LANSING – A traditional, defined benefit retirement plan will provide a more secure retirement to employees than a defined contribution plan, according a new study from Great Lakes Economic Consulting.
The study was commissioned by the Michigan Coalition for Secure Retirement, and the results were announced at a press conference at the Capitol on Tuesday.
Mitch Bean, former director of the House Fiscal Agency and author of the study said that a defined contribution plan is far more costly, more difficult to administer and favors the wealthy. Since the 1990s all newly hired state workers have to have defined contribution plans.
“According to a study by the National Institute on Retirement Security, the cost to fund a target retirement benefit under a DB plan is 12.5 percent of payroll,” Bean said. “The cost to provide the same benefit under a DC plan is 22.2 percent of payroll.”
It’s also more cost-effective to have one big plan invested the same way, rather than individual plans that need to be separately administered, Bean said.
The study also found that since more people withdraw from their IRAs under DC plans, despite a 10 percent penalty, they are then more likely to draw from state services later on, which adds cost to the state budget.
“My major concerns are the long-run implications, “said Robert Kleine, former state treasurer and co-author of the study. “The average income is $30,000 a year. How much can that person save? Ninety percent have trouble saving for a secure retirement, and they’re taking it out of their (retirement) plans, making it even worse. Twenty to 30 years down the road, all they’ll have is Social Security.”
This story was provided by Gongwer News Service. To subscribe, click on Gongwer.Com
