Talking Points: Opposing DC/Hybrid Plans

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TalkingPoints:

OpposingDefinedContribution(DC)andHybridPlans

WhatareDefinedContribution(DC)and/orHybridPlans?

•TeachersinLouisianapayintoaDefinedBenefit(DB)retirementplan,orpension.ThepayoutfromaDB retirementplanisguaranteedbasedonapaymentformula.Inotherwords,youreceivea guaranteedamount usingaformulathatisbasedonyouryearsofserviceandsalary.

•ADefinedContribution(DC)retirementplanissimilartoa401(k)plan.WhilebothDBandDCplansare affectedbythemarket,thepayoutforaDCplanisbasedonhowwellinvestmentsperformedbefore withdrawal.TheamountpaidoutbyaDCplanisnotguaranteed.

•HybridplansareacombinationofDBretirementplansandDCretirementplans.

WhydoesLRTAOPPOSEDCand/orHybridPlans?

•Changingtoahybridplan doesnot eliminatedebt.

•Statesthatswitchedtohybridretirementplansbeforepayingdowntheirdebtactuallyincreasedtheir debt(BondandDoonan,2019).

•SwitchingtoaDCplanfromaDBplancouldcostnearlytwiceasmuchtomaintain(RheeandJoyner,2019).

•DBplansoffersubstantialcostadvantagesover401(k)-styleaccounts.ADBplancancost27percentless thanan“ideal”DCplan,withbelow-averagefeesandnoindividualinvestordeficiencies(ForniaandDoonan, 2022).

•HybridretirementplansofferbenefitsthatarelessthanDBretirementplans.

•TheamountpaidoutbytheDCportionoftheplanisnotguaranteed.

•TheaccrualrateoftheDBportionoftheplantypicallyissignificantlylowerthantheaccrualrateofafull DBplan.Therefore,theguaranteedpayoutfromtheDBportionissignificantlylower.

•Nostatehaseffectivelyimplementedahybridplanthatproducesbenefitsequaltoorgreaterthanour currentplan.

•Wedonotrecommendachangeuntilresearchindicatesthathybridplansareeffective.

•ResearchshowsDBplansattractandretainteachers,whichislinkedtoimprovestudentachievement(Rhee andJoyner,2019).

Research

•Rhee,N.&Joyner,Jr.,L.F.(2019).Teacherpensionsvs.401(k)sinsixstates:Connecticut,Colorado,Georgia, Kentucky,Missouri,andTexas. NationalInstituteonRetirementSecurity.

•Bond,T.&Doonan,D.(2019)Examiningtheexperiencesofstatesthatclosedpensionplans. National InstituteonRetirementSecurity.

•Fornia,FSA,W.&Doonan,D.(2022)Abetterbangforthebuck3.0. NationalInstituteonRetirement Security.

Updated2023
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