State Retirement Systems a Retirement Plan Laboratory

The states may serve as laboratories and “try novel social and economic experiments,” wrote U.S. Supreme Court Justice Louis Brandeis, and a recent NTSA webcast addressed how they do that regarding retirement systems. In “Public Pensions in Flux? A Review of State Retirement System and Alternatives to Traditional Defined Benefit Plan,” Ellie Lowder of TSA Consulting and Mike Webb of Cammack Retirement shared their insights on state retirement systems, current cutbacks, and the opportunities and challenges that come with developments concerning these plans. 

They noted that benefits offered through state-sponsored plans are holding their own at best: for 24 states, there was no net change in benefit levels, but 23 states reduced them. But that’s not all — states have taken other steps as well. For instance, 32 states have changed employee contributions or increased them, or changed the normal retirement age for their employees. 

Some states are offering a defined contribution plan, rather than the traditional defined contribution plan; Webb observed that often, these DC plans are available only for hires only when they are introduced. Others, such as Oregon and Washington, provide a combined DB/DC plan. 

Employees are not always automatically attracted to DC plans if a state offers them, according to Lowder. “Some states find that if they offer a choice, over 90% of the employees choose to stay with the defined benefit plan,” she noted, adding that they want a “benefit they can rely on — predictability is attractive.” 

Lowder does not expect states to do much for the rest of this year. “Legislatively, we do not expect anything more happening in 2014,” she said, attributing this at least in part to its being an election year. But she says that will change, adding, “We can anticipate seeing a whole lot of activity in 2015.” 

Even if states are more active next year, Lowder thinks that it is “probably more unlikely” that DB plans will disappear in the public sector. She attributes this in part to the influence of public employee unions. 

Advisors should keep up to date with developments concerning their states’ pension plans, Lowder said, adding that they need to know how to calculate their state pension benefits. And their work takes on heightened importance in light of IRS enforcement activities. 

For instance, Lowder pointed out that the IRS does not consider instituting an employee financial/retirement education plan to be sufficient in increasing participation rates. She warned that to the IRS, “meaningful activity” — or, as IRS field examiners call it, “effective opportunity” — also includes workshops, newsletters, websites, continuing education and employer-provided access to financial advisors who will work with employees. 

Advisors can help in increasing participation rates, Lowder argued, saying, “If we advisors don’t sit down with these employees they are entirely rudderless.”