New research shows defined benefit plans can provide pensions at half the cost of individual accounts
WASHINGTON, D.C. December 4, 2014 – A new report finds that defined benefit (DB) pension plans are a far more cost-efficient means of providing retirement income as compared to individual defined contribution (DC) accounts. The study calculates that the economic efficiencies embedded in pensions enable these retirement plans to deliver the same retirement income at a 48% lower cost than 401(k)-type DC accounts.
The new analysis from the National Institute on Retirement Security (NIRS) finds that there are three unique drivers of the cost savings. More specifically, DB pensions:
Pool the longevity risks of large numbers of individuals to provide Americans with stable income that won’t run out in retirement. Said another way, pensions only have to save for the average life expectancy of a group of individuals. Absent a group retirement plan, individuals must save enough on their own should they be among the half of retirees who will live longer than the average life expectancy. This DB pension longevity risk pooling feature generates a 10% cost savings.
Are “ageless” and therefore can perpetually maintain an optimally balanced investment portfolio. In contrast, a typical individual investor must down shift investments over time to a lower risk portfolio of cash and bonds, sacrificing higher investment returns generated from stocks. This DB pension balanced portfolio feature generates an 11% cost savings.
Achieve higher investment returns as compared to individual investors because they have lower fees and are managed by investment professionals. This lower fees and higher returns DB pension feature generates a 27% cost savings.
The report, Still a Better Bank for the Buck: Update on the Economic Efficiencies of Pension Plans, updates a 2008 NIRS study with similar findings. This new, updated comparison of DB and DC plan costs takes into account recent developments in the retirement benefits landscape with regard to fees, investment strategies and annuities. It also builds an “apples to apples” comparison through a uniform set of demographic and economic assumptions.
Register here for a webinar on Thursday, December 4, 2014, at 2 PM to review the findings and respond to questions.
Download the full study here.
Read Pensions & Investments story here.
Dowload the study PowerPoint here.
[screen_shot_2014-12-03_at_8.00.02_pm] “The study findings are critically important for policymakers to consider as they grapple with the nation’s retirement crisis,” said Nari Rhee, Ph.D , report co-author and NIRS manager of research. “Because the U.S. faces a massive retirement savings shortfall, it’s all the more important to invest in cost-efficient retirement plans. We’ve shown that pensions provide the best bang for the retirement buck – every dollar that goes into a pension generates twice as much retirement income as a dollar invested in a typical 401(k)-type DC account.”
Rhee added, “Given this compelling evidence, policymakers should consider proposals that strengthen and expand DB pension plans. Pensions are a ‘win-win’ approach—they deliver financial security for Americans and are economically efficient. We hope this research informs the policy debate so that pensions are accurately understood and utilized to strengthen financial independence in retirement.”
“In recent years, 401(k) plans have been modified with target date funds and annuities. But even with these changes, DC plans cannot replicate the economic efficiencies of a well-managed pension plan,” said William (Flick) Fornia, FSA, report co-author and Pension Trustee Advisors, Inc. president.
The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Located in Washington, D.C., NIRS’ diverse membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers. More information is available at www.nirsonline. Follow NIRS on Twitter @nirsresearch.