By Dan Doonan
Executive Director, National Institute on Retirement Security
Source: Forbes

Florida lawmakers are considering legislation that would eliminate retirement plan choice for state employees. The proposed measure would do away with defined benefit pensions for newly-hired employees, offering only a 401(k)-style defined contribution plan.

Other states and localities that have implemented dramatic shifts to their public employee retirement plans have experienced unfortunate, unintended consequences – from skyrocketing costs to losing experienced employees who deliver essential public services. In some cases, governments have actually re-instated their pension plans after the experiment proved a fiscal failure.

As part of the legislative process, Florida lawmakers are pursuing an actuarial analysis of the proposed retirement plan changes. But it will be critically important to ensure the analysis asks the right questions. For example, one key issue is the legacy costs of the current pension plan if it is closed to new hires. Because pensions largely are funded by regular employee contributions and investment returns, cutting off a key source of revenue likely will drive up taxpayer costs substantially and trigger an investment strategy that generates lower returns.