A Better Bang for New York City’s Buck

Source: National Institute on Retirement Security and Pension Trustee Advisors on behalf of the Office of New York City Comptroller, October 2011

From the press release:
A report issued today finds that New York City’s defined benefit pension plans can deliver the same retirement income at nearly 40% lower cost than a defined contribution 401(k)-type individual account. The report, A Better Bang for New York City’s Buck, finds that defined benefit savings come from three sources:
• Superior investment returns. The pooled nature of assets in a defined benefit plan result in higher investment returns, partly based on the lower fees that stem from economies of scale, but also because the assets are professionally-not individually-managed. The City plans’ enhanced investment returns save from 21 percent to 22 percent, according to the report.
• Better management of longevity risk. Because pensions pool the longevity risks of a large number of individuals and can determine and plan for mortality on an actuarial basis, New York City’s defined benefit plans save between 10 percent and 13 percent compared to a typical defined contribution plan.
• Portfolio diversification. Unlike defined contribution plans, pension assets can be invested for optimal returns. Individuals using 401(k)s, by comparison, are advised to rebalance their investments, downshifting into less risky and lower-returning assets as they age. This ability to maintain portfolio diversity in the City’s defined benefit plans saves from 4 percent to 5 percent.
Previous reports:
Municipal Employee Compensation in New York City
The $8 Billion Question
Sustainable or Not? NYC Pension Cost Projections through 2060

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