The $119.6 billion New York City Retirement Systems’ defined benefit plans can provide the same retirement income at a much lower cost than could defined contribution plans, according to a report by the National Institute on Retirement Security and Pension Trustee Advisors, a pension advisory company.
Applying to New York City’s five defined benefit pension systems the methodology used in a 2008 national study on DB and DC plans, the NIRS found that the costs associated with New York City’s five plans were 36% to 38% less than those associated with models of 401(k) plans, Diane Oakley, executive director of NIRS, said in an interview. The report cites percentage ranges because the five city plans aren’t identical.
The New York City results are “in line with (our) national study showing that defined benefit plans in general are more efficient than defined contribution plans,” Ms. Oakley said.
According to a summary of the study, the city’s five DB plans offer three areas of savings vs. DC plans:
• The city plans’ investment returns are 21% to 22% better than a 401(k) plan due to their pooling of assets, lower fees and professional management.
• The plans’ ability to pool the longevity risks of many participants results in a savings of 10% to 13% “compared to a typical defined contribution plan.”
• Portfolio diversity in the city’s DB plans saves 4% to 5% vs. a typical DC plan.
“Calls to replace pension plans with 401(k) plans understandably increase when markets have returned poorly over sustained periods,” New York City Comptroller John C. Liu, who commissioned the study, said in a news release. “However, as this and other studies show, the defined pension is the most cost efficient vehicle to deliver retirement income security.”
The five DB plans in the New York City pension system are the New York City Employees’ Retirement System, Teachers’ Retirement System, Police Pension Fund, Fire Department Pension Fund, and the Board of Education Retirement System.
