Report Says Switching to DC Plan Would Cost Nevada

December 16, 2010 ( – A report from Segal Company says Nevada’s pension system would pay $1.2 billion more over the next two fiscal years than its current obligation to retirees if it converts its $24.7 billion plan to a 401(k)-style plan.

That’s because switching to a defined contribution plan would speed up the need for state payments to cover existing benefits, according to a report to Nevada’s Public Employment Retirement System. Defined-contribution plans can reduce potential liabilities and expenses for governments because workers choose investments for their savings and withdraw payments based on results; however, conversion can create additional costs because of the need to fund and administer two sets of benefits at once during the transition, the Segal report said, according to Bloomberg.   

Nevada may have to postpone plans to convert because of the cost, said Carole Vilardo, president of the Nevada Taxpayers Association.  

However, Joshua D. Rauh, a finance professor at Northwestern University’s Kellogg School of Management in Evanston, Illinois, said Segal’s study may be based on some flawed assumptions. One is that the state would be required to pay off the unfunded liability at the pace called for in the report. The report also fails to account for the benefit of stopping growth of the unfunded liability, he said.   

“I would not use this as a reason to take the option off the table,” Rauh told Bloomberg in a telephone interview.