New Report Debunks Conventional Wisdom on the Cost of Retirement Plans

Source: National Institute on Retirement Security, August 2008

A new report by the National Institute on Retirement Security found that defined benefit (DB) pension plans are more cost-efficient for employees and employers than Defined Contribution (DC) accounts. The study, “A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans,” was published on Thursday by the National Institute on Retirement Security, a new pension defense group. According to the report, DB plans can provide the same retirement income at nearly half the cost of individual 401(k)-type Defined Contribution (DC) accounts – 46 percent less. DB plans are designed to provide employees with a predictable monthly benefit in retirement. With a DC plan, however, determining whether it will be sufficient to cover a retiree’s needs depends on factors such as employee and employer contributions and the level of returns on assets. While DC plans are important to the retirement security equation, they were not designed to stand on their own. Certain built-in features make DB plans the most fiscally efficient way to provide retirement income: they avoid over-saving, are ageless, and achieve higher investment returns. The report concludes that DB plans should remain a centerpiece of retirement income policy and practice, especially in light of current fiscal and economic constraints facing corporate and government retirement plan sponsors.

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