Workers in the public sector generally have much longer tenures, on average, than those in the private sector. This is one big reason a new report says 401k-like defined contribution plan designs from the private sector are not good models for the public sector.
The tenure differences and the public sector’s prevalence of offering defined benefit pension plans underscores the need for public sector-specific research on DC plans and programs, according to a new study from the Public Retirement Research Lab (PRRL).
The PRRL is a new program of the Employee Benefit Research Institute and the National Association of Government Defined Contribution Administrators (NAGDCA) that is dedicated to research aimed at better understanding the design and utilization of defined contribution public retirement plans.
“The significant difference in tenure between public and private sector employees evidences the need for a model other than private sector retirement plans and programs for public sector employees,” said NAGDCA Executive Director Matt Petersen. “While this may seem obvious, currently public sector defined contribution plans are largely modelled on private sector 401k plans.”
Tenure for public-sector workers across all classes is longer than private-sector worker tenure, which translates into different retirement program needs, given that employee tenure is a critically important topic when it comes to designing retirement programs.
For the new study, “Trends in Public-Sector Employee Tenure,” PRRL collects and analyzes public sector defined contribution data “to provide unbiased, actionable findings to better inform public plan design, management, innovation, and legislation,” according to a May 7 statement announcing the study results.
The study found the share of public-sector workers in their 40s is decreasing sharply. This decline will result in a significantly younger workforce in 5 to 10 years, as workers now in their 50s and older retire and are replaced by the smaller group of workers now in their 40s. As younger workers comprise an ever-larger share of the public-sector work force, retirement programs will need to evolve accordingly.
“Of additional consideration, although not a focus of this study, is the relatively broad availability of traditional defined benefit pension plans for public sector employees, which suggests public sector defined contribution plans hold a different role in public sector employee retirement planning and likely require different features,” Petersen said.
DC plans in the public sector could have different appropriate asset allocation strategies given the guaranteed income coming from the DB plan, which could mean more investment in riskier assets and lesser need for income-generating assets in the DC plan, the study finds.
In addition, with public-sector workers being less likely to change jobs, that means fewer opportunities for leakage and more continuous participation.
Still, the report notes tenure for some groups of public-sector workers is shortening, so understanding how to incorporate more shorter-tenure workers may involve some tweaking of the retirement programs.
With the younger-than-age-50 cohort making up a larger and larger share of the public-sector workforce going forward, retirement programs are likely going to need to encompass programs that look at the total finances of the workers, as these can be more important for younger workers.
This could include various financial wellbeing programs, such as emergency savings programs, student loan debt programs, and overall budgeting programs.
“These programs can help establish the overall finances of the younger workers so that they have their finances in order to prepare for retirement instead of struggling to meet current financial obligations,” the report states.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
