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Florida Voices: Defined Contribution Pension Plans Make Sense
There’s a way to compensate retired public employees for their service without tomorrow’s taxpayers paying a high, unpredictable price. Providing benefits for both parties, this retirement plan option ensures public pension plans remain fiscally supportable over the years. This retirement plan is referred to as a defined contribution (DC) plan, or Investment Plan in the Florida Retirement System (FRS).
Advantages of DC plans for public employees focus on five important benefits – portability, immediate vesting, personal control, fair compensation and higher returns. Firstly, since contributions are paid directly into individual accounts it’s easy for workers to take their accumulated funds with them if they switch jobs making their portability a top benefit.
Secondly, under the Investment Plan, FRS members are vested after only a year of service. Comparatively, FRS members with defined benefit (DB) plans are vested after eight years of employment for all new hires on and after July 1, 2011. Those hired before that date have a six year vesting period. This greatly benefits the majority of state and local government workers who are not going to stay with one employer for the rest of their careers.
The third benefit is that the retirement funds in a DC plan are under the total control of the employee in their own individual account. This gives employees freedom of choice and ultimate ownership over their retirement plans. Employees can adopt the investment strategies and benefit plans that work for their individual requirements and have 24-hour access to guidance from professional fund advisors under the MyFRS program.
Fair compensation is another benefit of defined contribution plans, as traditional defined benefit (DB) plans are skewed to favor the longer term and older workers. Under the Investment Plan, employees keep the full contributions they made and can expect full returns earned. The result is fair, undistorted employee benefits that represent the full value of their contributions.
Lastly, DC plans include no limit on the benefits employees can receive. Those who achieve strong investment performance in their individual accounts will receive substantially higher benefits.
Florida taxpayers also gain from public employees enrolling in the Investment Plan in five main ways as well – no investment or unfunded liability risk, no political gambles, greater control over cost, reduced cost and improved employee recruitment.
DC plans eliminate the investment risk for taxpayers and any unfunded liability dangers. Under the traditional DB plan the government manages a common pool of investment funds; the taxpayers bear the complete risk of poor investment performance and any shortfalls in the common investment pool. In the DC plan, where the government does not maintain a common investment pool, but only pays a specified amount to each worker’s individual account each month, the benefits equal what those accounts can finance and there is no possibility of an unfunded liability that taxpayers would have to cover.
Additionally, under traditional DB plans, the government specifies benefits far in advance that could result in promises of higher retirement benefits that may not be able to be fulfilled. Under a DC plan where the government does not specify future benefits, this risk is eliminated.
The DC plan also provides the government and taxpayers greater control over costs, as in contrast to DB plans. Under this model, the government is responsible only for a specified contribution each year resulting in greater financial certainty and predictability in budgeting.
The final benefit to DC plans for taxpayers is that they have low administrative costs in comparison to DB plans for the government employer. The government simply pays an amount into each employee’s own account as part of payroll processing and the employee takes control from that point. A DC plan may save the government on funding cost as well. With a DC plan, government employers may be able to get a better deal for their workers while paying less into the plan.
Enrollments in DC plans ensure public employees have control over their own retirement assets and future taxpayers are not held liable for shortfalls and risky investments. Defined contribution plans are a win-win for FRS members and taxpayers, and most importantly a smart investment for the future.
Peter Ferrara is the Director of Entitlement and Budget Policy and General Counsel at the Heartland Institute. He also served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George Bush Sr.