Robert L. Clark, Emma Hanson, and Olivia S. Mitchell
WP2015-05
Abstract — This paper explores what happened when the state of Utah moved away from its traditional defined benefit pension. Instead, it offered new hires a choice between a conventional defined contribution plan, versus a hybrid plan option having both a guaranteed benefit component and a defined contribution plan shifting investment risk to employees. We show that some 60 percent of new hires failed to make any active choice and, as a result, they were automatically defaulted into the hybrid plan. Slightly more than half of those who made an active choice elected the hybrid plan. Slightly more than half of those who made an active choice elected the hybrid plan. Interestingly, post-reform, employees who failed to actively elect a primary retirement plan were also far less likely to enroll in a supplemental retirement plan, compared to new hires who made an active plan choice. We also find that employees hired following the reforms were more likely to leave public employment, resulting in higher turnover rates than previously. This could reflect a reduction in the desirability of public employment under the new pension design. Our results imply that public pension reformers must consider employee responses, in addition to potential cost savings, when developing and enacting major pension plan changes.