IB#8-19

Introduction

Equity assets in retirement plans dropped in value by about $4 trillion between October 9, 2007 and October 9, 2008. The decline was divided equally between defined benefit and 401(k)/Individual Retirement Accounts (IRAs). The decline in the defined benefit arena was in turn divided equally between private sector plans and those sponsored by state and local governments. This brief explores what a loss of roughly $1 trillion of state and local defined benefit equity assets means for the individual participants and for the taxpayers of the sponsoring entities.

The brief is structured as follows. The first section describes the important role of defined benefit plans in the public sector. The second section describes the immediate impact of the financial crisis on public sector participants, while the third section turns to the impact on plan sponsors by assessing the funding status of these plans. The fourth section explores the possible responses by plan sponsors should equity values remain low. The final section concludes that, while everyone agrees that funding of state and local plans is an important goal, the smoothing of asset values in the public sector allows these plans some space to restore their funding levels.

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For more information on retirement security and the financial crisis