Defined Benefits

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See article from Juneau Empire: Alaska Retirement System Woes Continue

 

 

HB30: Repealing Defined Contribution Retirement Plan

 

The Alaska Retirement Management Board met Feb. 12, and is schedule to meet again today, to hear presentations from the Division of Retirement and Benefits, Treasury Division, and Department of Law.

 

They will be giving updates on legislative actions, litigation matters, fund financial and investment actions. Public and member comments, new business, and a disclosure report will be covered on today.

 

Returning to a defined benefit retirement plan for employees hired after 2005 is one of my top legislative priorities. House Bill 30 is awaiting a hearing date in the House Labor and Commerce Committee.

 

As a legislator, what I hear is that people - our constituents - are concerned for their retirement security. When Alaska switched to a defined contribution system in 2005, we went too far. The push to change came about as a result of the unfunded liability in our pension systems.

 

Generally, the question should not be, "Which is better, a defined benefit plan or a defined contribution plan?" Instead, retirement benefits should be viewed in total, including those from all factors such as Medicare services, deferred compensation arrangements and the opportunity for retirees to have dignity during their later years. The question should be, "Are these benefits sufficient, in total, to provide retirement security?"

 

Since Senate Bill 141 was passed, the switch to a defined contribution system has not made our unfunded liability go away. What has impacted our pension liabilities more than anything is the monetary contributions approved by the Legislature and the governor in the 1990s - and the fluctuations on Wall Street.

 

In the meantime, we haven't solved the problem, but we have conveyed a message that, as an employer, we do not put a high enough value on retaining employees by providing them retirement benefits that they can count on; benefits that will pay a pension at retirement and not just provide a 401(k)-like account.

 

In a defined contribution plan, the employee bears the financial risk of outliving accumulated assets and risks poor investment returns. Half of all retirees will outlive the average life expectancy, in many cases by decades. Furthermore, the recent downturns in the stock market have impacted individual retirement accounts greater than the negative impact to the accumulated assets of defined benefit employees.

 

Within the last year, the PERS defined benefit plan lost 22.24 percent, while the defined contribution plan lost 35.46 percent of its retirement investment.

 

Alaska, like any employer, should offer a retirement plan which provides for the security of their employees. By passing this bill, a policy decision will be made that provides the right tools to make Alaska a better employer for the people we ask to provide public services.

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Sponsor Statement

 

HB30 repeals the defined contribution retirement plan for teachers and public employees – and replaces it with a defined benefit retirement plan.

 

In 2005, the Legislature and the Administration enacted a defined contribution retirement plan for public employees hired after July 1, 2006, thus preventing new hires from participating in the defined benefit retirement plan. The defined contribution plan is similar to a 401(k) savings plan; while the defined benefit plan assures a monthly pension for future retirees.

 

Here are some reasons to repeal the defined contribution system: 

 

• Employees bear the financial risk of outliving accumulated assets and poor investment returns. A series of poor investment returns during the first few years of retirement can devastate the retiree’s accumulated assets. Recent downturns in the stock market have impacted individual retirement accounts greater than the negative impact to the accumulated assets of defined benefit employees. 

 

• During periods of extended inflation, individual accounts tend not to produce benefits that keep pace with the cost of living.  

 

• While having the perceived advantage of portability, evidence suggests that short-term employees who terminate prior to retirement eligibility will take a lump sum distribution and use the money for other than savings toward retirement.  

 

By providing a retirement plan which is totally portable (such as a 401[k] or 457 plan), we risk employees leaving their positions for other opportunities. The result will be higher employee turnover, less loyalty from the employees, fewer experienced employees and educators, and a more transitory workforce.  Per dollar of benefits paid, a defined contribution plan is more expensive than a defined benefit plan. 

 

Employer contributions to the defined benefit plan are based on a benefit formula that calculates the investments needed to meet the defined benefit. These contributions are actuarially determined. Actuaries use statistical analysis to calculate the cost of future risks. The calculation takes into consideration the employee's life expectancy and normal retirement age, possible changes to interest rates, annual retirement benefit amount, and the potential for employee turnover.  Alaska should implement defined benefits as an incentive for teachers and public employees to provide effective and efficient services.

 

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Sectional Analysis

 

Section 1 changes the definitions of “plan” and “system” in the teachers’ defined benefit retirement plan.

 

Section 2 repeals language that says the provisions of AS 14.25.009 – 14.25.220 apply only to members first hired before July 1, 2006, replacing it with language that says AS 14.25.009 – 14.25.220 set out a defined benefit retirement plan as the teachers’ retirement plan.

  

Sections 6 and 7 remove a limitation on the pension board’s power to increase benefit payments to persons receiving benefits under the teachers’ defined benefit retirement plan.  The limitation was added by sec. 18, ch. 9, FSSLA 2005, a part of SB141.  SB 141 was the 2005 bill that created the defined contribution plan for teachers and public employees.

 

Section 25 changes the definition of “plan” in the public employee’ defined benefit retirement plan.

 

Section 26 changes the definition of “system” in the public employees’ defined benefit retirement plan.

 

Section 27 repeals language that says the provision of AS 39.35.095 – 39.35.680 apply only to members first hired before July 1, 2006, and replaces it with language that says AS 39.35.095 – 39.35-680 set out a defined benefit retirement plan as the public employees’ retirement plan.

 

Section 30 removes a limitation on the pension board’s power to increase benefit payments to persons receiving benefits under the public employees’ defined benefit retirement plan.  The limitation was added by sec. 112, ch. 9, FSSLA 2005, a part of SB 141.  SB 141 was the 2005 bill that created the defined contribution plan for teachers and public employees.

 

Section 31 removes language, made obsolete by the repeals in section 33 of the Act, regarding the return of previously terminated employers to the public employees’ retirement system.

 

Section 34 creates a temporary law that gives teachers and public employees (who are members of the defined contribution plan and were hired on or after July 1, 2006, and before the effective date of section 34) an opportunity to make a one-time election, before September 1, 2009, or within 90 days of the sections effective date, which ever is later, to switch to the defined benefit plan – the plan for teachers or the plan for public employees, depending on whether they are a teacher or public employee.  It also gives them the opportunity, within the same window period described here, to transfer their accrued contributions from the defined contribution plans to the defined benefit plan, if they make the switch described in this section.

 

Section 35 sets forth the procedure for making the elections described in section 34.

 

Section 36 creates a temporary law that requires the commissioner of administration to immediately adopt regulations consistent with the Act, although according to section 36 the regulations may not take effect before the effective date of section 34 of the Act.

 

Section 37 creates a temporary law instructing the revisor of statutes to submit, to the Alaska Legislative Council, a draft bill that would amend state statutes so that they are consistent with the Act.

 

Section 38 is an immediate effective date for sections 35 and 36 of the Act.

 

Representative Cathy Muñoz