Plan design refers to the framework of a retirement plan, defined by such characteristics as participation requirements (mandatory or optional); required contributions by the employer and employees; vesting requirements; benefit levels; methods of benefit distribution; and others.
There are two main types of retirement plans: defined benefit (DB) and defined contribution (DC). Among employees of state and local government, the vast majority participate in a DB plan. Some retirement plans, often referred to as hybrid plans, combine features of DB and DC plans.
A defined benefit plan is an employer-sponsored retirement benefit that provides workers, upon attainment of designated age and service thresholds, with a monthly benefit based on the employee's salary and length of service. The value of a DB plan benefit is not affected by the return on the assets that are invested to fund the benefit, although some DB plans in the public sector link post-retirement cost-of-living adjustments to investment performance. DB plans, also known as pension plans, are the central organizing element of the public retirement system community.
According to the U.S. Bureau of Labor Statistics, approximately 85 percent of employees of state and local government participate in a DB plan (this also includes those who participate in hybrid retirement plans); substantially all of the remainder participate in a defined contribution plan. More ...
A defined contribution plan is an employer-sponsored retirement benefit in which the employer provides a retirement savings vehicle for its employees, and also typically makes a contribution to the employee's retirement account. The 401(k) plan is the most popular form of defined contribution plan, although states and local governments may also sponsor other types of DC plans, such as 401(a), 403(b), and 457 plans.
On a statewide basis for broad employee groups (i.e., not including legislators, judges, etc.), two states and the District of Columbia provide only a defined contribution plan to their workers. All newly hired employees in Alaska since July 2006, new state employees in Michigan since March 1997, and general employees (not teachers or public safety workers) in the District of Columbia have only a DC plan as their primary retirement benefit. More ...
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As their name implies, hybrid plans combine features of both defined benefit and defined contribution retirement plans. Hybrid plans fall into one of two broad categories. One is a cash balance plan, which marries elements of traditional pensions with individual accounts into a single plan. The other type of hybrid is combines a traditional DB plan with a defined contribution plan. More ...
Cost-Sharing Features of State Defined Benefit Pension Plans, The Pew Charitable Trusts, January 2017
Sustainability in American Financial Security Programs, American Academy of Actuaries Public Interest Committee (June 2015)
Colorado Public Employees' Retirement Association Hybrid Defined Benefit Plan: A Comprehensive Study Comparing the Cost and Effectiveness to Alternative Plan Designs, Prepared by Gabriel, Roeder, Smith & Co. for the Colorado Office of the State Auditor (July 2015)
Are California Teachers Better Off With a Pension or a 401(k)?, UC Berkeley, (February 2016)
Retirement Benefit Decisions by City and County Governments, Center for State and Local Government Excellence (November 2014)
Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, Mark Olleman and Ilana Boivie
FAQs About Cash Balance Plans, U.S. Department of Labor
What are Hybrid Retirement Plans? A Quick Reference Guide, Center for State and Local Government Excellence (January 2011)
Essential Design Elements of Hybrid Retirement Plans, Government Finance Officers Association (2008)
Pension Resources, National Conference of State Legislatures
Which Employees Are Delaying Retirement and Why? Towers Watson (September 2014)
2014 Retirement Confidence Survey of the State and Local Workforce, Center for State and Local Government Excellence and TIAA-CREF Institute (August 2014)