DB plans deliver more at lower cost

Pooling of risks and assets 'fuel their fiscal efficiency.'
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 05/04/2009

A defined benefit (DB) pension plan can deliver the same retirement income at 46-per-cent lower cost than an individual defined contribution (DC) account, according to the study

Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans

from the National Institute on Retirement Security (NIRS) in Washington, D.C.

The study finds DB pension plans:

•avoid the problem of “over-saving” by pooling the longevity risks of large numbers of individuals — a 15-per-cent cost savings

•are ageless and therefore can perpetually maintain an optimally balanced investment portfolio rather than the typical individual strategy of downshifting over time to a lower risk/return asset allocation — a five-per-cent cost savings

•achieve higher investment returns as compared to individual investors because of professional asset management and lower fees — a 26-per-cent cost savings.

“The analysis is somewhat of a myth buster when it comes to conventional wisdom on the cost of retirement plans,” said Beth Almeida, report author and NIRS executive director. “The analysis clearly indicates the qualities inherent in DB plans — particularly the pooling of risks and assets — fuel their fiscal efficiency.”

The model was based on a group of 1,000 newly hired 30-year-old female teachers who work for three years, take a two-year leave to have children, work for 30 years and retire at age 62 with a final salary of $50,000 US.

The target annual pension benefit for the model is $26,684 or $2,224 US monthly with cost-of-living adjustments.

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