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.