NASRA (2024)

Hybrid plans are a form of risk-sharing retirement plan design that allocate risk between employers and employees. Figure 1. presents a conceptual illustration of how risk in a retirement plan operates on a continuum, featuring plans that place all risk either with employers or employees at each extreme, with various types of risk-sharing plans between. In the context of public retirement plans, risk refers to the possibility of an event resulting in a financial loss compared to what is expected. Public retirement plan risk manifests primarily in three forms: investment risk, longevity risk, and inflation risk.

The degree to which risk is shared between employees and employers varies across differing plan designs. The term hybrid generally refers to plans that combine elements of both defined benefit and defined contribution plans to generate participants’ benefit upon retirement. The most recognized hybrid plan designs are cash balance plans and defined benefit-defined contribution (DB-DC) combination plans, and these plan designs are the focus of this brief.

Although hybrid plans have been in place in public sector retirement systems for decades, they have received increased attention in recent years as more states established hybrid plans on either an optional or mandatory basis. The growing attention to hybrids has occurred amid the many adjustments states have made to public pension benefits and financing arrangements. Changes to retirement plan designs typically are made to achieve certain outcomes (lower cost, less employer risk, among others), although such changes also can cause unintended outcomes, as states may find that closing their traditional pension plan to future (and, in some cases, existing) employees may increase—rather than reduce—costs,1 and that providing only a 401(k)-type plan does not meet important retirement security, human resource, or fiscal objectives. Most states have chosen to retain their defined benefit (DB) plan by modifying required employer and employee contributions, restructuring benefits, or both.2 Some states, however, have looked to hybrid plans as a retirement benefit policy solution or as a political compromise.

As shown in Tables 1 and 3, cash balance and DB-DC combination plans sponsored by states exhibit abundant variety. Amid this diversity, these plans have retained the core features of retirement plan design known to best meet the human resources and retirement policy objectives of state and local government: mandatory participation, shared financing between employers and employees, pooled assets invested by professionals, targeted income replacement with survivor and disability protection, and a benefit that cannot be outlived.3 This brief discusses statewide hybrid plans in the context of these core design features.

Date published

Keith Brainard, Research Director
Alex Brown, Research Manager

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