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State Retirement Plans:
Executive Summary
by Jamee Fuller, CPPA, Dave Patton, CPPA and Jordan Robertson, MPA
Introduction
Over the course of the past decade, several states have
moved away from providing their employees with Defined Benefit retirement
plans, and have, instead, opted to institute Defined Contribution or 401(k)
plans for their employees. Currently,
only two states have switched completely over to a Defined Contribution plan
for new employees. Many states,
however, are reviewing this option.
Reasons why States
are Switching
There are several reasons why states are switching from
Defined Benefit plans to Defined Contribution plans. The majority of these reasons are rooted in financial
considerations for the State. The first
of these reasons are the unfunded liabilities that several states are
experiencing as the result of a weakened economy and the stock market drop at
the beginning of the decade (Goodman, 2006).
This was the reason why Alaska changed the benefits provided to their
employees. Government leaders believed
that a Defined Contribution plan would be less financially taxing on the state
in the long run.
A second reason why states are looking at changing their
retirement benefits is because of misappropriation of funds or benefit
allocations by state governments. When
New Jersey began to investigate options to remedy financial concerns in their
pension system, the Benefits Review Task Force for the State uncovered
misappropriations and allocations of pension funds. As a result, instead of changing to a Defined Contribution
retirement plan for new employees, steps were put into place to rectify the
problems within the system (The State of New Jersey, 2005).
An additional problem plaguing some retirement services is
that the individuals serving on pension system boards have not received formal
training or education in making investment decisions. This lack of understanding of fiduciary fields has created
significant problems in pension funds that are managed by boards made up of
these types of individuals. Some board
members have also engaged in unethical practices by doing business with
financial investment firms that contribute large sums of money to elected
officials, or seek kickbacks from investment firms for agreeing to do business
with their organization (Barrett & Greene, 2007).
Many states have also considered switching to Defined
Contribution plans to compensate for the rising costs of health care. States that have historically provided
retirees with health care benefits as part of a retirement package are
suffering monetary problems due to the high cost of providing these benefits.
Information Available
from Utah Retirement Systems
The State of Utah is unlikely to change completely over from
a Defined Benefit (DB) plan to a Defined Contribution (DC) plan. The Utah State Retirement Systems website
provides a pamphlet that analyzes the defined benefit versus the defined
contribution plans and argues against phasing State retirement systems from DB
solely to DC plans. These arguments
include concerns over the State needing to increase wages in order to remain
competitive for talent with the private sector if they decrease retirement benefits. Another worry is that the public sector will
experience higher turnover because individuals will lose the incentive to
remain in state service to ensure that they receive retirement benefits. Other concerns are that the cost to administer
the DB plan would increase; public employees without adequate retirement
funding would turn to the welfare system for support; DC plans expire when the
money runs out, whereas DB plans are a life-time annuity; and the success of a
DC plan is critically dependent on the circumstances of the market at
retirement (Utah Retirement Systems, 2007a).
Bills Recently
Introduced in the Utah State Legislature
An additional indicator that illustrates that it is unlikely
that the State of Utah will switch solely to a defined contribution plan is the
nature of the bills regarding retirement that were introduced in the 2007
General Session of the Utah State Legislature.
Many of the bills introduced called for increases to the current
retirement benefit structure in the State.
House Bill 377, however, when introduced, proposed to modify the Utah
State Retirement and Insurance Benefit Act to provide for an optional defined
contribution retirement plan. This bill
would allow new employees hired July 1, 2007, who are eligible to earn service
credit under any state retirement system, to make a one-time election to become
a member of a defined benefit retirement system or to receive a defined
contribution in lieu of a defined benefit.
The House eventually substituted a bill for this one—one that looked
nothing like the original bill. The
original bill obviously showed a desire to move away from DB plans toward DC
plans, by allowing employees to opt out of the DB plans and exclusively
contribute to DC plans. Eventually the
substitution bill was placed in the House file for defeated bills (Utah State
Legislature, 2007). The overall
attitudes exemplified by the Utah State Legislature are toward increasing
benefits for employees instead of reducing them. This is not parallel with the attitudes of other states prior to
changing from a DB plan to a DC plan.
Most states also commissioned task forces or committee groups to review
alternatives in their retirement funding options prior to switching over. The State of Utah has not yet done this,
further indicating that there are no plans in the near future to consider such
a drastic change.
Conclusion
From information gathered from other states, the Utah
Retirement Systems website, and the bills that were introduced into the 2007
General Session, it is unlikely that the State of Utah will change its
retirement benefits for state employees in the near future. The State is not experiencing some of the
same financial concerns that other states have experienced, such as significant
unfunded liabilities and healthcare costs.
No information or research has shown that the State of Utah
misappropriates in any way the money that is earmarked for their pension funds,
or that the State is offering benefits to people who are ineligible to receive
them (Utah Retirement Systems, 2007b).
The State also currently has seven individuals serving on the board for
the Utah Retirement Systems, and four of the seven are distinguished as
representing the “investment community.”
These individuals have received formal education in making proper
investment decisions for the pension fund.
There are significant implications associated with changing
from a Defined Benefit Pension plan to a Defined Contribution plan. The worries associated with switching to a
Defined Contribution plan have been expressed by the Utah Retirement Systems as
reasons why it is doubtful that the State will switch from a DB plan to a DC
plan.
References
Barrett, K. & Greene, R. (2007). The $3 Trillion
Challenge. Governing 21(1), 26-32.
Goodman, J. (2006). Legislatures 2006: Issues to Watch. Governing Online. Retrieved November 26, 2007, from http://www.governing.com/archive/2006/jan/issues.txt
The State of New Jersey Benefits Review Task Force. (date). The Report of the Benefits Review Task Force to Acting Governor
Richard J. Codey. Retrieved November 26, 2007, from http://www.state.nj.us/benefitsreview/final_report.pdf
Utah Retirement Systems. Defined
Benefit (DB) and Defined Contribution (DC) Questions and Answers.
Retrieved November 19, 2007, from
http://www.urs.org/general/pdf/DBvsDCQuestions.pdf
Utah Retirement Systems.
Defined Benefit Plans (DB) vs.
Defined Contribution Plans (DC). Retrieved November 19, 2007,
from http://www.urs.org/general/pdf/db_vs_dc.pdf
Utah State Legislature. (2007). Bills and Resolutions 2007 General Session Bill Documents List. Retrieved November 19, 2007,
from http://www.le.state.ut.us/session/2007/bills.htm
View the full report
[PRINTER FRIENDLY VERSION]
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