Pension plans like the one administered by NYSTRS are a far more cost-efficient means of providing retirement income compared to individual defined contribution accounts, according to a study conducted by the National Institute on Retirement Security (NIRS).
The December 2014 report, Still a Better Bang for the Buck: An Update on the Economic Efficiencies of Pension Plans, takes into account recent developments in the retirement benefits landscape with regard to fees, investment strategies and annuities. Like a 2008 NIRS study of the topic, the new report compares defined benefit (DB) and defined contribution (DC) plans. The NYSTRS plan is a DB.
The analysis finds there are three unique qualities to DB plans that allow them to deliver the same retirement income at a 48% lower cost than 401(k)-style DC accounts. They are:
- Pooled longevity risk. Because DB plans save for the average life expectancy of a large number of individuals, these plans are able to provide Americans with stable income that won't run out in retirement. Individuals, on the other hand, must save enough on their own should they be among the half of retirees who will live longer than the average life expectancy. Statistics show DB pension longevity risk pooling generates a 10% cost savings.
- Optimally balanced investment portfolios. DB pensions are “ageless” and therefore can perpetually maintain an optimally balanced investment portfolio. In contrast, a typical individual investor must downshift investments over time to a lower-risk portfolio of cash and bonds, sacrificing higher investment returns generated from stocks. The DB pension balanced portfolio feature generates an 11% cost savings.
- Lower fees. DB pensions achieve higher investment returns as compared to individual investors because they have lower fees and are managed by investment professionals. The lower fees and higher returns of DB pensions generate a 27% cost savings.
The full report is available on the NIRS website at www.nirsonline.org. NIRS is a non-profit research and education 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.