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.
Defined benefitA mandatory retirement savings plan in which a participant’s future benefits are known or can be calculated, but contributions are subject to adjustments. Defined contributionA voluntary plan in which participants can save pre-tax income for retirement. Contributions are “defined” by the employee, but the future benefit is not guaranteed.