Legislation has been proposed in several states to replace state and local government defined benefit (DB) retirement plans with 401(k)-type retirement accounts called defined contribution (DC) plans. The issue is not whether state and local employees should have access to DC plans - most already do in conjunction with their DB plans or else through DC-type plans, which play a useful role in providing supplemental, tax-deferred retirement savings. Rather the question is whether defined benefit plans should be eliminated and replaced with defined contribution plans.

While recognizing defined contribution plans are useful in providing supplemental retirement benefits, there are distinct advantages of maintaining state and local DB plans and disadvantages against replacing them with DC plans. Eliminating a DB plan and switching to a DC plan is a lose-lose situation for governments, their employees, and taxpayers for the reasons listed below.

1. Switching to a DC plan will cost state and local governments more over the short-term. Long-term cost savings are uncertain at best.
   
   
2. Almost all state and local DB plans provide disability and survivor benefits as well as retirement income. Switching to a DC plan would require employers to obtain these benefits from another source, and at a higher cost.
   
   
3. DB plans enhance the ability of state and local governments to attract qualified employees and retain them throughout their careers. Switching to a DC plan would limit this ability, possibly producing or exacerbating labor shortages in key service areas by increasing employee turnover rates. Higher turnover rates result in increased training costs and lower levels of productivity that can, in turn, result in the need for a larger total workforce.
   
   
4. DB plans help state and local governments manage their labor force by providing flexible incentives that encourage employees to work longer or retire earlier, depending on the circumstances. Switching to a DC plan would limit this flexibility and make these incentives more expensive for the employer.
   
   
5. DB plans lower overall retirement benefit costs by pooling the risks of outliving retirement benefits and of investment losses over a relatively large number of participants. Switching to a DC plan would require each individual to bear these risks alone, consequently requiring higher contributions than if the risks were pooled.
   
   
6. DB plans earn higher investment returns and pay lower investment management fees than DC plans. Switching to a DC plan is likely to lower investment earnings used to finance retirement benefits and increase management costs, to the detriment of plan members.
   
   
7. DB plan investment earnings reduce future employer contributions. Switching to a DC plan would prevent state and local governments from reducing employer contributions through investment earnings, which currently fund over two-thirds of public retirement benefits.
   
   
8. DB plans provide secure retirement benefits based on a person’s salary and period of service. Switching to a DC plan result in lower and less secure retirement benefits for many long-term governmental employees, including teachers, police officers, and firefighters, who constitute over half of state and local government workers. State and local employees who are without Social Security coverage would be put at even greater risk.
   
   
9. DB plans help sustain state and local economies by providing adequate retirement benefits for a significant portion of the workforce. Switching to a DC plan may slow state and local economies, since a large number of retirees would likely receive lower retirement benefits.
   
   
10. Switching to a DC plan is likely to result in pressure on state and local governments to increase DC plan benefits and provide additional financial assistance for public sector retirees.