September 19, 2013
By Liz Farmer
Switching from a defined-benefit plan to a defined-contribution, 401(k)-style plan may be all the rage in states and localities these days, but whether it’s the right move for the long run was the topic of much debate Wednesday at Governing‘s Cost of Government Summit in Washington, D.C.
“This is one of those areas where in fact it is not necessarily clear that choice is the best thing to give individuals in retirement plan investment,” said Keith Welks, Pennsylvania’s deputy state treasurer for fiscal operations. Welks and others said that the trend toward 401(k)-style pension plans means that, like private-sector employees, public employees will have greater access to their retirement funds before they vest. He believes that will lead to a greater likelihood that those employees will draw down on their retirement funds early, leaving themselves financially unprepared for when they do want to retire. [EXPAND Read more]
“Sometimes choice is the enemy and investing is an extraordinarily sophisticated challenge,” Welks said. “And I don’t know that the 401(k) process has been that successful in helping Americans depend on their retirement security.”
San Jose, Calif., Councilman Pete Constant, who helped push through pension reforms in his city, disagreed that 401(k) plans don’t ensure retirement security. After all, many private plans include employer match contributions and have minimum contribution rates. “You’re saying each retirement plan that is a 401(k) plan lets people do willy-nilly with what they have — that’s just not true,” he said. They are designed, he added, to make sure employees are taking care of their own investment. “Let them get the security they want without putting the taxpayer at risk.”
But retirement security is exactly what’s at stake, according to Keith Bainard, research director for the National Association of State Retirement Administrators. He called 401(k) plans “clearly inferior plans for assuring retirement income” because while they are portable to another job unlike traditional defined-benefit plans, most employees who leave a government job with a defined-contribution plan as their primary retirement benefit cash out their assets rather than rolling them over to another plan. Additionally, retirement assets that are pooled, as pensions are, and invested by professionals offer advantages over individual, self-directed accounts: Namely that combined portfolios have a longer investment horizon, which allows them to better weather any market volatility. Pooled assets often result in higher investment returns too, he said.
Seemingly supporting that point is a Center for Retirement Research study that found most people in their early 60s had just $60,000 in 401(k) savings, noted Nevada Controller Kim Wallin. “So how can we fix our retirement system, not just in the public sector but in the private sector,” she asked, adding, “because that’s going to come back and haunt us.”
Still, some say the traditional defined-benefit plan is outdated with today’s more mobile employee. Michigan’s state budget director John Nixon said he had to think long and hard about leaving his “very lucrative” pension in Utah (where he had put in 12 years) to start over in Michigan. “The 30-year career is just not there anymore,” he said. “I think we have to be careful in saying we know best.” [/EXPAND]