BISMARCK, N.D. -- North Dakota will start the new year with a new 401(a) plan and a more portable, hybrid defined benefit plan.
The new defined contribution plan covers elected and appointed officials and non-classified state employees; about 600 current employees are eligible for the plan, whereas 16,000 are in the defined benefit plan.
Those 600 employees may choose between staying in the $1.1 billion defined benefit plan or rolling over their assets into the new 401(a) plan, said Deb Knudsen, retirement programs manager for the North Dakota State Investment Board.
Those hired after Jan. 1 will have six months to make the election, she said.
Under the law authorizing the new plan, the Legislature also made some changes in the defined benefit plan, Ms. Knudsen said. Beginning Jan. 1, state employees who participate in North Dakota's $73 million 457 plan will receive a contribution from the state in the same amount -- up to 4% -- to the defined benefit plan.
So, for example, if a person who has stayed in the defined benefit plan chooses to contribute 2% of pay to the 457 plan, the state will "reward" that person by contributing another 2% to the defined benefit plan.
More portable plan
And, the defined benefit plan will be more portable. Beginning Jan. 1, employees who leave will be able to take both their contribution and the employer's 4.12% annual contribution plus interest, Ms. Knudsen said.
"This makes the plan more mobile," she said.
Currently, departing employees may take only their own 4% annual contributions plus interest.
Fidelity Investments, Boston, is the bundled provider for the new 401(a) plan. The plan will have eight investment options: stable value; balanced, with 65% equities and 35% bonds; value equity; indexed equity; growth equity; international equity; small-cap equity; and asset allocation, Ms. Knudsen said.
The employer contribution to the new plan will be 4.12%; the employee contribution will be 4%, she said. However, the state will pay 2% of the employee contribution in lieu of a pay increase.
The Legislature also made other changes to the retirement system, including reducing vesting to three years from five.
North Dakota's move to add a 401(a) plan is at the forefront of an increasingly popular trend, said Eric Wietsma, assistant vice president of Hartford Life Insurance Cos., Simsbury, Conn.
Although 401(a) plans have been around for a number of years, not many states used them until recently, Mr. Wietsma said.
"The recent popularity of the last two years has been driven by the corporate side," he explained. While many states have 457 plans, like North Dakota's, they are not well used, Mr. Wietsma said. Participation rates in 457 plans averages about 30%, compared with 80% to 90% participation rates in 401(k) plans, he said.
The low 457 plan participation is primarily because there is no employer match.
Moreover, when employees leave for the private sector, they have to leave their 457 money behind, he said. Only workers whose new employer has a 457 plan can roll over their 457 money, Mr. Wietsma explained.
However, employees can roll over 401(a) assets into an individual retirement account or a new employer's 401(k) plan, he said. And the 401(a) looks "virtually the same as a 401(k) plan," he said.
Several governmental entities are setting up 401(a) plans as a way to match employee contributions in their 457 plans, Mr. Wietsma added.
So far, a number of states are studying either adding or switching to a state defined contribution plan. Among them are:
* Colorado, which is studying whether to expand the current defined contribution system. The existing plan only allows for the Legislature to have a defined contribution plan;
* Florida, where a joint committee is looking at how to implement a defined contribution system;
* Georgia, where three statutes that would create a defined contribution plan for public employees and increase the portability through the use of a 401(k)-type program have been carried over to the next session;
* Idaho, which is conducting an interim study with a broad mandate that will include looking at the benefits of a defined contribution, defined benefit and hybrid plans;
* Illinois, where the Legislature passed a resolution calling for lawmakers to consider expanding the portability options for state retirement funds; and
* Kansas, where a joint committee is expected to evaluate several options for changing the current retirement system, including switching to a defined contribution plan.