How popular are defined benefit pension plans?

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With pension reform high on the agenda of recession-strapped states, defenders of the status quo are feeling the heat.  Case in point: the National Institute on Retirement Security, out with new data they claim shows that defined benefit plans are strongly preferred over defined contribution plans.  But a deeper look at the numbers tells a different tale.

NIRS looked at seven retirement systems (three including teachers) offering a choice between a defined benefit (DB) plan, the traditional plan that guarantees retirees set payments, or a defined contribution (DC) plan, generally like a 401(k), and concluded that DBs are preferred because the percent of new employees choosing DC plans ranged from only 2 to 25 percent.   

But the reality is that in most states, employees never actually "choose" a plan; the defined benefit system is the default option. Looking at the states that include teachers, 79 percent defaulted into the defined benefit plan in Ohio and 53 percent entered the DB plan by default in Florida.  (The third state, South Carolina, doesn't track defaults.)

What do the numbers look like when a choice is made?  In Florida, for those who actively enrolled in one plan or the other, more new employees actually chose the defined contribution plan. Twenty-five percent enrolled in the defined contribution plan, while 22 percent chose the defined benefit plan. In South Carolina, 18 percent chose the DC plan.  Even without knowing the percentage of defaulters, this number is impressively high, considering new teachers in South Carolina only have 30 days to make their choice, and amidst the sturm und drang of the first month of teaching it is easy to see how they would do nothing and default into the defined benefit plan.

NIRS also makes the relatively obvious point that switching to defined contribution plans does not solve the problem of already accumulated unfunded liabilities.  In fact, it may exacerbate the short term problem because new members are not covering the costs of previous members.  The point of offering defined contribution plans is to try to prevent future liabilities and lower costs in the long run, while creating systems that are more fair and portable to all employees, and to attract new professionals to teaching.  This would allow states and districts to spend money previously allocated to DB plans on more dynamic ways to attract, retain and compensate effective teachers.

Trish Madden and Sandi Jacobs