Lessons for Public Pensions from Utah’s Move to Pension Choice
We explore what happened when the state of Utah moved away from its traditional defined benefit pension. In its place, it offered new hires a choice between a conventional defined contribution plan and a hybrid plan option, where the latter has both a guaranteed benefit component and a defined contribution plan where employees bear investment risk. We show that around 60 percent of new hires failed to make any active choice and, as a result, were automatically defaulted into the hybrid plan. Slightly more than half of those who made an active choice elected the hybrid plan. Post-reform, employees who failed to actively elect a primary retirement plan were also far less likely to enroll in a supplemental retirement account, compared to new hires who actively selected a plan. We also find that employees hired following the reform were more likely to leave public employment, resulting in higher separation rates. This could reflect a reduction in the desirability of public employment under the new pension design and an improving economic climate in the state. Our results imply that public pension reformers must consider employee responses in addition to potential cost savings, when developing and enacting major pension plan changes.
The research described in this paper began with a conversation with Richard Ellis, State Treasurer of Utah, who provided introductions to the leaders of the Utah Retirement System (URS) and supported our examination of the impact of pension reform in Utah. The authors acknowledge the assistance of Daniel Anderson, Executive Director; Jeff Allen, Chief Information Officer; John Brinkerhoff, Chief Privacy Officer and Information Security Officer; Joe Kanis, Retirement Applications Manager; and others at URS. This work was presented at “Retirement and Health Benefit in the Public Sector,” an NBER conference, and useful comments were provided by David Laibson. Research support was provided by the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania. The research is part of the NBER programs on Aging, Public Economics, and Labor Studies. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated, nor of the National Bureau of Economic Research.
Olivia S. Mitchell
Mitchell serves as an Independent Trustee for the Wells Fargo Advantage Funds and has received more than $10,000 from the TIAA-CREF Institute for research on retirement security.
ROBERT L. CLARK & EMMA HANSON & OLIVIA S. MITCHELL, 2016. "Lessons for public pensions from Utah's move to pension choice," Journal of Pension Economics and Finance, vol 15(03), pages 285-310. citation courtesy of