Study Finds Shifting to Defined Contribution Pensions Doesn’t Always Save

A recent survey of a few states that have shifted some of their pension plans to defined contribution from defined benefit demonstrates that savings are not guaranteed.

About half of Maryland’s counties participate in the State’s pension system, and all counties contribute to the cost of teacher pensions statewide.

As stakeholders in the pension system with a vested interest in its sustainability, counties are interested in the debate between defined benefit and defined contribution systems. Defined benefit systems provide a set benefit to retirees, while defined contribution plans, often 401(k) or 403(b) are tax-deferred retirement accounts that provide returns on accumulated savings on set contribution amounts.

An article from Pensions and Investments describes that research into four states that transitioned from one plan to another did not reap cost savings,

NIRS researchers updated prior case studies on Alaska, Michigan and West Virginia and created a new study on Kentucky. All of the states have switched new employees to defined contribution-only accounts to deal with pension underfunding and rising costs.

According to an NIRS report on the studies, the changes increased overall costs for the states, did not address existing pension underfunding and led to a loss of retirement security for employees.

For more information, see NIRS: No money saved for 4 states that shifted to DC from DB plans from Pensions and Investments and the full study, Enduring Challenges: Examining the Experiences of States that Closed Pension Plans.