NIRS bites back on pensions report

The National Institute on Retirement Security took issue with a recent Manhattan Institute report on pensions, saying it is irrelevant and highly flawed.

Defined-Contribution Pensions are Cost-Effective, authored by Josh McGee, a senior fellow at the Manhattan Institute, looked at defined benefit plans in comparison with defined contribution plans and concluded that DB plans are not structurally more cost-effective than DC plans; DC plans achieve similar investment returns; DC plans can and do offer annuities; pension debt is a significant cost driver for DB plans; and DC plans are a good option for providing retirement security.

Also see: Are DB plans really more cost-effective than DC plans?

In a rebuttal this week, NIRS said that the Manhattan report “claims to assess public sector retirement plans but uses private sector pension data that is not comparable, which invalidates the findings.”

Diane Oakley, NIRS executive director, said “it is perplexing why the study uses the wrong data in the analysis. This major miscalculation renders McGee’s study misleading and useless. This is just one of the many problems with his study.”

She added that “the study isn’t even an apples to oranges comparison – it’s apples to nothing. Also troubling is that the study’s title is not supported by any numbers in the report to demonstrate the cost-efficiency of a defined contribution plan.”

NIRS put out a report, Still a Better Bang for the Buck: Update on the Economic Efficiencies of Pension Plans, which argued that DB plans are still a better value for employers and employees because at the end of the day, the employee receives a guaranteed retirement income.

The Manhattan Institute study claimed that DB plans were not structurally more cost-effective than DC plans, but NIRS’ report showed that DB plans can deliver a target retirement benefit at half the cost of a DC account.

“A DB plan, modeled with the typical fees and asset allocation of a large public plan, has a 48% cost advantage compared to a typical individually directed DC plan,” NIRS said in its study. “The DB pension costs 29% less than an ‘ideal’ DC plan that features the same low fees and no individual investor deficiencies.”

NIRS also took issue with the Manhattan Institute’s claim that DC plans get similar investment returns as DB plans.

“The analysis fails to use public pension data and it conveniently ignores asset allocation shifts in private sector pensions due to ‘frozen’ pensions,” NIRS said.

The Manhattan report said that DC plans can offer annuities so they are more like DB plans. NIRS said that very few companies offer annuities within their DC plans and “even fewer retirees choose annuities because they are costly.”

Also see: Annuities meaningless if savings ‘practically zero’

The Manhattan report said that DC plans are a good retirement security option. NIRS agreed that DC plans can be well designed “but the one public DC plan that might come close to the cost efficiencies of public pensions relies on the state DB plan to provide lifetime income. Luckily, this state reopened the DB plan to new employees and most of them actively make elections to join the DB pension.”