The foremost benefit of a defined contribution retirement plan is that the employer addresses all costs as they are incurred. But when compared with a defined benefit plan, there often are real dollar savings, too.
Here is an example of how it might work in the instance of a 20-year employee who retires at age 55. Assume his annual salary began at $80,000, ended at $120,000 and averaged $100,000 during his tenure:
Under a typical CalPERS defined benefits plan, he would be entitled to 2.5 percent of his highest annual earnings ($120,000) times his years worked (20). That would be $60,000 annually. If he lived to be 75, his 20 years of retirement would end up costing the employer $1.2 million.
Under a defined contribution plan such as Lafayette's, the employer pays 10 percent of the employee's annual earnings (on average, $10,000) for each of his years on the job (20). That works out $200,000. If the employee contributed 5 percent annually ($5,000) and the city matched it for 20 years, that would add $100,000. Total employer cost: $300,000.
The mammoth contrast in plan payouts would be reduced, but only marginally so, by any employee contributions and pension investment earnings, but those wouldn't begin to cover the $900,000 total difference.