As workers worry increasingly about having enough money to see them through retirement in reasonable comfort without running out, as well as wanting to be able to move their retirement plans from job to job, a report from the National Institute on Retirement Securitytouts public defined benefit pension plans as meeting both those needs.
The study was based on a survey of 89 public pension plans to determine plan types, employee contribution rates, vesting requirements, interest rates paid on withdrawn employee contributions, refunds of member accounts, redeposits of employee contributions and ability to purchase service credits.
As the private sector has increasingly moved away from defined benefit plans to defined contribution plans, the study said that migration “has resulted in a ‘great risk shift’ where the risk and most of the funding burden falls in individual employees, rather than experienced professionals and employers.” Because of that shift, it said, “the median retirement balance for all working-age households is only $2,500; for households near retirement, the balance only marginally improves to $14,500.”
And although employees in the private sector are glad to be able to move their accounts when they switch employers, the report said, far too many don’t — instead, they cash out their plans and end up short when it comes time to retire.
Defined benefit plans, in contrast, aren’t necessarily viewed as being portable — but the report said that wasn’t necessarily the case. Many public pension plans, it said “have adopted features that allow individuals who change jobs to retain and even increase their benefits.”
Another difference between defined contribution and defined benefit plans is the voluntary nature of the former, with employees usually having to opt in — although the use of auto enrollment is growing. But nearly all public pension plans, the report said, “consistently require employees to contribute toward the cost of their retirement benefits as soon as they start working, and to continue with every paycheck.”
Then there’s the annuitized nature of defined benefit plan benefits — something that the defined contribution market is working to catch up on. In addition, there’s the question of whether private sector employees have access to a retirement plan at all — the paper said that just 55 percent of private sector wage and salary workers between the ages of 25 and 64 had access to a retirement plan at work in 2013.
The study did not address the funded levels of any public pensions — something that’s made headlines for the precarious nature of many plans’ finances. Membership in Washington, D.C.-based National Institute on Retirement Security is comprised of financial services firms, employee benefit plans, trade associations and other retirement service providers.
Source: Benefits Pro