Pension Facts & Retirement Basics

In 2022, the median monthly benefit check received by retired state and local government workers was approximately $2,082, according to the Pension Rights Center.

Until the 1980s, pensions were common and workers knew that with Social Security, their own savings including 401(k)s, and a pension, they could retire with dignity. NCPERS believes retirement security should be a national priority. Learn more about our advocacy for the Secure Choice Pension model.  

The Revenue Act of 1978 laid the groundwork for the modern 401(k) or 403(b). Sometimes referred to as a defined contribution plan, these savings vehicles allow you to set aside a portion of your paycheck before taxes are taken out, and that money is invested in things like mutual funds or stocks. Some employers also match a portion of your contributions with varying vesting schedules. While a 401(k) can be more portable than a pension when changing jobs, they also place added responsibility and risk on the individual.

Unlike a pension, a 401(k) doesn’t guarantee a set income in retirement—the amount you retire with depends on how much you save and how well your investments perform. On average, investment returns for 401(k)s are lower than for pension plans, resulting in significantly lower investment earnings over a person’s lifetime. In 2019, the annual retirement benefit from a 401(k) was just one quarter (24%) of the average benefits provided by a pension.

Pensions are more cost-effective than 401(k)s because they pool money, invest it professionally, and deliver better returns at a lower cost—making them a more efficient and secure option for both workers and employers. Learn more.

Pensions are highly cost-effective for both employees and employers, especially in the public sector. Pensions deliver the same or better retirement income at nearly half the cost of 401(k)-style individual accounts. Pensions pool resources and invest them over long-time horizons, which leads to higher investment returns and lower fees. Research from NCPERS found that administrative and investment costs for 401(k)-style individual accounts can be more than four times higher than for pension plans.

This collective investment strategy allows employees to receive a guaranteed lifetime income at a lower personal cost. Employees benefit from professional fund management and risk-sharing, which means they don’t have to worry about outliving their savings or making complex investment decisions. Learn more.

Pensions help attract and retain skilled workers, reducing turnover and associated training costs. As pensions have become less common in the private sector, they have increasingly become a highly coveted benefit for current and prospective public servants. A 2020 study found that 74% of millennials pursued their role in the public sector because the employer offered a pension, and 84% remain in their current positions because of this benefit.

Many states or cities that have cut pension benefits have faced costly challenges due to high turnover rates. After the Palm Beach Town Council closed its pension for all employees, turnover costs rose signficantly, prompting lawmakers to reopen the plan.

In addition to being a highly desirable benefit, pensions provide a stable, predictable, and cost-effective retirement solution that benefits both sides of the employment relationship. For employers, pensions offer a highly efficient way to provide employees with retirement benefits. Pensions deliver the same or better retirement income at nearly half the cost of 401(k)-style individual accounts. This is due to economies of scale, longevity risk pooling, and superior investment performance.

Despite research showing that 86% of Americans believe all workers should have access to a pension, access has declined significantly as 401(k)-style individual accounts became increasingly popular with employers.

The most recent data from the U.S. Bureau of Labor Statistics shows that only 15% of private sector workers had access to a pension plan compared 86% of state and local government workers—including teachers, firefighters, municipal workers, and other public servants.

Many public pension funds offer a rewarding career path in public service, and approximately 85% provide employees with access to a pension, per NCPERS 2025 Public Pension Compensation Survey.

See who’s hiring: Explore public pension job opportunities available with NCPERS Careers roundup.

NCPERS Public Retirement Systems Study, conducted annually, tracks trends relating to fiscal, operational, and business practices. The most recent data shows that public pensions are continuing to see improvements in fiscal performance as average funded ratios reached a five-year high of 83.1% for plans with fiscal year-end dates in the first half of 2024. 

Funded ratios are the most commonly used to measure the relative fiscal health of a pension plan, however they may not always tell the whole story. Other factors—such as employers’ funding discipline or market volatility—can greatly skew these data points year to year. Looking beyond funded ratios alone, here are five ways to assess the health of public pensions.

In 2023, taxpayers contributed $216.7 billion to state and local public pensions. However, these costs are heavily offset by the tax revenue generated from the investment of pension assets and spending of pension checks.

