Public Sector Retirement: The Role of Defined Contribution ...



Public Sector Retirement: The Role of Defined Contribution PlansOn an almost daily basis, headlines ring out about public sector pension plans – they are too generous; they are underfunded; they are creating additional fiscal stress on public sector employers. These headlines refer to traditional or defined benefit pension plans. A recently released report explores how defined contribution plans can contribute to an employee’s base of retirement support from their defined benefit and social security accounts. The report, issued by Arthur N. Caple Foundation, the National Association of Government Defined Contribution Administrators and the Center for State and Local Excellence, notes that pension reforms at state and local levels increase the importance of defined contribution plans to supplement employees’ retirement income. The report notes that a defined contribution plan “does not promise a specific amount of benefits at retirement … In these plans, the employee or the employer (or both) contribute…The employee will ultimately receive the balance … based on contributions and investment earnings.”Key report findings include: Between 2009 and 2011, 43 states enacted pension reforms – ranging from lowering levels of income for new employees, current workers and, in some cases, retirees.Experts consulted for the study predict a continuing trend toward reliance on defined contribution plans.Experts also predict an increase in hybrid plans – a combination of defined benefit and defined contribution plans.The definition of what constitutes an adequate retirement varies – with revenue benchmarks ranging from 70% to 100% of pre-retirement income.State and local pension administrators are using tools to make saving and investing easier and more structured.Automatic enrollment is an effective way to encourage participation in voluntary defined contribution plans.Employers need to assess what tools they need and keep in mind that the primary goal is income security.Core defined contribution plans require the same fiduciary and management focus as defined benefit plans.A best practice recommended in the study is that participants in a defined contribution plan have access to lifetime income options that will protect them against longevity risk.Financial literacy and counseling can help employees improve their investment and retirement planning choices. The 30-page report, entitled “The Evolving Role of Defined Contribution Plans in the Public Sector” and written by Paula Sanford and Joshua M. Franzel, is available at . ................
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