Three states that shifted to defined contribution from defined benefit plans did not save money, said new case studies from the National Institute on Retirement Security.
NIRS researchers looked at Alaska, Michigan and West Virginia, which switched new employees to defined contribution-only accounts to deal with pension underfunding and rising costs. After looking at demographic changes, benefit costs, actuarially required contributions, plan funding levels and retirement security, NIRS found the switch exacerbated pension funding problems and increased pension costs to employers and taxpayers.
“People still have this misperception that switching will save you money. Switching to a DC plan does not solve the problem,” said NIRS Executive Director Diane Oakley in an interview. “The real problem is you’ve got to find a way to fund the plan.” She added that DC plans cost more for sponsors when providing a similar level of retirement security as participants get from a DB plan. “It will save you money only if you significantly cut benefits,” Ms. Oakley said.
In 2006, Alaska moved all new employees into DC accounts to address unfunded liabilities caused in part by inadequate employer contributions. The total unfunded liability has since doubled to $12.4 billion.
In 1997, Michigan closed its overfunded DB system to new state employees, who were offered a DC plan. The DB plan’s funded status dropped to about 60% by 2012 but has been improving in recent years, while retirement security for DC participants has decreased, NIRS said.
In 1991, West Virginia closed its teachers retirement defined benefit system to new entrants, who were offered a DC plan. The DB plan was reopened to all teachers in 2008 after a study showing that providing equivalent benefits would be less expensive in the DB plan. Because of improved funding, the teachers pension plan is expected to be fully funded by 2034 and projected to save $1.2 billion within 30 years by moving participants back to the DB system.
Source: Pensions & Investments