DB plans still more cost-efficient than DC plans.

• Position: Defined benefit - Defined contribution

A new report finds that defined benefit (DB) pensions can deliver the same retirement income at a cost that is 46 percent lower than an individual defined contribution (DC) account.

The analysis calculates that DB pension plans:

* Avoid the problem of "over-saving" by pooling the longevity risks of large numbers of individuals--resulting in a 15 percent cost savings.

* Are ageless and therefore can perpetually maintain an optimally balanced investment portfolio rather than the typical individual strategy of down-shifting over time to a lower risk/return asset allocation--resulting in a 5 percent cost savings.

* Achieve higher investment returns as compared to individual investors because of professional asset management and lower fees--resulting in a 26 percent cost savings.

Over the past three decades, private employers have shifted away from DB pensions, which provide employees with a steady retirement income stream, toward DC retirement accounts, in which individual workers manage their own investments. Since the 2008 financial crisis, public employers have faced pressures to make a similar change.

However, DB plans are inherently more cost-efficient than DC plans. A much-cited study released by the National Institute on Retirement Security in 2008, "A Better Bang for the Buck" found that a typical large DB pension plan provides a given level of retirement benefit at about half the cost of a DC plan. A recently updated comparison of DB and DC plan costs, which takes key fee developments into account, along with investment strategies and annuities, uses a uniform set of demographic and economic assumptions for an "apples to apples" comparison. Highlights are outlined below.

A typical DB plan provides equivalent retirement benefits at about half the cost of a DC plan, and 29 percent less than an "ideal" DC plan modeled with generous assumptions. A DB plan, modeled with the typical fees and asset allocation of a large public plan, has a 48 percent cost advantage, compared to a typical individually directed DC plan. The DB pension costs 29 percent less than an "ideal" DC plan that features the same low fees and no individual investor deficiencies. The DB cost...