One type of retirement plan that governments offer is a defined benefit (DB) plan. A DB plan provides retirees with a guaranteed benefit at retirement. Governments use a formula, typically based on age, length of service, and salary to determine the level of benefits. Benefits paid to retired employees do not fluctuate based on plan investment performance.
Characteristics of DB plans include:
- Plan liabilities change based on actuarial assumptions, such as future salary increases, investment earnings, employee turnover, and actual plan experience.
- Investment risk is assumed by the employer.
- Annual contributions can vary annually based on actuarial assumptions.
- Benefits may not be withdrawn while actively employed.
GFOA Best Practices and Advisories
Defined benefit plans are the predominant plan type in the public sector. GFOA identified the following best practices and advisories related to defined benefit plans:
- GFOA Best Practice: Design Elements of Defined Benefit Retirement Plans - GFOA recommends that pension administrators and finance professionals consider key plan design elements, plan funding, plan governance, including roles and responsibility and risk management, and participant education.
- GFOA Advisory: Responsible Management and Design of Defined Benefit Pension Plans - GFOA recommends that under no circumstance should state and local government plan sponsors engage in pension contribution holidays or make insufficient contributions.
- GFOA Best Practice: Funding Defined Benefit Pensions- GFOA recommends that every state and local government that offer defined benefit pensions formally adopt a funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner.
- GFOA Best Practice: Sustainable Funding Practices for Defined Benefit Pensions and Other Postemployment Benefits (OPEB)- GFOA recommends that state, provincial, and local government officials ensure that the costs of DB pensions and OPEB are properly measured and reported.
- GFOA Best Practice: Core Elements of a Funding Policy - GFOA recommends that every state and local government that offers defined benefit pensions and/or OPEB formally adopt a funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner.
- GFOA Best Practice: Asset Allocation for Defined Benefit Plans- GFOA recommends that state and local government retirement systems establish, within their overall investment policy, an asset allocation plan.
- GFOA Best Practice: Investment Fee Policies for Retirement Systems-GFOA recommends that retirement systems, especially those that use alternative investment strategies, adopt an investment management fee policy that will allow the retirement system to negotiate the lowest competitive fee possible while looking out for the system’s long-term earning potential.
Additional GFOA Resources
Other Links and Resources
- Public Plans Data
- National Association of State Retirement Administrators
- National Conference on Public Employee Retirement Systems
- National Insitute on Retirement Security
- American Institute of CPAs
- Center for State and Local Government Excellence
- Roanoke, Virginia, Ensures a Financially Sustainable Retirement Plan
- Ohio Public Employees Retirement System: No More Pension Spiking at Ohio PERS
- California Public Employees’ Retirement System: A Balanced Approach to Risk Mitigation