How Do College Employees Select between Defined Benefit and Defined Contribution Retirement Plans?

Given the complexity – and risks – of choosing between a defined benefit plan and a defined contribution plan, how do university employees decide?

Summary

Higher education is different from other sectors of the economy in terms of funding and operating retirement plans. Employee participation is often mandatory, and workers must contribute a portion of their salary to the plan. Additionally, roughly half of public institutions give their employees the choice of participating in either a defined benefit plan or a defined contribution plan. This study examines how faculty and staff at the University System of Georgia make this decision – which can have myriad financial and career implications – and the factors that influence people’s plan preferences.

Key Insights

• Mid-career, female, black and lower-paid employees all tend to prefer the defined benefit plan.
• Preference for the defined benefit plan rose for faculty during the period studied and fell for other staff.
• Those who choose the defined benefit plan often cite its perceived financial security.
• Those who choose the defined contribution plan often cite the likelihood of leaving their employer before the end of the defined benefit plan’s 10-year vesting period.

Methodology

The researchers examined 2015-16 data on more than 14,000 University System of Georgia employees hired between 2009 and 2015. They completed separate analyses of tenure-eligible faculty and other staff. They also conducted interviews with 12 recently-hired faculty at the University of Georgia to explore in-depth how these individuals decided between the two retirement plan options.