When a state closes a public pension system, the consequences are widely felt. Unfunded liabilities skyrocket and plan costs rise. Defined contribution 401(k) plans cost 91% more than pensions, with the burden falling on taxpayers. No one feels these consequences more directly, however, than the public employees whose retirement security is on the line.
In 1991, West Virginia closed the Teacher Retirement System pension plan. New hires were forced into a risky 401(k) plan while current employees were given the option to switch. NPPC recently spoke with retired teacher Garry Lynne Shearer in Charleston, West Virginia. She experienced the consequences first hand:
“I am a retired teacher from West Virginia. I worked through the ten-year period that the West Virginia legislature gave the public school employees the option to change to a 401(k) pension plan.
I opted to remain in the defined benefit pension plan, which was funded by both the state of West Virginia and by me. Several of my friends opted to move to the 401(k) plan and worked to build their pensions via the stock market or annuities.
After ten years and many complaints, the legislature revisited the 401(k) plan and worked out a plan to return them to the defined benefit pension plan, at the cost of a onetime payment to the public employees defined benefit pension plan. This was a costly move, but was a blessing to those who changed back to the defined benefit pension plan.
The average amount in a retired school employee’s 401(k) plan after ten years was extremely low. It was a disaster.”
When the state evaluated the 401(k) plan in 2003, they found the plan to be costly and ineffective. Nearly 15,000 workers switched back to the pension when the plan was reopened two years later. Garry Lynne’s story encapsulates the far-reaching ramifications of abandoning a pension plan. When it comes to providing retirement security, 401(k)s are a disaster.
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