DC Plans Have Advantages over DB Plans

A best-practice defined contribution (DC) plan can provide secure retirement income at equivalent cost to a defined benefit (DB) plan, according to a new research paper from the TIAA-CREF Institute.

The paper, “Equivalent Costs for Equivalent Benefits: Primary DC Plans in the Public Sector,” was authored by Josh B. McGee, vice president of Public Accountability for the Laura and John Arnold Foundation, and Paul J. Yakoboski, senior economist with the TIAA-CREF Institute.

“The sweeping generalization that DB plan designs provide benefits at lower cost to public employers than could a DC structure is simply incorrect,” said the authors. “Features producing the purported DB cost advantage—such as annuitized benefit payments and low fee, professional asset management—can easily be incorporated into the DC model, and in fact, are inherent to the best practice, risk-managed DC design.” They said that many DC plans already exhibit these features, such as 401(a) and 403(b) plans sponsored by public and private colleges and universities.

According to McGee and Yakoboski, best-practice DC plans are a viable, sustainable option for providing retirement security to workers. They concluded that assertions a DB-type structure is more cost efficient, as compared with DC ones, are based upon “dubious comparisons with the typical private sector 401(k) model and assumptions that place a heavy thumb on the scale in favor of DB plans.”

McGee and Yakoboski found that, in fact, DB plans do not possess a structural advantage over DC plans. “Providing adequate, secure income throughout retirement is the overriding objective of any retirement plan, regardless of the plan design. Risk-managed DC plans accomplish this aim by incorporating longevity risk pooling through in-plan annuities, automatic diversified asset allocation solutions in a limited menu of professionally managed, low-fee investment options, and objective advice for plan participants. Best-practice DC plans are a viable, sustainable option for providing retirement security to workers.”

More information on this research paper can be found here.