By Lisa Barron
Although the introduction of defined contribution retirement plans
by some states has received much attention, actual activity thus far has been modest, according to a brief by the Center for Retirement Research at Boston College.
In the wake of the financial crisis, sponsors of state and local government pensions cut back on existing defined benefit plans by raising employee contributions and initiated proposals to shift some or all of the pensions system to a DC plan.
But the CRR said its analysis of the data post-crisis found that most of the recent efforts have been a move to either hybrid plans, with a mandatory defined contribution and defined benefit component, or to cash balance plans, where participants are guaranteed a return of 4 or 5 percent.
In addition, none of the sponsors has followed a model adopted by Alaska and Michigan before the crisis that required all new hires to participate solely in a DC plan
where the employee bears all the risks.
As for the reasons behind introducing DC plans, the CRR found the motivations before and after the crisis differed. Before 2008, the motivation was largely to offer employees an opportunity to manage their own money and take advantage of a rising stock market. After 2008, it was more to avoid the high costs associated with large unfunded liabilities and to alleviate some of the investment risk associated with DB plans.
The CRR noted that the shift from DB plans
means that individuals have to face the risk of poor investment returns and the risk that inflation will erode the value of their income in retirement.
But the outlook is not all negative, according to the brief's authors, Alicia H. Munnell, the director of the Center for Retirement Research at Boston College, Jean-Pierre Aubry, assistant director of state and local research at the CRR, and Mark Cafarelli, a research associate at the CRR.
If some defined contribution component or cash balance arrangement enhances the likelihood of responsible funding, public sector employees may enjoy some increased security, they said.
Originally published on BenefitsPro.com