Shared-Risk in Public Retirement Plans

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Retirement plan designs feature a variety of risk-bearing arrangements, ranging from an employer maintaining sole responsibility for funding guaranteed benefits, to employees bearing the full obligation to finance their own retirement savings. In plans for state and local government workers, risk sharing falls between these extremes. Although most states offer a defined benefit (DB) plan, the typical DB plan also places some level of financial responsibility and risk on both the employer and the employee. The use of shared-financing and shared-risk have grown in recent years as states have modified required employer and employee contributions, restructured benefits, or both, and some states also established so-called “hybrid” plans that combine elements of traditional pensions and individual account plans.

This brief identifies general types of risk present in public sector retirement plans and analyzes longstanding and emergent uses of risk-sharing features enacted by states and designed to meet their specific financing and human resource goals.