In fact, public pensions generated $661.9 billion in state and local tax revenues in 2023—$445.2 billion more than the $216.7 billion contributed by taxpayers. For every dollar taxpayers contributed to public pensions in 2023, they generated $13.41 in economic activity. Explore the state-by-state breakdown of tax revenue generated from public pensions.  

NCPERS Guide to Pension Governance & Oversight Best Practices, developed in collaboration with Segal Marco Advisors, provides an overview of governance and risk management practices for pension funds to consider. These include:

• Governance manual: Whether it is in electronic or paper form, a fund should adopt a governance manual that serves as a central repository for the fund's primary governance documents. A well-designed governance manual facilitates effective management and provides a tool to educate trustees and stakeholders on fund operations.
• Board practices: A retirement system should establish, document, and adhere to a set of practices that have a proven impact on performance and risk oversight. Some of these practices are mandatory (e.g. actuarial valuations), while others may be optional. Key practices include development of a strategic (multi-year) plan, board evaluations, adoption of a fiduciary education program, actuarial valuations, asset-liability modeling (ALM) studies, establishment of a program of audits and assessments, and adoption of a corporate governance and proxy voting approach.
• Board policies: A fund should adopt and adhere to a set of policies designed to guide system operations toward the achievement of stated goals within established risk tolerances. While their form may vary, a board's key policies and procedures should include: standards of conduct for fiduciaries, a communications policy, an investment policy, procurement guidelines, a privacy policy, whistleblower policy, and a risk management policy or equivalent.             
• Risk oversight: A fund should adopt a risk management framework and document it in a risk policy or within other policy documents (e.g. investment policy, privacy policy). The board should delegate accountability for management of market, credit, operational, asset / liability, liquidity and other risks through job descriptions, contracts, and charters.
• Strategic planning: A fund should adopt a strategic planning approach either in the form of a multi-year plan or within other documents. Strategic planning is a hallmark of successful organizations. It provides the board with a mechanism to map out long-term goals along with the implementation steps necessary to achieve them.  
• Key performance and risk measures: Reports to the board should include a set of key performance and risk measures to help the board assess the fund's progress toward goals across actuarial, administrative, audit, compliance, and investment functions. Given their expansive duties, boards rely on efficient reporting to enable effective oversight.
• Stakeholder communications: A fund should communicate regularly with members and other stakeholders through multiple media including website notifications, publications, letters, and required reports. Communications provide transparency into fund operations and may increase member satisfaction, while strengthening the fund's reputation.

Legal protections for public sector healthcare benefits can vary greatly from state to state. Attorneys at Williams & Jensen conducted a comprehensive 50-state review of state cases addressing public sector healthcare benefits. Access it here.

Since the SECURE 2.0 Act was signed into law, retirement plan sponsors have been working to understand the specific changes that will impact their plans, employees and retirees. The legislation included approximately 90 separate provisions and impacts virtually all aspects of retirement savings for American workers.

For governmental plans, the deadline to adopt plan amendments pursuant to the changes required (or optionally permitted) by SECURE 1.0, the CARES Act and SECURE 2.0 is December 31, 2029.  However, plans must still operate in accordance with the provisions of SECURE 2.0 as of the applicable effective date.

NCPERS developed the SECURE 2.0: A Desk Reference for Governmental Plans to provide guidance on the provisions most likely to impact its member plan sponsors and trustees. The report includes action steps and amendment deadlines, as well as the latest IRS guidance on relevant provisions. Download it here.

The Healthcare Enhancement for Local Public Safety Act, known as HELPS, is part of the existing federal tax law. It is found at Internal Revenue Code Section 402(l). HELPS allows eligible retired public safety officers to exclude from gross income up to $3,000 in annual distributions from a governmental retirement plan to pay qualified health care insurance or long-term care insurance premiums. HELPS was enacted as part of the Pension Protection Act of 2006.

Section 328 of the SECURE Act 2.0 modified the direct payment requirement under HELPS by making it optional and created an alternative to the direct payment method, namely allowing the retirement plan to make the distribution to the retired public safety officer. The retiree could then make the premium payment to the provider and remain eligible for the tax exclusion. This change is effective for distributions made after the date of enactment of the SECURE Act 2.0, which was December 29, 2022. Learn more.

