While noting the benefits of DC plans, the report by Governor Scott Walker administration appointees and the Department of Employee Trust Funds says actuarial analysis indicates that to provide a benefit equal to the current Wisconsin Retirement System (WRS) plan, an optional DC plan would require higher contributions than employers and employees currently pay. In addition, the report notes that studies conducted by other public retirement plans also show higher administrative costs to manage a DC plan than a DB plan (see “Report for New Hampshire System Finds Switch to 401(k) May be Costly”).
The report authors found that numerous studies have shown that as the number of participants in an optional DC plan increases, more contributions are diverted from the DB plan and the greater the effect on the ability to invest, because of reduced economies of scale as well as restricting investment in certain asset classes.
They also noted that in order to have benefits equal to what the WRS now provides, participants electing a DC option would need to purchase additional protection for death or disability prior to retirement. The existing WRS plan provides for death and disability benefits.The report points out that the WRS is stable and highly-funded, with a funding ratio more than 90% in the last 20 years, and the system is of low cost and risk to taxpayers.
As for allowing employees to opt-out of making required contributions and receiving a money-purchase annuity, actuarial and legal analysis indicates that, depending upon how this option is structured, it could raise multiple Internal Revenue Service (IRS) tax qualification issues for the WRS, including those related to cash or deferred arrangements.
Participants electing this option would receive a much lower benefit at retirement than under the current WRS plan. Individuals who opt out of employee contributions would be at a higher risk of not having enough money available to live on after retirement.
Reducing overall contributions would decrease the system’s cash flow position, requiring a more liquid asset allocation and potentially resulting in lower investment returns.
The WRS’ structure is actuarially designed for regular contributions from employees and employers to appropriately fund future annuities, the report says. If new employees opt-out of contributions, there is a risk of destabilization of the Trust Fund. It could then have the unintended effect of raising contribution rates for existing employees in the DB plan.
As with the optional DC plan, participants opting out of contributions would need to purchase additional protection for death or disability benefits prior to retirement.The full report is at http://etf.wi.gov/.