Tennessee taxpayers spent $731 million last year to support the state’s public pension system, which, barring changes, could exceed $1 billion annually within a decade, cautioned State Treasurer David Lillard. Lillard, therefore, proposed pension-reform legislation, which quickly was enacted. The law creates a hybrid plan that has defined benefit (DB) and defined contribution (DC) features that will become the retirement benefit for state employees, higher-education employees and K-through-12 teachers who start work July 1 or later.

Existing employees will remain in the state’s $40 billion defined benefit plan, the Tennessee Consolidated Retirement System (TCRS), and can voluntarily participate in the state’s 401(k) and 457 plans. Currently, these two plans together have $2 billion in assets and 76,000 participants. The 401(k) plan has 70% participation, and state employees as well as higher-education employees get a dollar-for-dollar match up to $50 per month. Both the 401(k) and the 457 currently are supplemental plans, with the former established in 1982 and the latter in 1980.

With the new hybrid plan design, “the DB benefit goes down a bit, but then employees will have a new employer contribution to the DC plan,” says Kaci Lantz, deferred compensation director at the Tennessee Department of Treasury. Tennessee state employees also get Social Security benefits when they retire.

The DC element is the same as the 401(k) plan the state already has, but there are some new provisions for the hybrid plan. Employers will contribute 5% of pay to the DC plan for workers in the hybrid plan, who will automatically be enrolled at a 2% deferral rate.

For the current employees, the state’s employer contribution to TCRS will continue to be 15.02% of payroll; for the hybrid plan, the employer contribution will be 9%. Hybrid participants will have a different formula for their pension benefit than TCRS participants.

The state has taken a number of steps to increase current acceptance of the new hybrid plan, such as enrolling new employees, Lantz says.

The state also is putting together a Treasury Department managed option for the 401(k) and 457 investment lineup, which essentially will allow participants to invest in a share of the pension plan’s $40 billion portfolio. Since the hybrid plan will include the 401(k) as its DC element, those participants also will have access to this option.

—Judy Ward
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