Introducing the LRTA E-Newsletter
December 29, 2020
Understanding and Defending the Current Defined Benefit Plan
January 11, 2021

Breaking Down Retirement Plans

It’s important to understand the different types of retirement plans, especially if there are proposed changes to the current plan. LRTA breaks down three often-discussed retirement plans: defined benefit, defined contribution and hybrid retirement plans.


Defined Benefit (DB) Plan

Aka Pensions

A Defined Benefit (DB) retirement plan, or pension, uses a predetermined formula to calculate the amount of the employee’s retirement benefit. Both the employer and employee contribute to the plan.


Throughout their careers, teachers and their employers (school boards) contributed to a pension plan administered by The Teachers’ Retirement System of Louisiana (TRSL). TRSL pooled all employee and employer contributions together and professional asset managers invested the money (see Figure 1). These contributions and the interest earned on TRSL investments pay for future retirement benefits.


When the teacher retired, TRSL applied a formula based on their years of service and final average compensation and a benefit factor (a percentage used to calculate the retirement benefit) to determine the monthly benefit amount.


Retired teachers receive a guaranteed amount based on this formula every month for the remainder of their lives, as guaranteed by the state constitution, per Article X, Section 29 (A).


Pension contributions are pooled together and specifically invested for the long-term, meaning pensions can overcome the ups and downs of the market. The volatility of the stock market does not directly affect the benefit amount a retired teacher would receive in the future.

Defined Contribution (DC) Plan

Aka 401(k) or 401(k) style plan


Defined Contribution (DC) plans are similar to 401(k) style plans. Employers and employees can contribute to the DC plan. However, it is up to the employee to make investment decisions themselves. Oftentimes, employees have different portfolio options to choose from to make their investment decisions (Figure 2).


The retirement benefit from a DC plan is not a guaranteed amount. DC plans base the amount of the monthly benefit to be paid on the balance of funds in the individual’s retirement account at the time the decision is made to terminate employment. The balance of the account is normally annuitized. The amount of the balance, plus an assumed rate of interest to be earned over the life expectancy of the retiree, determines the monthly benefit. Depending upon how the plan is established, should downward market fluctuations reduce the account balance, the monthly retirement benefit could also be reduced. Ultimately, the retirement benefit amount is dependent on how well the employee’s investments performed.


Hybrid Plan

Hybrid plans combine the features of Defined Benefit (DB) and Defined Contribution (DC) plans. The money employees and employers contribute to a hybrid plan are split between a DB and DC plan. The DB portion of a hybrid plan is smaller than a traditional pension plan. The benefit factor, or accrual rate, is lower than the typical benefit factor of a traditional DB plan. Because the benefit factor is smaller, the guaranteed payout of the DB portion of a hybrid plan is generally lower. The amount of money available from the DC portion is dependent on how well the employee’s investments performed.

Currently, active teachers in Louisiana contribute to a DB plan. LRTA supports the current DB plan and opposes changes to the current plan, including switching to a DC or Hybrid plan.


Why? Research shows:


  • Defined Benefit plans provide stable and secure retirement benefits for retired teachers and public employees, which allow retirees to live independently and contribute to their local economies.

  • There is no DC or hybrid plan currently implemented that provides benefits greater than or equal to the current DB plan (or Social Security benefits*).

  • Switching from the current DB plan to a DC or Hybrid plan could accrue additional costs to administer or cause the Unfunded Accrued Liability (UAL) or debt to increase.


Check out the research:

Pensionomics 2021 | Measuring the Economic Impact of DB Pension Expenditures – Dan Doonan, Ilana Boivie; NIRS

Teacher Pensions vs. 401(k)s in Six States: Colorado, Connecticut, Georgia, Kentucky, Missouri and Texas – Leon (Rocky) Joyner, Nari Rhee; NIRS

*Note: teachers in Louisiana do not pay into Social Security.