Public pension plans need to better communicate the benefits of their defined contribution plans  

Modern defined contribution retirement plan designs recognize the needs of today’s state and local government employees in ways that neither traditional defined benefit pensions nor older defined contribution plan designs ever could. However, these advantages are lost unless effectively communicated to prospective and current employees.

Too often, whether a defined contribution (DC) plan is the default for new hires or is an alternative to a defined benefit (DB) plan, many public pension system administrators offer education about DC plans that does not properly explain the benefits such a plan can provide.  

For many pension plan administrators, their only exposure to a defined contribution approach has been as a supplemental tax-deferred savings plan like a 457 or 403(b) plan. These administrators might be unfamiliar with the design of a retirement-focused DC (not a supplemental one), and employee representative groups and related trade groups might have told them that DC plans are ineffective retirement plans.

Not every administrator understands that cutting-edge DC-based designs offer tremendous flexibility to meet individual participant financial needs while operating within plan sponsor-defined guardrails to produce and protect adequate lifetime income. 

To defend these administrators, the defined contribution retirement plans in some states or municipalities have been implemented to address crushing DB unfunded liability problems without properly designing the DC plan to focus on lifetime income and specific employee needs. In these situations, public pension plan administrators, employees, and candidates often were not effectively educated on the features and benefits of the new plans, leaving them susceptible to those influencers devoted to old-school, ineffective pensions. This fixation on pensions ignores the reality that in many public DB plans only one-third to one-half of current DB participants will ever get a benefit. 

Both private and public sector employees will likely change their employer multiple times during their careers. Traditional DB pension plans, ubiquitous in the public sector, are purposely designed to back-load their value to participants, penalizing non-full career employees. Similarly, 401(k)-style defined contribution plans, while attractive to early-career employees because of the portability of assets, are not designed to provide employees lifetime income after a full career, and are not an effective retirement plan design either. 

A robust communication, education, and advice strategy will enable an employer to educate employees and prospects on the plan’s features and benefits and how to use them to meet individual needs. Also, complete plan understanding can lead to greater employee satisfaction, positively impacting an employer’s ability to meet workplace goals around retaining workers.  

Through a comprehensive and targeted communication, education, and advice strategy tied to a properly designed retirement plan sitting on a defined contribution foundation, employees can better understand: 

• Provisions for guaranteed lifetime income 
• Plan flexibility to: 
  • Customize asset allocation
  • Customize distribution options
  • Incorporate other individual and family assets into planning
  • Choose active or passive management
  • Utilize advice and financial planning tools to structure the plan to meet individual needs

This education about pension plans should begin before employment starts. This could be based on written and web-based materials that describe the plan’s features and benefits, focusing on portability and flexibility. Starting early in an employee’s tenure an opportunity should be afforded for the employee to meet with a plan-provided financial planner. This session should include goal setting, risk tolerance, and additional assets and income sources.   

This “baseline-setting” session is important in providing non-financially sophisticated employees with the comfort and confidence they need in a plan. Group educational sessions, web tools, and periodic meetings with the planner should be provided throughout workers’ careers. Closer to retirement, the education and communication plan should shift to focus more on income planning rather than asset accumulation.

The product offered by the financial planner should always include specific fund-level advice (as opposed to guidance) independent of investment providers associated with the plan. Web-based advice should also be offered for individuals who choose not to utilize in-person financial planning sessions.  

Employees and prospects who are not educated on a plan’s features and benefits, especially how a plan can work for them, are subject to misinformation and dissatisfaction. An employee who understands the mobility possibilities and the lifetime income focus in a cutting-edge DC-foundational plan will be more engaged and satisfied. And having satisfied employees is one of the best ways for an employer to meet workplace goals. 

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