Hybrid plans are a form of risk-sharing plan design that allocate risk between employers and employees, as shown in Figure 1. In the context of public retirement plans, risk refers to the possibility of an event resulting in a financial loss compared to what is expected. Public retirement plan risk manifests itself primarily in three forms: investment risk, longevity risk, and inflation risk. The degree to which risk is shared between employees and employers varies across differing plan designs. The term hybrid generally refers to plans that combine elements of both defined benefit and defined contribution plans to generate participants’ benefit upon retirement. The most recognized hybrid plan designs are cash balance plans and defined benefit-defined contribution (DB-DC) combination plans, and these plan designs are the focus of this brief.
The continued focus on hybrid plans also occurs as states find that closing their traditional pension plan to future (and, in some cases, existing) employees could increase—rather than reduce—costs, and that providing only a 401(k)-type plan does not meet important retirement security, human resource, or fiscal objectives. While most states chose to retain their defined benefit (DB) plan by modifying required employer and employee contributions, restructuring benefits, or both, some looked to hybrid plans—that combine elements of traditional pensions and individual account plans—as retirement benefit policy solutions.
Hybrid plans have been in place in public sector retirement systems for decades, and they have received increased attention in recent years as more states established hybrid plans on either an optional or mandatory basis. The growing attention to hybrids has occurred amid the many adjustments states have made to public pension benefits and financing arrangements. Modifying retirement plan designs can have potential unintended outcomes, as states find that closing their traditional pension plan to future (and, in some cases, existing) employees may increase—rather than reduce—costs,1 and that providing only a 401(k)-type plan does not meet important retirement security, human resource, or fiscal objectives. While most states have chosen to retain their defined benefit (DB) plan by modifying required employer and employee contributions, restructuring benefits, or both, some states have looked to hybrid plans as retirement benefit policy solutions.
Despite variability in the design of cash balance and DB-DC combination plans, well-designed plans generally contain the core features of retirement plan design known to best meet the human resources and retirement policy objectives of state and local government: mandatory participation, shared financing between employers and employees, pooled assets invested by professionals, targeted income replacement with survivor and disability protection, and a benefit that cannot be outlived. This brief discusses the degree to which these core design features have been retained in public sector hybrid plans.
Keith Brainard, Research Director
Alex Brown, Research Manager
Download Issue Brief