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State and Local Government DC Plans on the Rise

It’s no secret that in the private sector, defined contribution plans have expanded while defined benefit plans have declined. But a recent Federal Reserve report says that state and local governments are increasingly turning to DC plans as well.

In “Defined-Contribution Pension Plans for State and Local Government Employees in the Financial Accounts of the United States,” the Federal Reserve says that while DB plans are still the dominant retirement plan among state and local governments, DC plans are gaining ground.

According to the Bureau of Labor Statistics, by March 2014, 75% of state and local government employees participated in a DB plan, and 16% in a DC plan. That may not suggest that DC plans comprise a hefty share of the state and local government retirement plan universe, but assets tell a different story. The Federal Reserve report shows that assets held in state and local DC plans amounted to $215 billion in the fourth quarter, but by the end of last year they more than doubled to more than half a trillion.

But the report notes that the funds in state and local government DC plans are subject to at least the potential for volatility since a substantial amount of the investments in which the assets are invested are in stock-market related accounts. By the fourth quarter of 2014, investments were as follows:

  • mutual funds: 36%

  • equities: 31%

  • unallocated insurance contracts: 25.8%

  • credit market instruments and other assets: 7.2%

Most assets in DC plans state and local governments offer are held in 403(b) plans and 457 plans; some also are held in 401(a) and 401(k) plans.