Even though public and private sector employers find them impossible to afford, a new study reports that public sector employees with a retirement plan choice overwhelmingly choose defined benefit pension plans over 401k-style defined contribution accounts.
While the latter might soon be the only option left, of the eight states studied that offer employees such a choice, the DB pension take-up rates in 2015 were 80 percent or higher in six states.
Two of the plans studied had pension take-up rates higher than 95 percent, while Florida and Michigan had take-up rates of 76 percent and 75 percent, respectively.
Importantly, the research finds that even when the retirement plan default option favors a 401k-style plan, most employees still select a pension plan.
For example, in Washington the default retirement plan is a combination DB/DC plan. Employees must affirmatively act to elect to participate in the DB pension plan instead, and they do. Most newly-hired employees–six out of every 10 new hires–actively choose a pension plan.
The findings are contained in a new study, “Decisions, Decisions: An Update on Retirement Plan Choices for Public Employees and Employers.”
The research is co-authored by Jennifer Brown, manager of research for the National Institute on Retirement Security and Matt Larrabee, principal and consulting actuary with Milliman.
“When employees have a choice, pensions continue to win in a landslide,” report co-author Jennifer Brown said in a statement. “These findings indicate that public employees highly value their pension benefits, which is consistent with NIRS’ polling that finds Americans strongly support pensions for providing economic security in retirement. Notably, our polling also indicates that public employees strongly agree that all Americans should have a pension.”
“Our findings also suggest that the public sector is unlikely to mimic the trend away from pensions as seen in the private sector for two reasons,” she added. “First, there is strong employee support for pensions. Second, DB pensions remain the most cost-effective way for public employers to provide a modest and secure retirement benefit for employees who typically earn less than comparable private sector employee.”
The research also indicates that employees directing their own investments typically tend to earn lower investment returns than that of state pension plans.
The investment advantage in public DB pensions can be attributed to three factors: lower expenses, professional asset management and an optimal investment allocation used by the DB plan over decades. DB pension plans also benefit from longevity risk pooling.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
