Defined benefit plans continue to provide greater cost advantages to plan sponsors than defined contribution plans, according to a report from the National Institute on Retirement Security.
The report, "A Better Bang for the Buck 3.0: Post-Retirement Experience Drives Pension Cost Advantage," says a typical DB plan has a 49% cost advantage compared to a typical DC plan account, due to higher investment returns, optimally balanced investment portfolios and longevity risk pooling.
The report is an updated version of reports previously issued by NIRS in 2008 and 2014 comparing DB plans and DC plans, and analyzes the costs of the two different types of retirement plans as a percentage of payroll. According to the latest analysis, the cost of an individually directed DC plan equals 32.3% of payroll, while the typical cost of a DB plan equals only 16.5% of payroll. In the 2014 report, a typical DB plan had a 48% cost advantage over DC for an identical level of benefit.
The report says superior investment returns coming from professional managers and lower fees accounts for 30% of the 49% cost savings, while more diversified portfolios account for 12% of the cost savings and longevity risk pooling accounts for 7% of the savings.
"Pensions have economies of scale and risk pooling that just can't be replicated by individual savings accounts," said Dan Doonan, NIRS executive director and co-author of the report, in a news release Thursday. "This means pensions can provide retirement benefits at a much lower cost."
The report also says 80% of the cost difference between a DB plan and individually directed DC plan occurs after retirement, because individual retirees in a DC plan manage their assets on a short-term basis without the benefits of longevity risk pooling.
The report is available on NIRS' website.
