State Hybrid Retirement Plans

Source: National Association of State Retirement Administrators, NASRA Issue Brief, November 2011

Hybrid plans have been in place in public sector retirement systems for decades. Currently, this plan design is receiving increased attention as states find that closing a traditional defined benefit pension plan to new employees could increase–rather than reduce–costs, and that providing only a 401(k)-type plan does not meet retirement security, human resource, or fiscal needs. While most states made the decision to retain their defined benefit plan by modifying required employer and employee contributions, restructuring benefits, or both,2 some have also looked to so-called “hybrid” plans that combine elements of traditional pensions and individual account plans.

This brief examines two types of hybrid plans in use in the public sector. The first is a cash balance plan, which marries elements of traditional pensions and individual accounts into a single plan (see Table 1). The second combines a smaller traditional defined benefit (DB) pension with an individual defined contribution (DC) retirement savings account, referred to in this brief as a “DB+DC plan” (see Table 2). Despite variability among these plans, most contain the core retirement plan elements known to promote retirement security: mandatory participation, shared financing between employers and employees, pooled assets invested by professionals, a benefit that cannot be outlived, and survivor and disability protections.

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