The 401(k) Transparency (Dis)Advantage for Public Plans

New Jersey Governor Chris Christie is going to defer most of a $1.6 billion pension payment due next month into the next fiscal year to balance the budget for the current year. The announcement will be made this coming week and, to deflect from this fiscal chicanery, he will call out the legislature to get New Jersey public employees into 401(k) plans. The campaign kicked off this past week at the Peterson economic summit with a criticism of the “insanity of a defined benefit pension system”:

and continues with an article planted in the Wall Street Journal.

But going to a Defined Contribution (DC) system does not guarantee any savings to taxpayers since DC plans can be structured to be just as expensive as the current DB system.

Though what it would provide is transparency. The cabal currently manipulating costs downward will be out of business and there would be no surprises – for taxpayers having to pay for the underfundings of the past or retirees losing their COLAs.

The other advantage (or disadvantage to some) will be the elimination of those games played to pump up benefits without having them paid for.  For example:

Jim McGreevey was governor of New Jersey from 2002 to 2004 earning an annual salary of $157,000.  As of 2012 he was on the payroll of Kean University earning a base salary of $7,200 which, as a Tier 1 employee who entered the system prior to 1/1/07, means he accrues benefits as long as he makes over $1,500.   The value of the benefit he accrued in 2012 (based on the terms in the PERS handbook) can be calculated as follows:

Date of Birth: 8/6/1957
Date of Hire: 1/1/1992
Retirement Date: 9/1/2017
Avg Salary: $157,000
Benefit Accrual for 2012: $157,000 / 55 = $2,855
Estimated PV: $2,855 x 10.46855* = $29,888

For this $30,000 Jim McGreevey did pay his ‘fair’ share. In 2012 that was 6.5% of his salary which came to $468 (.065 x $7,200) while his employer also had their contribution tied to his salary (roughly 10% or another $720).** Quite the deal and impossible to get done in a DC system which is why some people (including 100% of those in decision-making roles on the issue) are happy with what they have.
* Using 417(e)(3) segment rates for December, 2013 and AMT13 mortality table
** It works the other way too where a political insider cashes in near retirement for a three-year job that pays a much higher salary to which their prior service is applied to get a much higher pension.

7 responses to this post.

  1. Posted by Tough Love on May 17, 2014 at 3:10 pm

    Quoting … “But going to a Defined Contribution (DC) system does not guarantee any savings to taxpayers since DC plans can be structured to be just as expensive as the current DB system.”

    Of course they can, but we BOTH know that not only WON’T they be, but any DC Plan will likely include taxpayer contributions 2/3 (or MORE) LESS THAN the true level annual cost (fully funding the over the workers’ careers) of current NJ DB Plan promises.

    It’s about time …. and hopefully the switch will include the future service of ALL (or all but those within 3-5 years of retirement) CURRENT workers ….INCLUDING judges and safety workers.


  2. Posted by Anonymous on May 17, 2014 at 3:30 pm

    dream on, and have another martini to ease the pain.


    • Posted by Tough Love on May 18, 2014 at 11:57 am

      Quoting Gov. Christie …

      “The bigger issue is how do we avoid this in the future and the only way is to stop the insanity of a defined benefit pension system that we cannot afford,” said Mr. Christie.


  3. Posted by Anonymous on May 18, 2014 at 10:29 am

    This would probably be an expansion of the current DC plan the state has; 5% mandatory contribution with a 3% match, immediate vesting, little portability (If you withdraw the funds from the state plan before retirement, the state keeps the matching funds). The part time special services employees, who get no other benefits, have to join this plan.


  4. Posted by Dave S on May 26, 2014 at 2:02 pm

    Below are my recent posts to & the Bergen Record on this topic:

    Record 05 25 2014
    Don’t be shocked –shocked at the governor’s hardball decision to reduce pension payments in response to the budget crisis. This is a moment for him to achieve real pension reform. Its also an opportunity for Democrats to blame the governor for a transition to 401k’s that was inevitable. Better on his watch than theirs. Many Democrats in private, as do the Record Editorial writers, agree that the pension numbers simply don’t add up. Even if everyone made their contributions, two key problems remain. Too many game the pension system. Second, because investment risk is transferred from the recipient, it unfairly rests with the taxpayer. Remember also, the State is responsible for all public pensions, not just State workers. These issues evaporate under a 401k system. Democrats’ opportunity here is to negotiate a package for all of the related pension systems that is fair to current stakeholders while setting the state on a sound fiscal basis going forward. 05 24 2014

    Ok. He broke his promise and the law. However, there is no realistic way to put Humpty Dumpty back together again. Raising taxes on the wealthy is not a realistic solution. So where do we go from here? There are really 4 or so different State pension systems. The changes need to apply to all. There is a difference between career workers spending 15 or more years working, often underpaid, and those who have gamed the system by benefitting from a few years of high compensation. The priority is to protect pension payments for that career base, especially once they reach 65.

    Firstly, the defined benefit pension(s) end. Not necessarily tomorrow for those already employed. It can continue for a few years at which point it sunsets. At that point benefits are calculated and the State’s liability is actuarially determined. Pension benefits are paid out with a few changes. Pensions are paid starting at age 65 in most cases. There is a COLA from age 65 on. Pensions are capped at say, $125,000 (also subject to COLA). For those whose compensation increased rapidly in a short period, there is a limiting formula.

    For new hires and for existing employees after the sunset, there is a 401K plan. The State makes its annual contribution on an equivalent basis as at present, but there is one system and rate for all.
    There is no perfect solution. We can spend years in litigation. Or we can restore the State to fiscal responsibility while reducing somewhat the burden on the taxpayer and being fair to career workers.


  5. Posted by Dave S on May 26, 2014 at 2:13 pm

    My posts were in response to the publicity in the last week regarding the suspension of payments. Some of the comments above have some misguided impression that defined contribution plans are as expensive as defined benefit. No way.

    No one, including the governor, proposes ending pensions. If the average state contribution per worker under DB plans, if current, were, say 8%, that rate and payment would continue under DC. The difference is the investment risk remains with the recipient, who is also contributing on the same average basis as present. (I’m saying all pension plans should evolve into a single DC plan). There would be no McGreevy type calculation, which is one of the “gaming” situations I consider abuse.


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