DC retirement plans for public sector workers? It's a new normal, but it's complicated

Half of public-sector employees in their 60s with defined contribution plans had less than $40,000 in their retirement savings account balances at the end of 2021, according to one of two new reports from the Public Retirement Research Lab, a collaborative effort of the Employee Benefit Research Institute and the National Association of Government Defined Contribution Administrators.

The reports, “The State of Public-Sector DC Plans: 2021” and “A Gender Lens on Public-Sector DC Savings Behaviors,” focus on the specific challenges that public-sector employees with defined contribution plans face in their retirement saving efforts. While public-sector employees are more likely to have a defined benefit pension plan when compared to those in the private sector, DC plans are playing an increasingly larger role for those entering public sector employment and “understanding participant behavior in public-sector DC plans is critical to ensuring retirement security for participants,” according to the PRRL.

A big-picture view

The analysis in “The State of Public Sector DC Plans” reflects data for 267 plans across 457(b), 401(a), 401(k), and 403(b) DC plans. The most common plan in the database studied is the 457(b) (63% of participants), which typically is used in the public sector as voluntary supplemental savings vehicles in conjunction with a DB pension, according to the PRRL. Meanwhile, 401(a) plans represent 20% of participants, non-ERISA 401(k) plans account for 16% and just 1% are in 403(b) plans.

Among the findings in “The State of Public Sector DC Plans” was that loan usage peaks at age 40 with nearly 10% of those in their 40s having an outstanding loan with a mean size of $9,600. In addition, the report showed that nearly 1 in 5 workers participate in multiple DC plans. Michael Gropper, a research associate with EBRI, said the issue of workers participating in multiple DC plans is an important one that the PRRL plans to examine more closely in future research. He said multiple DC plans can prove to be a positive for some employees who may benefit from additional investment options or educational opportunities offered by different employers.

“However, having more retirement accounts can be burdensome in terms of additional time and paperwork,” Gropper said. “Different plans may also have different tax treatments or other rules; for example, the rules for so-called ‘catch up contributions’ differ between 401(k) and 457(b) plans. This is also a reflection of the public sector retirement plan system, where the 401(a) has limited contribution availability. Thus, if the employee wants to save more, they may have to use one of the other plans.”

A gender gap

According to the second report, “A Gender Lens on Public Sector DC Savings Behaviors,” the retirement savings account balances for women are lower than those of men among public-sector employees across all age groups. The differences are the result of both higher savings rates for men and men taking on greater equity risk in their retirement accounts. The report says more research is necessary to explain the reasons for the observed gender gap in retirement savings and the impact it has on retirement readiness of public-sector workers.

“Everyone’s financial situation is different, so I want to stress that the observed gender gap in retirement savings among public-sector employees could be a result of many different factors,” Gropper said. “That being said, some plan sponsors are implementing strategies to help their employees save for retirement. One such strategy, which has historically been limited in the public sector, is to automatically enroll new employees into defined contribution plans. Another strategy is building an auto-escalation feature into the plan, which automatically increases employees’ paycheck contributions over time to help increase the overall rate of savings. Closing the retirement savings gap may also be helped by financial wellness programs and participant education.”

Related: Closing the gap: Public pensions’ key role in retirement security for low-wage workers

Gropper noted that previous PRRL research has demonstrated that public-sector employees “may not have fully realized the effects of reduced defined benefit pension payments.”

“Education that is tailored to particularized circumstances may help employees understand what they may reasonably expect in terms of their pension in retirement,” Gropper said. “This in turn may help to encourage employees to save more in their defined contribution plans. There is more to examine on why there is a gender gap, to see what the specific drivers are, and what can be done to address them.”