Defined Benefit

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					Defined Benefit vs. Defined Contribution

 The Georgia Association of Educators advocates for pension benefits on behalf of members of both the
Teachers’ Retirement System (TRS) and the Public School Employees Retirement System (PSERS). GAE
feels strongly that one of the most effective ways to protect both employment sectors’ interests is to
advocate for the maintenance of a Defined Benefit pension plan. GAE strongly supports Defined Benefit
(DB) Pension Plans and opposes any movement toward a Defined Contribution (DC) Plan or any type of
hybrid plan that would include a Defined Contribution component that would compromise the current
Defined Benefit structure. According to experts, a DB plan can do the same job at almost half the cost of
a DC plan. There are fundamental differences in DB and DC plans. Here is how each plan works:

How the DB Plan works: DB plans are designed to provide a predictable monthly benefit in retirement.
That amount is usually arrived at by considering a number of factors including years of service and
compensation history. DB plans are prefunded (employers and public sector employees) contributions
to a common pension fund over the course of an employee’s career. Asset managers invest the funds
(overseen by trustees). The earnings, along with the dollars initially contributed, pay for the lifetime
benefit workers receive when they retire.

        Plain and Simple: retirement benefit is “defined” by a calculation using your years of
        membership service, the average of your two highest membership salary years, and a 2%
        multiplier. Under this plan, you assume no investment risk, plus you have survivor and disability
        protection while you are an active member. An additional benefit to DB plans is that members
        are guaranteed retirement income for the rest of their lives. (Source:

How the DC Plan works: There are no guarantees of retirement income in DC plans. Employees usually
contribute to the plan over the course of their career. The rub is whether the funds in the account will
be sufficient to meet retirement income needs. This is usually determined by the employer and
employee contributions, the investment returns and assets, and whether loans or withdrawals have
been made prior to retirement. Because DC plans are normally “participant directed,” they tend not to
have histories of stable returns or withdrawals upon retirement. This is in part because professional
asset managers do not make the investments--the employee does.

        Plain and Simple: retirement income is based on the performance of investment choices made
        by the plan member and employer. Retirement, survivor, and disability income are limited to
        the value of the member’s account. The most noted example of a DC Plan is a 401(k) program.
        (Source: ibid).

Over 90 percent of the K-12 public school teachers, education support professionals and other public
employees and retirees in the United States can rest assured that they have a guaranteed pension for
life. They are covered by DB Plans.
During the past decade, various groups with a financial or political interest have worked to eliminate DB
plans that are provided to public employees and replace them with DC plans which are not guaranteed.

DB Plans offer both employees and employers a number of distinct advantages that DC Plans do not.
Here are some of the reasons GAE supports DB Plans:

Employee Advantages

    -    Employees know in advance what their retirement benefit will be. The amount of the benefit
         is known in advance, usually based on factors such as age, earnings, and years of service.

    -    Employers, not pension plan participants, are responsible for providing retirement benefits,
         and the benefits are not subject to the fluctuations of the stock or bond markets. The employer
         bears the investment risk and normally professional money managers make the investments.

    -    A plan participant can earn service credit for earlier years of service, even if the participant has
         not been covered by a retirement plan earlier in a career.

    -    DB plans provide a defined, guaranteed benefit. A retired participant receives a pension
         annuity, such as monthly benefit for life, as does the participant’s surviving spouse, unless both
         the participant and spouse elect otherwise.

    -    DB Plans are comprehensive. DB plans can provide additional valuable benefits to participants,
         such as early retirement, disability, and death benefits and also benefits for past service,
         increased benefits, or cost-of-living adjustments.

Contrary to most recent reports from private industry, Defined Benefit plans offer several advantages to
the employer that Defined Contributions do not. Here are some:

Employer Advantages

DB plans have a “built-in” savings mechanism which helps make them highly efficient income vehicles
capable of delivering retirement benefits at a low cost to both the employer and employee. This is
realized by three principal sources:

    1.    DB plans are managed according to longevity risk (chance of running out of money in
         retirement). By pooling the risks of large numbers of individuals, DB plans are able to avoid
         saving more than people need on average to avoid running out of cash. Essentially, DB plans are
         able to do more in the long run with less.

    2. DB plans do not age. They take advantage of the enhanced investment returns that come from
       a well-diversified portfolio-for the life of an individual.
   3. Finally, DB plans which are professionally managed achieve greater returns than DC plans.
      Experts say that a retirement system that achieves higher investment returns can deliver any
      given level of benefit at a lower cost.**

   -   DB plans help ensure a high performing workforce. By providing a predictable, guaranteed
       benefit at retirement that is valued by employees, a defined benefit plan can promote employee
       loyalty and help retain valuable staff.

   -   DB plans can be useful in attracting people into public service. An employer can provide a
       significant retirement benefit for employees, even older employees for whom no contributions
       have previously been made, or who did not or could not save for retirement earlier.

   -    DB plans are flexible. While the employer bears the investment risks for the plan, favorable
       interest rates and economic conditions can reduce or eliminate an employer’s contribution, or
       make it possible to increase benefits at reduced or nominal cost.

   -   DB plans can be designed to accomplish specific goals, such as offering enhanced early
       retirement benefits.

   -   DB plan assets are collectively invested, which may result in higher investment returns.
       Because of their size, DB plans have the financial ability and knowledge to hire expert advisors.

   Comparison of Defined Benefit and Defined Contribution Plan Features

Features                                           DB Plans                     DC Plans
Guaranteed Benefit                                 Yes                          No
Employer bears investment risk                     Yes                          No
Benefit Predictable                                Yes                          No
Portability                                        Yes                          Yes
Low Expenses                                       Yes                          No
Cost-of-Living Adjustments (COLA’s)                Yes                          No
Disability Features                                Yes                          No
Minimum Death Benefit                              Yes                          No

Three commonly discussed myths and the GAE position:

   1. DC plans are more cost effective to the employer.
      GAE Position: We disagree. There are two key factors to consider in plan administration; the
      cost of the benefit and the cost to administer the benefit. When an employer replaces a DB
       plan with a DC plan, the benefits have likely been cut, otherwise where would the large cost-
       savings be realized? According to some investment counselors, there is a concept of “wasted
       dollars” that should also be considered. The argument is that if the primary purpose of plan
       sponsorship is to provide employees with a source of retirement income, any benefits
       distributed in the form of cash payments before an employee reaches retirement eligibility are
       wasted dollars. In other words, cash payouts defeat the purpose of retirement savings because
       it is money that is no longer being deferred.

   2. DB plans are not well-regarded anymore because the career employee is rare.
      GAE Position: We disagree. While Georgia like several other states is experiencing a teacher
      shortage and migration from the profession, there is an overwhelming number of professionals
      who are members of the TRS and PSERS systems. There are approximately 75,000 retirees in
      Georgia and roughly 272,000 active public school professionals. A large percentage of these
      individuals have been in their field of choice for not less than 10 years and most have been in
      the field between 15 - 20 years. PSERS has about 13,000 retirees and 37,600 active members.

   3. DC plans are portable making them more appealing to the “modern-day” employee.
      GAE Position: We disagree. Similar to myth number 1, if the issue is immediate access, then the
      money shouldn’t be considered retirement money because most money that’s readily accessible
      is spent and not used for retirement.

Our members’ confidence in their retirement security is essential to our legislative priorities. We will
actively work to protect current benefits offered through the system. Our staff will also continue to
monitor meetings and hearings of both the Teachers’ Retirement System and the Public School
Employees Retirement System to keep you apprised of any developments or considerations that could
affect your pensions.

**National Institute on Retirement Security was also frequently referenced throughout this document.

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