Costs of Changing Plan Design

So far there has been no large scale shift in plan design for the primary pension benefits of state and local government employees; although it has been proposed and studied in a number of states as well as at a macro level.

A 2008 study by the National Institute on Retirement Security, updated in 2014, found that defined benefit plans are 48% more cost efficient than defined contribution plans when measured at any level of retirement benefit. This is largely because defined benefit plans pool longevity risks or large groups of people as opposed to defined contribution plans which are designed to provide benefits to one individual. Defined benefit plans also enjoy greater returns on investment due to professional management and the advantages of economies of scale. 

There are advantages and disadvantages to defined benefit and defined contribution plan designs, both to the individual retiree and the organization administering the plan.

State Studies Addressing Costs of Changing Plan Design

• Actuarial analysis of switching Kentucky teachers to a defined contribution plan, Cavanaugh Macdonald Consultants (November 2017)

• Most Kentucky Teachers Are Significantly Better Off with Pensions than 401(k)s, UC Berkeley Center for Labor Research and Education (March 2018)

• Legislative analysis of proposal to close the hybrid plan for Michigan public school teachers in lieu of a defined contribution plan, Michigan House Fiscal Agency (May 2017)

• Defined Contribution & Retirement Study Committee Final Report, Arizona State Treasurer (December 21, 2012)

• Pension Benefits Design Study by the TRS of Texas (September 2012)

• Kansas PERS Study Commission Final Report, Kansas Legislative Research Department (December 2011)

• Retirement Plan Design Study, Minnesota Statewide Retirement Systems (June 1, 2011)

• Defined Contribution Retirement Plan Study for the New Mexico Educational Retirement Board, Gabriel, Roeder, Smith & Co. (October 2005)

• Study of Retirement Plan Designs for the State of Colorado, Buck Consultants (November 2001)

• Benefit Review Study of the Nebraska Retirement Systems, Buck Consultants (August 2000)