On December 21, 2024, the U.S. Senate voted to approve H.R. 82 (the Social Security Fairness Act) without amendment to repeal the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These provisions reduced or eliminated the Social Security benefits for public sector workers who receive a pension based on work that was not covered by Social Security (a “non-covered pension”) because they did not pay Social Security taxes.

The Social Security Fairness Act was signed into law on January 5, 2025, but it applies retroactively to all monthly insurance payments made after December 2023. Anyone whose monthly benefit is adjusted, or who will get a retroactive payment, will receive a mailed notice from Social Security explaining the benefit change or retroactive payment.

An investment consultant advises individuals or organizations on how to manage their investments to meet financial goals, often by designing and overseeing tailored portfolios. 

Core responsibilities of investment consultants, include: 

• Portfolio Design and Management: They create customized investment portfolios based on a client’s financial objectives, risk tolerance, and time horizon. 
• Strategic Advice: They guide clients on asset allocation—deciding how much to invest in stocks, bonds, real estate, or other asset classes. 
• Manager Selection: For institutional clients, they may help select and evaluate fund managers, coordinating the selection process. 
• Performance Monitoring: They periodically review and adjust portfolios to help ensure alignment with goals and market conditions. 
• Client Education: They explain investment concepts and strategies to help clients make informed decisions.

"Diversification is the only free lunch in investing."  - Nobel Prize-winning economist Harry Markowitz. 

Dr. Harry Markowitz, the father of the Modern Portfolio Theory (MPT), revolutionized how investors think about risk and return. His insight was that diversification reduces risk without necessarily sacrificing returns. By combining assets that don’t move in lockstep, investors can likely smooth out volatility and potentially improve long-term performance. This idea became a cornerstone of investment strategy, especially for institutional investors and financial advisors.

The term “alternative investments” often refers to those strategies that fall outside traditional public market securities and/or those that invest in public market securities in a non-traditional manner (e.g., short-selling, using leverage or derivatives, etc.).   

Alternative investments can be implemented in an effort to reduce volatility, enhance potential returns, and/or access different risk premiums relative to traditional asset classes such as public equities. As noted above, diversification is often an important risk mitigation tool for pensions and other long-term investors.     

Alternative investments can be considered an important component of portfolio construction when the investment strategies being considered have been evaluated as appropriate for the specific pension plan.  

The potential benefits associated with alternative investments in a pension plan’s portfolio always need to be balanced against the various risks such as principal liquidity restrictions, reduced transparency, and higher fee structures that are commonly associated with alternative investments.

Yes, pension plans do pay investment fees. These fees often include expenses paid to the investment managers, custodial banks, and investment consultants. Since the 2008 global financial crisis, pensions have pushed for lower fees and transparency in the fees paid. They have largely eliminated soft-dollar fees and seek to avoid other arrangements with potential conflicts of interest. 

Economies of scale further allow large pension systems to obtain attractive fees relative to small institutional or retail investors. Larger asset bases allow for greater negotiating power and increased ability to reach fee schedule break points, reducing total portfolio costs. 

Commonly, pension boards require fee reviews at least quarterly along with “net of fee” performance comparisons of the portfolio’s investment managers relative to their benchmarks. Investment consultants can assist pension plan clients in structuring cost-effective investment programs. Investment consultants  help review client portfolios to determine appropriateness of fees and actively assist with the negotiation of fees and other terms in investment manager contracts.   

Performance is important, so the explicit fees paid and “net of fee” performance reviews are additive to effective discussion around beneficial portfolio construction. The result has been fee compression across the institutional investment industry consistent with the fee statistics published in the recent NCPERS Public Retirement Systems Study.

This is provided for educational and informational purposes only and has been prepared for use with NCPERS. This document is not intended to be reproduced or distributed to the public. The opinions expressed herein are solely those of the speakers and may not represent the firm views of Mariner Institutional. It should not be regarded as investment advice or as a recommendation regarding any particular course of action and is not intended to provide legal, tax, actuarial or accounting advice. This presentation contains hypothetical examples that are intended solely for illustrative purposes. They should neither be viewed as a guarantee nor relied upon when making a specific decision applicable to a particular fund or plan. This presentation contains statements of future expectations, estimates, projections, and other forward-looking statements that are based on available information and Mariner Institutional’s view as of the time of those statements. Such forward-looking statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Mariner Institutional and NCPERS are not affiliated.