A new research analysis finds that defined benefit (DB) pension plans are strongly preferred over 401(k)-type defined contribution (DC) individual accounts.

The study analyzes seven state retirement systems that offer a choice between DB and DC plans to find that the DB uptake rate ranges from 98 to 75 percent. The percentage of new employees choosing DC plans ranges from 2 to 25 percent for the plans studied.

In recent years, a few states have offered public employees a choice between primary DB and DC plans. The new study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, analyzes the choices made by employees and finds that:

• When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
• DB pensions are more cost efficient than DC accounts due to higher investment returns and longevity risk pooling.
• DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan which are therefore not deposited into the members’ accounts.
• When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
• A “hybrid” plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.

The seven plans offering DB and DC choice that were analyzed for the study include Colorado Public Employees’ Retirement Association, Florida Retirement System, Montana Public Employee Retirement Administration, North Dakota Public Employees Retirement System, Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, and South Carolina Retirement Systems.

The report is co-authored by Mark Olleman, consulting actuary and principal with Milliman, Inc. and Ilana Boivie, NIRS economist and director of programs.