Revisiting the DB-DC question.

• Author: Brainard, Keith
• Position: Interview

THE DB PERSPECTIVE

By Keith Brainard

The following is reprinted with the permission of the National Association of State Retirement Administrators. It was originally published in the Spring 2005 issue of NASRA News.

The defined benefit plan is the foundation of retirement benefits for most public employees and serves as the unifying element binding the public retirement system community. Yet many DB plans, which have enjoyed near-monopoly status for generations among most of state and local government, now find themselves in competition with their chief counterpart: defined contribution plans.

The threat from advocates of DC plans is currently the most pressing issue facing the public retirement system community. Effectively responding to this challenge requires that we first recognize and understand it. Following is a discussion of the DB/DC issue.

Why do you believe defined benefit plans are endangered?

Indications that DB plans for public employees are under assault are all around. For example:

* The Alaska legislature approved a bill, which has been signed by the governor, to replace DB plans with a DC plan for public employees hired after June 30, 2006.

* Since 2001, four states--Florida, Montana, Ohio, and South Carolina--have begun to allow broad groups of public employees to choose a DC plan rather than participate in the DB plan. Beginning in 2006, newly hired Colorado state employees will be able to choose between a DB and DC plan. One concern with this development is that it may serve as the foot in the door through which the DB plan eventually may be terminated entirely.

* California Gov. Arnold Schwarzenegger earlier this year announced his support for terminating DB plans for all public employees in the state who enroll after June 2007. This would include all employees of the state and its political subdivisions--public school teachers, city and county workers, state employees, and university faculty and staff. Although the initiative later was withdrawn, the governor has continued to express his support for overhauling the state pension structure.

* The New Mexico governor signed a bill this year that directs the board of the state teachers retirement plan to study the feasibility of converting to a DC plan.

* President Bush's promotion of an "ownership society" is providing political inspiration to state legislators and others who are sympathetic to the idea of replacing pooled assets with individual accounts for public employees.

* Groups representing taxpayers and corporations continually lobby legislators in favor of replacing DB plans with DC plans. The leader of a national taxpayer-rights group has announced on multiple occasions his intentions to eliminate DB plans for public employees.

* The size and cost of unfunded pension liabilities are provoking a response in some states that the solution is to terminate the DB plan.

For all this activity threatening public DB plans, why do 90 percent of state and local government workers continue to participate in a DB plan?

DB plans in the public sector have demonstrated remarkable resilience. Many states have considered closing off their DB plans but, upon closer inspection, recognized that they actually are better off working within the existing DB plan framework than pursuing drastic changes that are likely to result in less, not more, retirement security for public workers.

A recent study of federal employees found that 91 percent believed that their pension is an important factor in their decision to work for the federal government. Attracting and retaining qualified workers is an overarching objective for every employer.

In each state (Michigan, Florida, South Carolina, Ohio, Washington, and Montana) where workers were given a choice between plan types, the overwhelming majority elected to participate in a DB plan. Moreover, although many states have considered legislation to (or studied the idea of a) switch to a DC plan, all but three (West Virginia, Michigan, and the District of Columbia) have retained the DB plan. Earlier this year, West Virginia closed its school teacher DC plan to new entrants, establishing in its place a DB plan for teachers hired after June 2005. Participants in the old DC plan will vote next year on whether to...