A new research brief documents the extent of the shift away from stand-alone defined benefit (DB) pension plans for a sample of 180 major local governments to see how it compares to the changes at the state level. In 2018, 19 percent of large localities had a defined contribution (DC), cash balance, or hybrid plan for new hires, instead of a stand-alone DB pension, up from 11 percent in 2001.
These finding are contained in a new research brief, Have Localities Shifted Away from Traditional Defined Benefit Plans?, from the Center for State and Local Government Excellence (SLGE) and the Boston College Center for Retirement Research (CRR). The analysis was conducted by CRR researchers Jean-Pierre Aubry, associate director of state and local research and Kevin Wandrei, research associate. Download the research here.
The analysis indicates that retirement plan shifts at the local level are similar to states’ changes in volume and geography, but not in the types of plans introduced. States tend to offer hybrid retirement plans, while localities tend to choose stand-alone defined contribution (DC) plans. Even though contributions to these new DC plans are lower than those made to the prior DB pension, the impact on government costs likely will be incremental because most of pension contributions fund benefits that are for past service, and thus are unaffected by the shift to a new plan. The research also indicates that public employees covered under the new alternative plans are at risk of receiving lower benefits than under the prior DB pension plans.
The research key findings are as follows:
- In 2018, 19 percent of large localities had a defined contribution (DC), cash balance, or hybrid plan for new hires, instead of a stand-alone DB pension.
- The volume and geography of alternative plans at the local level is similar to that of states, but localities are more likely to offer a DC plan.
- Government contribution rates for the local alternatives are lower than for the DBs replaced, and employees are likely to see lower investment returns.
- Any cost reductions will be gradual as the alternative plans are primarily for new hires.
The Center for State and Local Government Excellence gratefully acknowledges the financial support from ICMA-RC to undertake this research project.