By Paula Aven Gladych
Common wisdom might suggest otherwise, but a properly managed defined contribution plans can be as cost-effective as defined benefit pension plans
, according to a study by the TIAA-CREF Institute.
Pension plan features, such as annuitized benefit payments and low-fee, professional asset management can be incorporated into the 401(k) and 403(b) plan models very easily. Many DC plans already include these features, including 401(a) and 403(b) plans
sponsored by public and private colleges and universities, TIAA-CREF said.
DB plans do not hold any advantage over DC plans, according to its study.
In fact, the funding of public sector DB plans is of real concern to policymakers as governments continue to face budgetary challenges in the post-recession economy. Among DB plans sponsored by state and local governments, the ratio of assets to liabilities was estimated to be between 50 percent and 73 percent in 2012, depending upon methodology used, the report found. Increasing plan cost and reduced tax revenues have made it difficult for many governments to fully fund the annual required contributions associated with their plan.
This concern has led policymakers across the country to consider pension reform, many of which incorporate defined contribution plan
elements into the primary plan structure.
TIAA-CREF describes the elements that make up a “best-practice, risk-managed” DC plan as follows:
- Mandatory participation or automatic enrollment.
- Adequate contribution rates.
- A limited set of professionally managed, low-cost, pooled investments.
- Mandatory or default investment in automatic asset allocation vehicles, such as target-date funds.
- Limited or no borrowing from the plan.
- Annuitized benefit payments.
- Provision of objective education and advice for participants.
The report concluded that the assertions that DB-structured retirement plans are more cost-efficient are based on comparisons with the typical private sector 401(k) model that don’t incorporate these best practices.
Originally published on BenefitsPro.com