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It is assumed in some circles that defined benefit plans are more economical to run than defined contribution plans, and that participants are better off because plan assets are managed by professional investment managers.
Not so, concludes a study titled, “Defined-Contribution Plans Are Cost-Effective,” issued today by the Manhattan Institute for Policy Research.
Author Josh B. McGee, Ph.D., a senior fellow at the think tank, drew the following conclusions:
- DC plans achieve similar investment returns,
- DB plans are not structurally more cost-effective than DC plans,
- Pension debt is a significant cost driver for DB plans, and
- DC plans are a good option for providing retirement security.
DB plans remain a mainstay of public employers, but some are beginning to think seriously about following the lead of private sector employers and make a DC plan the primary retirement funding vehicle. According to McGee, so far only Michigan and Alaska have done so, “as well as a handful of cities.”
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When state and local governments have considered adopting a DC plan for...