Myths and Facts
Defined Benefit (DB) vs. Defined Contribution (DC) Retirement Plans
Myth: Defined Contribution Plans are cheaper to administer.
Fact: Administrative costs of DC plans are higher than DB plans. The average administrative cost for a DC plan is 2 percent of assets, compared to .18 percent for DB plans. Typically in a DC plan 50 cents of each $ is spent on benefits; in a DB plan 80 cents of each $1 is spent on benefits.
Myth: The state and local governments will save money by changing to a DC plan.
Fact: The conversion to DC plans will cost the state and local government money. They will have to pay start-up costs to set up DC plans, while still bearing all the costs of running the DB plan for existing employees. They must also pay the unfunded liability for existing employees. Stopping all new entrants into the DB plan eliminates the continuous flow of younger members used to fund benefits. The state and local governments will have to pay more as DB plan members get older and retire, and will also incur costs to train employees on how to invest funds. Changing to DC plans will result in greater costs to the state and local governments and bigger budget deficits.
Myth: Employees do better under DC plans than under DB plans.
Fact: Numerous studies show that employees fare far worse under DC plans due to lack of investment experience, high fees and administrative costs, and underperformance in down markets. DC plans provide no protection against inflation, no disability benefits, and no death benefits. A study by Dalbar found that the average stock fund investor had a 5 percent annual gain from 1984-200, while the S&P stock index had an average gain of 16 percent over the same period.
According to Watson Wyatt Worldwide, DB plans outperform DC plans in down markets. The bottom line is, DC plans require employees to gamble 100 percent of their retirement nest egg in the market and force taxpayers to bail them out.
Myth: Public employees receive excessively high retirement benefits.
Fact: The average state pension is $1,673.82 per month for a worker at age 60, with 19.5 years of service. DC plans will reduce the advantage of public sector retirement and make it hard to recruit and retain skilled workers.
Myth: Most private sector employers are switching from DB to DC plans.
Fact: Most large private sector employers still offer DB plans. Only 17 percent of Fortune 100 companies have DC plans. In 2003, 68 percent of large private sector employers still offered DB plans.