NIRS study: DB plans still more cost-effective

The structural cost advantages of defined benefit plans over defined contribution plans has not changed in recent years, despite DC enhancements, said a research report released Thursday by the National Institute on Retirement Security.

The report revisits 2008 NIRS research that found a typical large defined benefit plan provides the same level of retirement benefit at half the cost of a defined contribution plan. In the 2014 report, “Still a Better Bang for the Buck: An Update on the Economic Efficiencies of Defined Benefit Pensions,” a typical DB plan has a 48% cost advantage over DC for an identical level of benefit, despite DC enhancements like target-date funds and annuities.

The three structural cost advantages of DB plans are longevity risk pooling; well-diversified, long-term portfolios; and low-fee professional investment management, according to NIRS researchers, who found a 100-basis-point differential in DC returns due to higher expenses and reduced investing skill among participants.

“What doesn't get talked about is the participant drag aspect on all this,” said NIRS Executive Director Diane Oakley. For employers considering shifting to DC from DB, “the bottom line is that people will have significantly lower benefits, if you want to keep the cost the same,” Ms. Oakley said in an interview.

For the 2014 report, NIRS used new mortality tables with longer life expectancies, and used a more conservative assumption of when participants would run out of money.