According to a news report on TheStreet.com, Nebraska made the change after a state study in 2000 found that typical state employees earned an average annual return of 6% to 7% directing their own 401(k) investments. Money managers handling the state’s defined benefit pension, meanwhile, had 11% average annual returns.
The cash balance requirement only applies to new state workers – current employees can opt to stay in the 401(k) plan.
Before imposing the new rules, state officials said they tried to encourage retirement saving by requiring workers contribute money to their 401(k) account which, in addition to a employer match, typically amounted to 10% to 11% of their income, according to TheStreet.com story.
Nebraska state workers were also given days off to attend daylong investment education seminars.
But the evidence showed state officials’ best efforts weren’t working. Nearly half of the money in workers’ accounts ended up in a low-risk, low-return guaranteed investment contract fund – the default investment option for those who didn’t specify any other investment. And 90% of the workers’ money went into three funds – despite the fact that the state offered 11 fund choices, TheStreet story said.
“The point is that the professional money manager – i.e., our investment council – had a better return than what the individual participant could realize by his own allocation of assets,” said Anna Sullivan, executive director of the Nebraska retirement system.
As a result, mounting evidence showed that employees weren’t benefiting from the plan. Because returns were so low, Nebraska administrators grew concerned that the state was wasting taxpayer money via matching contributions to workers’ accounts, says Sullivan.
Florida Unveils K Plan
Presently, almost all states still have traditional pension plans. But recently Florida, which claims the fourth-biggest state retirement system, decided to offer workers the option of switching from its existing pension plan to a 401(k) plan starting in June.
In the meantime, opponents of the shift are already arguing that many employees will reject the 401(k) plan. Of the roughly 1.5% of Florida employees who were allowed to vote early, nearly 90% opted for the pension plan, according to TheStreet.com story.
To be sure, many of the people who voted early had worked for the state for a long time, so would be expected to support the option that rewards years of service. As a result, their votes aren’t necessarily representative of what the final tally will be. But the state’s largest union says it’s not surprised by the weak reception. In its view, most workers would lose out under a 401(k) plan.
“The fundamental reason is it doesn’t guarantee retirement security,” says Rich Ferlauto, director of pension investment policy for the American Federation of State, County and Municipal Employees. “The risk is totally placed on the employee, and there’s no benefit they can rely on at retirement.”