The bill would affect nearly 650,000 state and local public employees. If Governor Jeb Bush signs it as expected, it will go into effect in 2002.
Wait and watch
While smaller states have passed similar measures, the move in Florida drives home the trend among public funds to offer employees a choice among plans. Because of its sheer size – the Florida Retirement System has $103 billion under management – the state is also likely to be looked upon as the established leader and frontrunner in this field. “Defined contribution legislation is under consideration in other jurisdictions,” said Tom Herndon, Executive Director of the Florida Retirement System . “We know people will want to wait and watch our experience.”
Thomas Hughes, Senior Vice President of Fidelity Investments Tax Exempt Services Company , said Vermont, North Dakota, and Ohio have passed legislation creating similar plans. Montana and Arizona are considering it.
Nebraska Public Employees Retirement System’s state and county retirees have been in a savings plan since 1964. “The risk of losing money falls entirely on the employee,” noted Nebraska Legal Counsel Shawn P. Nowlan. “It’s a bigger step than plan sponsors like to think it is. You decrease the financial risk to the state, but increase the risk of litigation over inadequate participant education. I also wonder whether this trend would survive a serious stock market downturn.”
If similar bills are passed nationwide, nearly 15
million governmental workers would be faced with a similar
Herndon called the new 401(a) option “a good, workable plan that will offer significant benefits to some portions of the employee population. The general view is that defined contribution plans tend to favor younger employees, but we don’t have enough first hand experience yet.”
Workers can choose to remain in the defined benefit plan. Herndon said many computer models were run by Florida’s actuaries Milliman and Robertson to see how employees would fare under various scenarios.
In addition, workers who switch to the saving plan and change their minds are given a one-time opportunity to switch back. Legislation is being considered to limit the switch back window to the first five years after transition. A flood of retirees switching back if the markets turn sour near retirement would strain the system.
Pressures pro, con
Like other states, Florida lawmakers had to consider the following pressures in favor of the 401(a) plan:
- Heavy lobbying by pension industry players like Fidelity Investments, Prudential Life Insurance Company, and TIAA-CREF.
- Purported taxpayer savings on the costs of managing large state pension funds.
- Reduced taxpayer liability for meeting financial obligations of traditional pensions.
- Reported desire of some public employees to manage their own money.
- Portability of retirement assets when employees switch jobs.
The move also has its critics, who see the following downsides:
- Pressure from many employees who don’t want to undertake the responsibilities of savings plan investing.
- Studies that show workers in traditional plans do significantly better financially than those in savings plans.
- The temptation on workers to cash out and spend their monies between jobs.
- The added dangers to those public workers (about 25% nationwide) who do not pay into Social Security and will not draw benefits upon retirement.
Some $2 trillion currently is in public pension coffers in the United States at this time. A move to savings plans would swell existing 457 and 403(b) savings plans now in place.