Some public employees have expressed concerns with the New Jersey Pension and Health Benefit Study Commission‘s proposal to provide future retirement benefits through “cash balance” plans because “a 401(k) cannot fund retirement for an average worker.” The cash balance plans recommended by the commission, however, are not 401(k) plans. While the two plan types have some similarities, the distinguishing characteristics of the proposed cash balance plans address many of the public employees’ concerns with 401(k) plans.
Yes the 401(k) has a bad name as it was never intended as a primary retirement vehicle. Books like The Great 401(k) Hoax debunk their myth:
The American public was hoodwinked: 401(k)s were established to satisfy corporations, not the interests of working Americans. Portrayed as a perpetual wealth machine, the 401(k) was meant to satisfy the needs of every employee. Yet, it was an impossible promise to fulfill: It was the great 401(k) hoax. According to William Wolman and Anne Colamosca, this was the latest act in the gradual erosion of the nation’s retirement system.
Yet in the public sector 401(k) plans with a pre-defined match or employer contribution are much preferable for public employees concerned with security to Cash Balance plans for one simple reason:
Cash Balance plans are Defined Benefit plans and in the public sector there are NO enforceable funding rules for Defined Benefit plans. Mr. Sher may claim:
Funding of the cash balance plans will also be far more predictable, stable and responsible than pension funding has proven to be in New Jersey. The current pension benefits are defined as a percentage of final average salary, regardless of what salaries turn out to be or the actual performance of the plan’s investments. The need to take into account uncertain future salaries and investment returns inevitably injects subjectivity into pension funding. Over the years, both employers and employees have taken advantage of this subjectivity to excuse underfunding or justify benefit enhancements, or even worse, as happened with 2001’s 9 percent pension increase, to excuse underfunding while enhancing benefits.
But that is not the worst problem for the New Jersey Retirement System.
Of course funding methods for public sector Defined Benefit plans are a joke with inflated interest rates, open-amortization periods, and willful blindness to the benefit shenanigans politicians and their cronies get up to but all that only erodes funded ratios over an extended period of time. In New Jersey if politicians want to ignore putting in even a woefully inadequate ‘required’ contribution, they can, and if they want to pass a law saying that the woefully inadequate ‘required’ contribution HAS to be made as a contractual obligation, they can’t.
In New Jersey the main fault is not in the methods but in the meatheads running these plans.