Retirement plans’ impact on recruiting and retention in the public market

State and local pension systems, along with allies in public employee unions, have presented as fact their opinion that traditional pensions aid the recruiting and retention of highly qualified employees. While statistical evidence supporting this conclusion is questionable, proponents have continued this promotion. In doing this, they have not promoted retirement plan designs that might actually serve to support recruiting and retention goals while better meeting employee needs. 

The MissionSquare Research Institute, along with the International Public Management Association for Human Resources (IPMA-HR) and the National Association of State Personnel Executives (NASPE), conducts an annual survey of human resource professionals in state and local governments aimed at tracking challenges facing public employers in recruiting and retaining employees. The survey, which had 319 state and local government respondents, indicates that 55% of respondents hired more full-time employees in 2022 than in 2021 with another 32% reporting no change in hiring from year over year. Only 14% of respondents reported hiring fewer full-time employees in 2022 than in 2021.

While the hiring of full-time employees significantly increased year-over-year, 69% of respondents also reported voluntary (non-retirement) separations of service (i.e., people quitting their jobs) increased in 2022. Another 26% had resignations in 2022 that were consistent with 2021—only 5% saw a reduction of service separations. With high levels of hiring, it becomes clear that recruiting and retention should not be combined when evaluating needs. The factors that help attract employees to a particular employer are clearly not the same factors that keep them employed there. Not surprisingly, non-competitive compensation was the number one reason cited for employees leaving their jobs.   

The survey further reports that 77% of responding organizations made no changes to their retirement plans in the current year for either current employees or new hires. For those that did make changes, only 1% replaced a traditional defined benefit pension plan (DB) plan with a hybrid plan for existing employees, 1% replaced a DB with a hybrid plan for new employees, and another 1% implemented a choice between DB and defined contribution (DC) for new employees. 

A number of conclusions regarding the retirement plan’s impact on recruiting and retention can be drawn from the MissionSquare survey results:  

1. Recruiting and retention should not be looked at as a singular issue. While public employers have seen steady success in hiring, retention has suffered greatly in recent years in the public market. 

2. The survey does not make the case that an employer’s retirement plan, whatever the design, has a substantial impact on recruiting or retention at all. In fact, the survey shows employers are more focused on employee morale, development, and engagement to enhance retention, along with salary increases. The survey does not suggest that there is a widespread recruiting issue although some positions, including nurses, engineers, and police officers, are more difficult to hire than others. 

3. Plan sponsors should avoid treating retirement plan design only as a tool for retaining employees. Rather, they should focus on a retirement plan design that realistically meets the needs of a modern workforce. The retirement plan should focus on providing lifetime income in retirement commensurate with the part of a career that an employee spends with a particular employer. The plan should recognize the realities of mobile modern employees and should not penalize employees that do not spend a full career with one employer. 

4. The survey illustrates that employers are focused on employee wellness as a means to improve retention. It follows that keeping employees happy should also be the focus of the retirement plan. Retention is best addressed by having a retirement plan that addresses the realities of the workforce today, as noted above.  

In the state and local government marketplace, it is imperative that employers focus on retirement plan designs that recognize and meet the needs of the modern workforce. Pension designs from decades ago that seek to lock employees into jobs simply do not work today.   

Alaska narrowly avoided a major setback this past legislative session when legislation to eliminate their forward-looking defined contribution plan in favor of a poorly designed defined benefit plan fell short. While the thinking behind the legislation was that a traditional pension would help recruit employees, this polling suggests the data do not support that position. In fact, it is likely that a plan that clearly does not meet the career patterns of modern employees will not help with recruiting or retention of qualified employees in a competitive labor market.  

Rather than trying to design retirement plans with recruiting and retention goals in mind, public employers should adopt plans that best meet the realistic career patterns of employees and prospective employees. This will not only keep employees satisfied but will also enhance the employer’s ability to meet broader workplace objectives, including recruiting and retention. As the MissionSquare survey indicates, state and local government employers are focused on improving the employee experience as they work to retain employees they have recruited. A retirement plan that meets employee needs keeps them happy and ties into other employer efforts toward employee satisfaction.