. The employee’s retirement benefit is based on their account balance at retirement. A 401(k) is a type of defined contribution plan.