Plan sponsors in government
Building a Better Retirement: Government
Big changes are coming to government plans. The last bastion of pensions is eyeing defined contribution plans.
457s move to the front seat.
A quiet revolution is underway in public-sector retirement plan design. Government employers are the last bastion of defined benefit pension plans—but while most government workers have access to these plans1, with employees living longer and spending more in retirement, the amount of income they can expect to receive may fall short of what they’ll need in retirement. And in fact, the median pension benefit for public employees is only about $25,000 a year.2 As a result, many public employers are looking to defined contribution plans—specifically governmental 457 plans—to supplement that income and give workers a more active role in retirement planning.
While retirement benefits look different by state, public employers across the nation say 457 plans will play a bigger role in delivering retirement security. They offer flexibility, provide more control over savings and investments, and can help bridge retirement income gaps where pensions and Social Security—if the employee is even eligible—fall short. Well-structured DC plans can also help employers compete more successfully with the private sector, helping them recruit younger workers who want portable plans they can take with them if they change jobs.
TIAA’s Building a Better Retirement survey connected with 50 government employers with 457 plans to find out how they’re thinking about their DC plans today and going forward.
Supporting employees with a light touch, for now.
Public-sector employers say they feel a commitment to their workers. Indeed, 82% say they see it as their responsibility to employees to offer a DC plan. They’re less motivated by a DC plan’s role in talent management, however: Only 46% say it helps them manage their workforce, versus 64% for all sponsors. When it comes to ensuring their employees are set up for a successful retirement, public sector employers say increasing the amount employees contribute to the plan by default would be the top intervention (58%) if possible, followed by financial education (50%), and guaranteed lifetime income (44%).
Notably, government employers tend not to use features that automate participation, with only 32% saying they currently use auto-enrollment, versus 54% overall. State regulations likely contribute to the slow uptake: Today, only nine states allow state and local government plan sponsors to implement automatic plan features without restrictions.3 Nevertheless, more than half (56%) of public-sector employers say they want to add automatic enrollment in the next two years, which may indicate optimism that policy changes could allow governmental 457 plans to follow the example of many private-sector DC plans.
Acknowledging the A-word (annuities!)
Government employers have long understood the necessity of guaranteed lifetime income, which is why they still offer pension plans when the private sector has largely dumped them. This commitment extends to their 457 plans. Among government employers, 96% agree that annuities provide predictable retirement income, and nearly seven in 10 say they already offer access to annuities in their 457 plans. Of those that don’t, most say they plan to offer one in the next two years. Only 2% of government employers say they are not at least considering adding annuities to their 457 plans.
Being able to help a retiree annuitize a cash flow stream and lessen risk in retirement is paramount.
At the same time, employers recognize that annuities can be complex, which is why they emphasized the need to proceed carefully and perform thorough due diligence when adding one to a plan. Consultants play an important role in annuity consideration, according to the survey. “We would definitely look to consultants for plan ideas and direction,” one plan sponsor noted. “Your average HR administrator isn’t out there investigating annuities.”
The road ahead.
Yes, government employees are the fortunate few when it comes to pensions. But pensions and Social Security alone might not be enough to build a secure retirement. By adding annuities to 457 plans, employers can bolster retirement income and help ensure better retirements for their employees.
Who we surveyed.
TIAA’s Building a Better Retirement survey consulted 500 C-suite leaders in finance and human resources across 17 industries, including 50 employers with governmental 457 plans, to elicit their thoughts on how their retirement plans are working, what they’d like to do next, and what’s standing in their way. These decision-makers responded to our online survey between June and August 2024, and some gave follow-up interviews through November 2024, facilitating an even better understanding of how they’re thinking and the trends they’re driving.
This blind survey was conducted with Greenwald Research; respondents did not know TIAA developed and sponsored it.
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1 U.S. Bureau of Labor Statistics, Retirement plans for workers in private industry and state and local government in 2022, February 01, 2023.
2 Pension Rights Center, 2022 data.
3 National Association of Government Defined Contribution Administrators (NAGDCA).
“Building a Better Retirement” was conducted by Greenwald Research on behalf of TIAA.
Annuity account options are available through contracts. These contracts are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Payments from the variable annuity accounts are not guaranteed and will rise or fall based on investment performance. Any guarantees are backed by the claims-paying ability of the issuing company.
This material is for informational or educational purposes only and is not fiduciary investment advice, a securities investment strategy or an insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.