New York City's defined benefit pension plans deliver the same retirement income as a defined contribution 401(k)-type individual account, for 40 percent less cost, according to a report by the National Institute on Retirement Security and Pension Trustee Advisors on behalf of the Office of New York City Comptroller John C. Liu.
"A Better Bang for New York City's Buck" found that defined benefit savings came from superior investment returns, better management of longevity risk and portfolio diversification. The report found that defined benefit plans had higher investment returns because of the pooled nature of the assets and lower fees stemming from economies of scale, but also because the assets are professionally, not individually, managed. The City plans' enhanced investment returns save from 21 to 22 percent.
New York City's defined benefit plans save between 10 and 13 percent compared to a typical defined contribution plan because pensions pool the longevity risks of a large number of individuals and can determine and plan for mortality on an actuarial basis.
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The report also found that pension assets can be invested for optimal returns. Individuals using 401(k)s are advised to rebalance their investments, downshifting into less risky and lower-returning assets as they age. This ability to maintain portfolio diversity in the City's defined benefit plans saves from 4 to 5 percent.
"These findings are consistent with our national study on the cost efficiencies embedded in pension plans," said Diane Oakley, NIRS executive director. "The analysis clearly indicates that the qualities inherent in DB plans – particularly the superior investment returns and pooling of risks and assets – fuel their fiscal efficiency. The report provides important insight for policymakers, employers and employees, who are struggling to ensure adequate retirement income with the fewest dollars possible."
Comptroller John C. Liu said in a statement that, "calls to replace pension plans with 401(k) plans understandably increase when markets have returned poorly over sustained periods. However, as this and other studies show, the defined pension is the most cost efficient vehicle to deliver retirement income security."
The model for the research was based on a group of 1,000 newly hired employees from each of the five New York City pension plans, including teachers, civil service workers, sanitation workers, police and fire personnel.
The National Institute on Retirement Security, based in Washington, D.C., is a not-for-profit organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy through national research and education programs.
Pension Trustee Advisors provide expertise, education, and customized solutions to trustees, pension fund staff, government entities, attorneys, labor and other pension decision makers.
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