New Study: Defined Contribution Retirement Plans Provide Retirement Security

Defined contribution plans are cost-effective and eliminate the prospect of pension debt

NEW YORK, NY (7/23/15) — A new study by Manhattan Institute senior fellow Josh B. McGee finds that defined contribution retirement plans, as opposed to defined benefit plans, are a cost-effective option for providing retirement security to employees at all stages of their careers. Many advocates of defined benefit plans, including the National Institute for Retirement Security, have long claimed that defined contribution plans are simply not as cost-effective, while ignoring the weight that pension debt places on defined benefit plans. This study shows that those with a true interest in retirement security should not so easily dismiss the benefits of defined contribution plans.

Using significant empirical work, this study shows that the most influential voices in the retirement policy discussion have misrepresented the effectiveness of defined-contribution retirement plans as compared to defined-benefit plans. McGee shows that the return distribution, the difference between the two types of plans is minimal, and has been trending toward zero. At the upper end of the distribution—the best-performing retirement plans—defined contribution plans consistently outperform defined benefit plans.

Today governments owe public pension plans somewhere between $1 and $4 trillion for benefits public workers have already earned. Of crucial importance for public pension policy in the face of this reality, the study finds that pension debt has been generally underappreciated as a cost of maintaining defined benefit retirement plans. Defined contribution plans, on the other hand, entirely avoid the possibility of pension debt, as they are funded throughout a worker’s career, rather than at the end, based on a final average salary.

The paper’s key findings include:

• Defined contribution  retirement plans are cost-effective vehicles for helping workers achieve retirement security.
• Defined contribution retirement plans are achieving investment results that are equivalent to defined benefit  plans, and can offer annuities (i.e., lifetime income) at similar prices.
• Defined contribution plans eliminate the prospect of pension debt (i.e., unfunded liabilities), an underappreciated cost driver for defined benefit plans.

Click here to read the full report.