Behavioral effects of employer-sponsored retirement plans

Abstract

Many organizations have either already terminated their defined benefit (DB) plans or are thinking about it, in order to offload the financial and regulatory risks these programs pose. But plan sponsors should think carefully about how their decision might affect their workers' commitment and productivity – and ultimately their organization's success.To answer those and other retirement questions, Watson Wyatt set out to learn how DB and defined contribution (DC) plans affect employees' workforce behavior and decisions. Watson Wyatt's Retirement Attitude Survey (WWRAS) found that, while most workers value both types of plans very highly, workers with DB plans generally appreciate their retirement programs significantly more than those with only a DC plan. This was particularly the case for those with a hybrid pension plan. This analysis found that retirement plan generosity and effective communication strongly affect a plan's perceived value to employees. This has important implications for plan sponsors, since greater plan appreciation is strongly linked to employee commitment. In fact, we found that workers covered by a defined benefit plan express a very strong commitment to their current employer, while DC plan coverage has no effect on employee commitment. This is partly owing to a selection effect, whereby firms with DB plans tend to attract more committed workers. However, even after controlling for the selection effect, DB plans exert an independent effect on the likelihood that employees will stay with their employer.

Sustainable Public Pension System for Florida Local Governments: Financial Solvency, Paradigm Switch, and Interperiod Equity

“…Thus the results of Question 1 reflect an underestimation of the transition costs of the DB-to-DC switch. Question 2 yields the lowest response in this section, which suggests that participants may not be aware of the preference that younger workers have for DC plans (Bowman & West, 2006;Dolan, 2007;Nyce, 2007). This could be explained that the respondents may believe the pension type is not a cue for prospective hiring especially under the current economy environment, or they simply infer this conclusion from their own previous experiences.…”

“…Public employees, who have longer tenure than private workers, prefer DB plans over alternative plans because the DB plan features favor long-term service (Dulebohn, Murray, & Sun, 2000;Munnell et al,, 2007;Olleman, 2009). Therefore, DB plans can enhance the probability to attract and retain employees with long-term commitments to their employers (Ippolito, 1997;Nyce, 2007). By contrast, DC plans are less capable than DB plans of instilling employee loyalty to younger employees (Nyce, 2007).…”

“…Therefore, DB plans can enhance the probability to attract and retain employees with long-term commitments to their employers (Ippolito, 1997;Nyce, 2007). By contrast, DC plans are less capable than DB plans of instilling employee loyalty to younger employees (Nyce, 2007). They are more attractive to those who focus more on current rewards rather than the deferred pension benefit with long tenure offered by DB plans.…”

What Does the Literature Tell Us About the Possible Effect of Changing Retirement Benefits on Public Employee Effectiveness?

“…DB pension plans are hence good for retention (Friedberg & Owyang 2005;Gustman, Mitchell & Steinmeier, 1994;Nalebluff & Zeckhauser 1984). DB pension plans also consistently reduce employee turnover (Allen, Clark & McDermed, 1993;Even & MacPherson, 1996;Ippolito, 1997;Munnell, Haverstick & Sanzenbacher, 2006;Nyce, 2007).…”

“…The literature shows a lot of uncertainty related to each of these three factors. Ending deferred compensation tends to lead to higher turnover (Allen, Clark, & McDermed, 1993;Even & MacPherson, 1996;Ippolito, 1997;Nyce, 2007), but the estimates of the size of the turnover increase vary widely. Moreover, turnover will only reduce average effectiveness if there is a learning curve for public employees.…”