Webinar: Best practices in optional defined contribution plans for public workers

The following is a discussion about best practices in optional defined contribution plans. This webinar accompanies a recent policy study on the same topic.

The most common retirement offering for public workers is a defined benefit (DB) pension, but shifts in employee behavior suggest a need to modernize this approach for new hires. With changes in workforce mobility, government employers must expand their offerings beyond the traditional pension plan to appeal to a broader range of career paths. An increasingly popular and effective way to do this is by adding an optional defined contribution, or DC choice, plan that new workers can select at the beginning of their employment.

As public workers come to expect a shorter tenure or simply want more control over their retirement contributions, DC choice plans can be optimal over the commonly offered pension plan.

Examining how retirement benefits accrue differently between these two options shows that one type of plan can work better, depending on factors like age of hire and years of service. The best way to accommodate all workforce situations is to allow each new worker to select the option that they believe best works for them. In most cases, an educator hired at 25 is only better off after full retirement when compared to a defined contribution plan. Before full retirement, that teacher will likely only get about 70% of the benefit they would have gotten in the DC plan.

Choice plans—plans that give the option to choose between a defined benefit or defined contribution plan at the time of hiring—benefit not just the employee but can also benefit the employer. With the proliferation of unfunded pension liabilities among U.S. governments, optional DC plans can serve as valuable risk mitigation solutions. For example, Utah significantly improved its funded status after implementing a DC choice system in 2012.

For those looking to implement or improve an optional DC plan to go alongside an existing pension, several key policy decisions are important:

• The default option set must work for the particular workforce.
• Contribution rates must be adequate to achieve the committed retirement goals.
• There must be options for guaranteed retirement income.
• Proper benefit education must be provided to new members making the choice.
• The benefit selection period must be ample.

This discussion is a hands-on tool for public fund managers willing to implement an optional defined contribution plan.

Full Study: Best Practices in Optional Defined Contribution Plans