NEW YORK CITY PENSIONS PROVIDE RETIREMENT INCOME AT LESS THAN FORTY PERCENT OF THE COST OF INDIVIDUAL ACCOUNTS
Built-In Economic Efficiencies Enable NYC Pensions to Do More with Less Dollars
OCTOBER 20, 2011, Washington, D.C. — A report issued today finds that New York City’s defined benefit Pension Plans can deliver the same retirement income at nearly 40% lower cost than a defined contribution 401(k)-type individual account. The report, A Better Bang for New York City’s Buck, finds that defined benefit savings come from three sources:
- Superior investment returns. The pooled nature of assets in a defined benefit plan result in higher investment returns, partly based on the lower fees that stem from economies of scale, but also because the assets are professionally—not individually—managed. The City plans’ enhanced investment returns save from 21 percent to 22 percent, according to the report.
- Better management of longevity risk. Because pensions pool the longevity risks of a large number of individuals and can determine and plan for mortality on an actuarial basis, New York City’s defined benefit plans save between 10 percent and 13 percent compared to a typical defined contribution plan.
- Portfolio diversification. Unlike defined contribution plans, pension assets can be invested for optimal returns. Individuals using 401(k)s, by comparison, are advised to rebalance their investments, downshifting into less risky and lower-returning assets as they age. This ability to maintain portfolio diversity in the City’s defined benefit plans saves from 4 percent to 5 percent.
The study was conducted by the National Institute on Retirement Security and Pension Trustee Advisors on behalf of the Office of New York City Comptroller John C. Liu. It is based on a similar national report conducted by NIRS, and uses current data from the five New York City retirement systems. The study found that costs associated with traditional pensions range from 36 percent to 38 percent less than 401(k)-type individual accounts.
“These findings are consistent with our national study on the cost efficiencies embedded in pension plans,” said Diane Oakley, NIRS executive director. “The analysis clearly indicates that the qualities inherent in DB plans – particularly the superior investment returns and pooling of risks and assets – fuel their fiscal efficiency. The report provides important insight for policymakers, employers and employees, who are struggling to ensure adequate retirement income with the fewest dollars possible,” Oakley added.
“Our model makes an ‘apples to apples’ calculation of the actual dollar contributions required for a DB and DC plan to achieve the same target retirement benefit,” said William Fornia, report author and president of Pension Trustee Advisors. “The efficiencies of DB plans already are well documented. This report quantifies the magnitude of those efficiencies in New York City.”
“Calls to replace pension plans with 401k plans understandably increase when markets have returned poorly over sustained periods,” said Comptroller John C. Liu. “However, as this and other studies show, the defined pension is the most cost efficient vehicle to deliver retirement income security.”
Pension Trustee Advisors conducted the analysis under the direction of founder and president, William B. Fornia, an actuary with 30 years of experience. Fornia also co-authored the earlier national research for NIRS. The model for the research was based on a group of 1,000 newly-hired employees, from each of the five New York City pension plans, including teachers, civil service workers, sanitation workers, police, and fire personnel.
About the National Institute on Retirement Security
The National Institute on Retirement Security, based in Washington, D.C., is a not-for-profit organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy through national research and education programs. NIRS seeks to encourage the development of public policies that enhance retirement security in America.
About Pension Trustee Advisors
Pension Trustee Advisors provide expertise, education, and customized solutions to trustees, pension fund staff, government entities, attorneys, labor and other pension decision makers. It was founded by William Fornia, a retirement consultant and actuary with more than 30 years of industry experience. Prior to forming PTA, Fornia held senior positions with leading actuarial firms, and also served as corporate actuary for The Boeing Company. More information is available at www. pensiontrusteeadvisors.com.
About the New York City Pension Funds
The New York City Pension Funds include: the New York City Employees’ Retirement System, the Teachers’ Retirement System, the New York City Police Pension Fund, the New York City Fire Department Pension Fund, and the Board of Education Retirement System. This report marks the fourth in a series produced by Comptroller Liu’s Retirement Security NYC initiative. Previous reports: Municipal Employee Compensation in New York City, The $8 Billion Question, and Sustainable or Not? NYC Pension Cost Projections through 2060, are available at http://www.comptroller.nyc.gov/rsnyc/
“Calls to replace pension plans with 401k plans understandably increase when markets have returned poorly over sustained periods,” said Comptroller John C. Liu. “However, as this and other studies show, the defined pension is the most cost efficient vehicle to deliver retirement income security.”
Pension Trustee Advisors conducted the analysis under the direction of founder and president, William B. Fornia, an actuary with 30 years of experience. Fornia also co-authored the earlier national research for NIRS. The model for the research was based on a group of 1,000 newly-hired employees, from each of the five New York City pension plans, including teachers, civil service workers, sanitation workers, police, and fire personnel.
About the National Institute on Retirement Security
The National Institute on Retirement Security, based in Washington, D.C., is a not-for-profit organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy through national research and education programs. NIRS seeks to encourage the development of public policies that enhance retirement security in America.
About Pension Trustee Advisors
Pension Trustee Advisors provide expertise, education, and customized solutions to trustees, pension fund staff, government entities, attorneys, labor and other pension decision makers. It was founded by William Fornia, a retirement consultant and actuary with more than 30 years of industry experience. Prior to forming PTA, Fornia held senior positions with leading actuarial firms, and also served as corporate actuary for The Boeing Company. More information is available at www. pensiontrusteeadvisors.com.
About the New York City Pension Funds
The New York City Pension Funds include: the New York City Employees’ Retirement System, the Teachers’ Retirement System, the New York City Police Pension Fund, the New York City Fire Department Pension Fund, and the Board of Education Retirement System. This report marks the fourth in a series produced by Comptroller Liu’s Retirement Security NYC initiative. Previous reports: Municipal Employee Compensation in New York City, The $8 Billion Question, and Sustainable or Not? NYC Pension Cost Projections through 2060, are available at http://www.comptroller.nyc.gov/rsnyc/
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