Late last year, the National Institute on Retirement Security re-released a report on the economic efficiency of defined benefit pensions. This updated report, titled “Still a Better Bang for the Buck”, finds that pensions remain a more efficient and reliable means of saving for retirement than defined contribution 401(k)-style plans.
Here are a few highlights from the report:
- Defined benefit pensions pool risk for a group of individuals. Pension plans are not built around the life expectancy of an individual, but around the life expectancies of a group of people that is continually being renewed by new members joining the plan. This means the retirement benefits don’t have to be paid out according to an individual person’s unknowable lifespan, but can be continually be paid out to a group.
- Pensions can also take advantage of an optimal investment portfolio. As individual investors age, they must shift from riskier but higher return investments to more conservative investments. Since a pension fund constantly has new, younger members joining the plan, it can maintain a more balanced mix of investments with higher returns.
- Defined benefit pensions also achieve higher returns because they have lower fees than 401(k)-style plans and they are professionally managed by plan administrators. Individual investors can lose a significant portion of their retirement savings in fees paid to financial advisors who manage their funds – and those advisors may not recommend investments that are in the best interest of the investor.
The researchers at NIRS found that all of these efficiency advantages add up to a 48 percent cost savings over defined contribution 401(k)-style plans. When West Virginia decided to reopen its defined benefit pension plan for teachers, it did so partly because a study showed that it could deliver equivalent retirement benefits at a lower cost with a pension rather than a 401(k)-style plan. When Wall Street interests attack pensions for working families, it’s not because 401(k)s are cheaper or more efficient – they aren’t – but because Wall Street profits off managing 401(k) investments.