Public-sector employees overwhelmingly choose defined benefit plans over defined contribution plans when given a choice, according to a report by the National Institute on Retirement Security and Milliman.
In six states that offer new employees a choice between DB and DC plans, the report found that DB was chosen by most employees, ranging from 75% to 98% among the state plans.
“If you had an election with 75% of the vote (for a candidate), it would be well past a landslide,” Mark Olleman, a consulting actuary and principal at Milliman, said in a telephone interview. Mr. Olleman is co-author of the report, which was issued Thursday, with Ilana Boivie, an NIRS economist.
Statewide DC plans have lower investment returns than DB plans because DB assets are pooled and professionally managed, according to the report.
“Some states have considered moving from a DB-only to a DC-only structure in an attempt to address an unfunded liability,” the report said. “Making this shift, however, does nothing to close any funding shortfalls and can actually increase retirement costs.”
In the same telephone interview, Ms. Boivie said some states contemplated closing DB plans to new employees and requiring new workers to choose a DC plan. “They have conducted feasibility studies, but the studies say they won’t save money and may increase costs,” she said.
Ms. Boivie and Mr. Olleman studied seven state-run retirement plans in Colorado, Florida, Montana, North Dakota, Ohio and South Carolina. They looked at data for some plans for the 2010 calendar year and data at other plans for the fiscal year ended June 30, 2011.
“Public employees value their public pension benefits quite highly,” their report concluded. “This fact, coupled with the fact that DB pensions remain the most cost-effective way to fund a retirement benefit, suggest that the public sector is unlikely to mimic the trend away from DB pensions witnessed in the private sector.”