Over the years, NPPC has produced content outlining two critical topics: 401(k)s and the retirement security crisis and how converting public employees from a defined-benefit plan to a defined-contribution plan can cause states financial issues in the future. In our new report entitled, Fiscal Responsibility and 401(k)s: Why Converting Public Employees to Defined-Contribution Retirement Plans Is Wrong For Your State, we examine both topics and the overwhelming evidence against this type of retirement plan conversion.
In the report, we seek to answer the following questions:
- Has the emergence of defined-contribution plans contributed to the retirement savings crisis in the country?
- Does converting a defined-benefit pension plan to a defined-contribution plan impact overall costs to the state?
- What are the consequences of converting a defined-benefit pension plan to a defined-contribution plan?
- Does conversion to a defined-contribution plan impact recruitment and retention of public employees?
The report begins by examining the creation of the 401(k) as a retirement vehicle in the 1980s. Originally not intended to be a retirement plan, the US Congress created the 401(k) in the 1978 Revenue Act as a way to defer compensation. When a tax professional named Ted Benna found the provision, he pitched it to businesses to create a retirement plan for their employees. Unlike a defined-benefit pension plan, 401(k)s put employees at the whims of the market. Since the dawn of the 401(k) era in the private sector, the retirement savings crisis has been exasperated as workers have no guarantee they’ll save enough to retire with security and dignity. In contrast, a defined-benefit plan pools workers’ assets and promises a monthly retirement benefit for life.
States that have decided to close their defined-benefit retirement plans to future public employees faced financial consequences and failed to recruit and retain their best workers. Michigan, West Virginia, and Alaska have all faced their unique set of circumstances since the closure (and in one case re-opening) of their plans for public employees. There is a reason that 94% of state and local employees polled by the National Institute on Retirement Security cited pensions as a valuable tool for retention, and 73% said they would be likely to leave their job if their pensions were cut.
The report also includes a breakdown of several states: Arizona, Kansas, Montana, North Dakota, Oklahoma, and Wyoming. Detailed are the economic benefits of pensions in each state, the plans each state offers, and a history of the state pension systems or recent legislation passed that has impacted plans.
Defined-benefit pension plans are the best retirement plans for public employees. States and even local governments who have decided to switch their future public employees to defined-contribution 401(k) plans have faced the consequences. Lawmakers considering such a change should understand the repercussions of such a move and learn from others who have made the short-sighted decision in the past.