DB Might Be Cheaper than DC

Defined benefit (DB) retirement plans are a less costly benefit for employers than a defined contribution (DC) plan, according to research from the National Institute on Retirement Security (NIRS).

The economic efficiencies inherent in a defined benefit retirement plan make it less costly, according to Beth Almeida, executive director of NIRS, during a press conference call.

Almeida and William (Flick) Fornia, senior vice president at Aon Consulting, coauthored the report summarizing the findings of their analysis of the cost of achieving a target retirement benefit in a typical DB plan versus the cost of providing that same benefit under a 401(k)-style DC plan.

The NIRS analysis found that the cost to deliver the same level of retirement income to a group of employees is 46% lower in a DB plan than it is in a DC plan. More specifically, according to the report, “longevity risk pooling in a DB plan saves 15%, maintenance of a balanced portfolio diversification in a DB plan saves 5%, and a DB plan’s superior investment returns save 26% as compared with a typical DC plan.”

Though DB plans typically provide a more generous benefit than DC plans, and more generous benefits are more expensive, DB plans are more efficient and “stretch taxpayer, employer or employee dollars further in achieving any given level of retirement income,’ according to the report.

A copy of the report can be downloaded here.