Defined benefit (DB) pension plans, such as your NYSTRS plan, deliver retirement benefits at half the cost of 401(k)-style defined contribution (DC) plans, according to a new national study.
The January 2022 study by the National Institute on Retirement Security (NIRS) found that defined benefit pension plans are more cost effective than defined contribution plans due to “longevity risk pooling, higher investment returns, and optimally balanced investment portfolios.”
“Pensions have economies of scale and risk pooling that just can’t be replicated by individual savings accounts,” said Dan Doonan, NIRS executive director and co-author of the study, “A Better Bang for the Buck 3.0: Post-Retirement Experience Drives the Pension Cost Advantage.”
Much of the cost savings occurs after retirement when retirees shift from saving to spending down their retirement income, the study found. DC plans impose substantially higher fees when retirement assets are withdrawn. In addition, retirees often shift their savings in DC accounts into lower risk, lower return asset classes. This doesn’t happen with DB plans where assets continue to be managed by the pension plan and a certain pension payment for life is guaranteed.
“The cost differences are a key consideration for employers and policymakers given that most Americans are deeply worried about retirement, and retirement savings levels are dangerously low for the typical U.S. household,” Doonan said. “Policymakers are wise to protect existing pensions while also fostering innovation in DC plans to improve the financial security of those relying on 401(k) accounts.”
Read the full study on the Facts & Research page in our Pension Education Toolkit.