While 401(k) plans now dominate the private sector, defined benefit plans remain the norm among state and local governments. Why have public sector employers not shifted from defined benefit plans to 401(k)s like their private sector counterparts?
This brief examines the unique factors affecting the two sectors that may explain their very different patterns of pension coverage. State and local governments have an older, less mobile and more risk-averse workforce, with a higher degree of unionization to press for benefits that satisfy the needs of these workers. The nature of the employer is also fundamentally different. Unlike private sector firms, state and local governments are perpetual entities. They do not disappear — like many of the large manufacturing firms — taking their plans with them, and they are much less concerned about the financial volatility associated with defined benefit plans. States and localities can also increase required employee contributions to keep the plan’s finances under control. Finally, the public sector has not had comprehensive pension regulation like the Employee Retirement Income Security Act of 1974; the absence of such regulation lowers administrative costs and enables later vesting.