Industry News

On April 14, 2020, the Center for Retirement Research at Boston College (CRR) released its issue brief, Have Local Governments Shifted Away from Traditional Defined Benefit Plans?  The brief indicated that the predominant type of public sector retirement plan is a traditional defined benefit (DB) plan.  As compared to changes at the state level, CRR analyzed the extent of local governments considering the adoption of alternative plans to shift away from traditional defined benefit (DB) structures.  In 2018, 19% of large localities offered a DC, cash balance, or hybrid plan for new hires rather than a stand-alone DB plan, up from 11% in 2001.

According to CRR, “The analysis indicates that retirement plan shifts at the local level are similar to states’ changes in volume and geography, but not in the types of plans introduced.  States tend to offer hybrid retirement plans, while localities tend to choose stand-alone defined contribution (DC) plans.”

Other key findings include:

• Self-administered city and county plans are more likely to switch to a hybrid plan or DC plan model in states where alternative plan designs have been used by the state-run plans.

• Although contributions to the new DC plans are lower than those made to the prior DB pension, the impact on government costs will likely be gradual since shifting to a new plan typically applies only to new employees.

• Importantly, the employees covered under the new alternative plans are at risk of receiving lower benefits than under the prior DB pension plans particularly if investment returns fall short of the DB plans’ actuarially assumed return.

The brief is available here.