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NIRS Report Examines Impacts of Switching Away from Defined Benefit Plans

On December 3, 2023, the National Institute on Retirement Security (NIRS) released its report, No Quick Fix: Closing a Public Pension Plan Leads to Unexpected Challenges. The report analyzed the experience of five states that shifted new employees away from defined benefit (DB) pensions to defined contribution (DC) or cash balance plans. Of the states that switched to a DC plan, the report indicated that there were increases in costs, negative cash flow and employee turnover. In addition, the retirement security of plan participants in DC plans was negatively impacted due to a large amount of “leakage” of retirement assets from the DC accounts that replaced pension plans.  

Other report findings include:

  • Of the states studied, employer costs significantly increased after closing a pension plan. In some states, poor funding practices preceded the plan closure and funding discipline improved only after closing the plan. In one of these plans, employer costs remain high even after 26 years of being closed. However, the ongoing contributions of new active members combined with sound funding practices show strong results.
  • In the closed plans, cash flows have become more negative over time as demographics shift and the plan initiates spending down its assets.
  • The available retention data indicates that retention is poor in the new plans or tiers even though claims exist that younger workers will be attracted to savings-based plans (i.e., DC and cash balance plans). The analysis indicates that workforce management has become a challenge in many of these states with closed plans.
  • When leaving a public sector job, many workers have cashed out their DC plan account balances and those amounts are likely not used for producing retirement income. The available data suggests that DC plans are failing to help many workers accumulate sufficient retirement savings.

The report concludes, “Closing a public DB plan offers no quick fix to the ongoing challenges of maintaining a robust and thriving public workforce and managing existing financial obligations. Instead, experience shows that closing a DB pension plan creates more problems for public sector employer[s] and employees for many decades.”

The report is available here.