State Hybrid Retirement Plans

Source: National Association of State Retirement Administrators, NASRA Issue Brief, November 2016

From the introduction:
Although hybrid plans have been in place in public sector retirement systems for decades, this type of retirement plan design has received increased attention in recent years. The heightened attention to hybrids has occurred amid the many reforms states have made to public pension benefits and financing arrangements. The new focus on hybrid plans also occurs as states find that closing their traditional pension plan to future (and, in some cases, existing) employees could increase—rather than reduce—costs, and that providing only a 401(k)-type plan does not meet important retirement security, human resource, or fiscal objectives. While most states have chosen to retain their defined benefit (DB) plan by modifying required employer and employee contributions, restructuring benefits, or both, some have looked to so-called “hybrid” plans that combine elements of traditional pensions and individual account plans.

Many defined benefit plans in the public sector already contain hybrid plan elements, which, by definition, shift some risk from the employer to plan participants. Hybrid plan elements commonly incorporated into traditional public sector defined benefit plans include employee contributions or benefits that are linked to the plan’s investment performance or actuarial condition. The use of these hybrid plan elements embedded in traditional pension plans are discussed in NASRA Issue Brief: Shared Risk in Public Retirement Plans.

Although hybrid retirement plans take many forms, this brief examines two types in use in the public sector. The first is a cash balance plan, which marries elements of traditional pensions with individual accounts into a single plan (see Table 1). The second type combines a traditional DB plan, usually with a lower level of benefit accrual, 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 features known to promote retirement security: mandatory participation, shared financing between employers and employees, pooled assets invested by professionals, targeted income replacement with survivor and disability protection, and a benefit that cannot be outlived.