Pension Information

Special Pension Briefing

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Defined-Contribution Plan v. Defined-Benefit Plan

With a few exceptions, defined-contribution plans were not initially created as retirement vehicles but rather as supplementary savings accounts.

With a defined-contribution plan (401k, 403b, 457), only your contributions are defined.
A defined-contribution plan shifts all the responsibilities and all the risk from the employer to the employee; thus, your benefit is not guaranteed.
Your benefit is based upon investment earnings.
A defined-contribution plan does not have the pooled investments, professional money managers, and shared administrative costs that a defined-benefit plan provides.
Your benefit ends when your account is exhausted.
There are no survivor or disability guarantees.
This plan does allow for portable assets.
Changeover costs to this plan would be significant.
Investment fees are paid by the member.
On-going costs would be higher: in 2006, the expense ratio was 1.29%, 4.3 times higher than a defined-benefit plan; in 2004, the median cost was 1.4%, 4.7 times higher than a defined-benefit plan.
The State of Illinois will not “save money.” Most of the State’s obligation to TRS is for contributions not paid during the past several decades; therefore, the deferred cost of underfunding cannot be eliminated by switching to a defined-contribution plan.
Shifting to a defined-contribution plan can raise annual costs by making it more difficult for Illinois to pay down existing liabilities. The plan will include fewer employees and fewer contributions going forward.
Even with a defined-contribution plan option, states and localities are still left to deal with past underfunding.
“There is a $6.6 trillion deficit between what 401k account holders should have and what they actually have.”

Defined-benefit plans are more dependable

This is the plan that we retired teachers have.

You cannot outlive the benefit.
You are not affected by market volatility.
Defined-benefit plan assets are held in trust and managed by professional investors.
Survivor and disability benefits are part of this plan.
This plan encourages a long-term career and stable workforce.
Since most Illinois teachers have not paid into Social Security, it is perhaps their only retirement guarantee.
This plan is the best choice for middle-class retirement.
Teachers with a defined-benefit plan are more likely to be self-sufficient and less likely to need public assistance.
Because teachers understand the value of such a plan, they are willing to give up higher wages.
TRS performance is well-diversified; it is in the top quarter of all public funds for the last 10 years.
Since 1982, the average rate of return has been 9.83 percent.
The costs for this plan are not excessive or expensive: 0.3% of total assets, and these costs are paid for by TRS.

Sources: The Teachers’ Retirement System, the Illinois Federation of Teachers, the National Institute on Retirement Security, Center for Retirement Research at Boston College, National Conference on Public Employee Retirement Systems, and Center on Budget and Policy Priorities.