Hybrid Pension Plans
Crucial (and complicated) concepts in public money explained.
These plans are growing in popularity as a middle ground between keeping Defined Benefit plans and doing away with them altogether by switching to a Defined Contribution plan. Hybrids can take varying forms but, in short, they are a defined contribution plan backed up by a lower-level defined benefit plan. For example, one type of hybrid plan caps the employer’s contribution to a defined-benefit plan. If the plan’s costs are higher than the cap, employees make up the difference. The goal is to have the employee and employer share the investment risk. This helps the employer keep retiree benefit costs in check and gives the employee more retirement security than a DC plan.
Hybrids have been around for years (Indiana has had one since the 1950s) although they have been growing in popularity as more states and localities revise their pension programs. Currently, 15 states and a handful of cities have adopted a hybrid pension plan for their employees – in most cases just for their new hires.