NIRS/Berkeley Labor Center Studies Teacher Pension Plans with 401(k) Plans

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NIRS/Berkeley Labor Center Studies Teacher Pension Plans with 401(k) Plans

On January 7, 2019, the National Institute on Retirement Security (NIRS) and the University of California (UC) Berkeley Labor Center released their joint report, Teacher Pensions vs. 401(k)s in Six States: Connecticut, Colorado, Georgia, Kentucky, Missouri, and Texas. The report is intended to represent a diverse range of defined benefit pension structures and membership demographics across the U.S.

Specifically, the report analyzes teacher retirement system membership and actuarial data in six states. Using retirement system actuarial assumptions, the study examined teacher turnover patterns and projected the final tenure years of service at retirement or separation for current teachers. According to the report, pension plans have important retention impact and provide greater retirement security than 401(k) plans.

Some key findings include:

  • On average in the six states studied, teachers typically serve 25 years in the same state and are well-positioned to benefit from a traditional pension.
  • On average, about 80% of teachers in the states studied, a pension plan will provide more secure retirement income compared to a 401(k) plan.
  • In all six states studied, most teachers would require significantly greater contributions to realize the same retirement income in a 401(k) plan as the lowest-tier pension.

The report suggests some implications for any policymakers considering pension reform, including:

  • As the teacher shortage worsens, pensions positively affect retention, lower turnover and contribute to quality education.
  • The effect of shifting from pensions to 401(k)s and other account-based plans will increase turnover, greatly reduce retirement income and reduce future consumer spending.
  • To help ensure equity between short- and long-term employment teachers should consider restoring or augmenting portability provisions in existing pensions (i.e., service credit purchases, reciprocity, matching employee contribution refunds, or allowing non-vested employees to purchase lifetime income).

The report is available here.

CRR Issues Brief on Late-Life Financial Risks for Retirees

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CRR Issues Brief on Late-Life Financial Risks for Retirees

On January 2, 2019, the Center for Retirement Research at Boston College (CRR) published its brief, What Financial Risks Do Retirees Face in Late Life? According to the brief, the number of individuals in the U.S. over age 75 is increasing and may become more reliant on 401(k) plans rather than Social Security and traditional pensions. As life expectancy increases, more retirees will face late-life financial risks such as: high health costs; difficulty of managing finances due to cognitive decline; and widowhood.

Other key findings include:

  • Currently, researchers indicate that these risks severely affect only a small number of retirees, but the impact may become more extensive in the future.
  • Some reasons for the expected increase would include rising health care costs; increase in 401(k)s that may be more vulnerable to fraud; and the declining role of Social Security’s widow benefits.
  • Since these challenges may be anticipated in advance, individuals, researchers and policymakers may affect the outcome by developing and implementing viable solutions.

The brief is available here.

NASRA Publishes Report on Risk Sharing in Public Retirement Plans

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NASRA Publishes Report on Risk Sharing in Public Retirement Plans

In January 2019, the National Association of State Retirement Administrators (NASRA) released their report, In-Depth: Risk Sharing in Public Retirement Plans. The report is intended to help enhance knowledge and awareness of various current options that are being utilized to design and finance retirement benefits.  Specifically, the report discusses shared risk features that are incorporated into public pension plans and also presents nine case studies of plans that have shared risk structures.

The types of risk sharing discussed in the report include:

  • Variable employee contribution rates;
  • Contingent or limited cost-of-living adjustments;
  • Cash balance hybrid plans; and
  • DB-DC hybrid plans.

In addition, the brief discusses the key risks faced by public retirement plans and the efforts to share the risks between employers and employees through changes in plan designs.  These risks include:

  • Investment Risk – the risk that actual investment returns underperform the expected rate of return;
  • Longevity Risk – the risk that individuals will outlive their retirement assets; and
  • Inflation Risk – the risk that the purchasing power of money will decline over time.

According to the report, “Shared risk plans are intended to increase the predictability of financial outcomes resulting from both positive and negative events affecting plans, sponsors and beneficiaries…. A primary consideration for any retirement plan sponsor is which types of risk, and in what proportion, are most appropriately borne by individuals, and which risks are best borne collectively, by institutions.”

The report is available here.

NASRA Updates Study on Pension Reform for State Retirement Systems

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NASRA Updates Study on Pension Reform for State Retirement Systems

In December 2018, the National Association of State Retirement Administrators (NASRA) updated their report, Spotlight on Significant Reforms to State Retirement Systems, 2018.  NASRA updated their previous report published in 2016 which covered the state pension reforms enacted between 2009 and 2014.

Some of the key findings include:

  • Since 2009, 23 states have introduced or added one or more risk-sharing plan design features for broad employee groups. These include new hybrid plans, variable contribution rates, and benefits, including COLAs, that may change based on external factors, such as the fund’s investment performance or the plan’s funding condition.
  • 29 states increased retirement eligibility, affecting over 40 plans, and typically increased age, years of service or both; and
  • Almost all states retained traditional pension plans and modified employer and employee contributions, restructured benefits or both. 

The report indicates, “Since 2009, nearly every state passed meaningful reform to one, or more, of its pension plans. Although the global market crash and recession affected all plans, differing plan designs, budgets, and legal frameworks across the country defied a single solution; instead, each state met its challenges with tailored changes specific to its unique circumstances.”

The report also includes an appendix with a state-by-state listing of pension reforms for state retirement systems and identifies the applicable changes from 2009-2018. The listing presents detailed descriptions of changes affecting various combinations of contributions, benefits, and eligibility for retirement plans that were affected by pension reform legislation in each state.

The report is available here.