Defined benefit pensions are great for employees — until they aren’t

The 2013 Employee Benefits Survey from the Bureau of Labor Statistics shows that of all private sector employees, 19 percent have access to a defined benefit pension and 59 percent have access to a defined contribution retirement plan. Conversely, of all state and local government workers, 83 percent have access to a defined benefit pension, while 32 percent have access to a defined contribution plan.

In Washington, public employees may join Plan 3, which is a hybrid defined benefit/defined contribution retirement plan, but there is no pure defined contribution option. Last year, the state Senate passed ESSB 5851 (and it was re-introduced this session), which would create a defined contribution retirement plan that public employees would have the option to join. If not, they would still be able to join either Plan 2 or 3.

Along similar lines, SB 6305 would create a defined contribution plan for elected officials in Washington. Elected officials would have the option of joining the plan, but “those who do not elect to become members of the system may not be a member of any other retirement plan for their service as elected officials.”

Last year, there was a proposal to create a defined contribution plan for public employees, but it would not have been optional. In a March post, Dick noted state Treasurer McIntire’s opposition and wrote,

I agree that we don’t have an urgent pension problem, certainly not by national standards. And the state does a good job with investments. But as we’ve written before, over time it makes sense to change the plans to establish more parity with the private sector and acknowledge that the workforce of tomorrow will be more mobile, something portable DC plans help facilitate.

Defined benefit pensions are thought to be a great deal for employees; indeed, the employer (in the case of public pensions, the taxpayer) bears the market risk. But they are exposed to political risk — perhaps less so in Washington currently than in Detroit, for example, but nationally public pension promises are looking less and less bankable. Given what has happened in Detroit, Washington’s public employees may very well find the option of a defined contribution plan — in which the funds contributed belong to them no matter what — increasingly attractive.

Another retirement proposal in the Legislature this year is SB 6294, which would create the cutely-named “save toward a retirement today (start) retirement savings plan” for the private sector. It would include employer plans and individual retirement accounts, and would be open to employers with fewer than 100 employees. Participation would be voluntary. The bill means the plan to be funded by fees, but until such time as it is self-sustaining, the bill would allow the use of the state general fund. Funds in the plan could not be commingled with public employee retirement funds. The bill says that the state “may contract with private sector financial services firms to enroll eligible private and nonprofit sector employers and employees.” In introducing the bill at today’s Senate Financial Institutions committee hearing, Sen. Mullet described the bill as a public-private partnership. Representatives from the Department of Retirement Services said that no other state has done anything like this, developing the plan and getting IRS approval would take time, and all day-to-day administration would be done by the private sector.

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