The past will be prologue to a great degree in the evolution of public pension plans during the next 25 years. Defined contribution public pension funds were common about 25 years ago, but a number of factors -- among them, a bear market -- combined to make the defined benefit plan the dominant vehicle since that time.
A different set of factors, however, has swung the pendulum back to defined contribution plans. But this time, public pension plans will evolve into hybrids, experts predict.
"Clearly, we will see more hybridization of defined benefit plans in the public sector," said Cathie Eitelberg, senior vice president and national government practice leader of The Segal Co., Washington.
"Many of the systems have decided that if they can combine the characteristics of both (defined contribution and defined benefit) in one plan, then that is an attractive option."
So far, though, the trend is more toward defined contribution and away from defined benefit. Some 21 of 48 states with defined benefit plans considered abandoning their DB plans for DC plans during the most recent legislative session, according to a report by the Government Accounting Office, Washington.
Among the major reasons state officials gave for considering the move were reducing government costs, enhancing portability and lobbying by special interests.
According to Ms. Eitelberg, the creation and proliferation of term limits for elected officials was a factor in the creation of many defined contribution plans in the public sector. Once these were in place, the precedent was set for offering the option to broader groups of employees.
"People are not thinking they will be there in 10, 15, 20 years," Ms. Eitelberg said. "So they can't accrue benefits."
In order to attract workers, employers realize they have to offer portability of retirement savings.
A strong stock market also has been a contributing factor, with government employees envying the returns corporate plan participants were earning in their 401(k) plans, said Howard Weizmann, managing consultant with Watson Wyatt Investment Consulting, Washington.
"Individuals are much more comfortable (than they used to be) managing their own money," Ms. Eitelberg said. "They have IRAs (individual retirement accounts) and supplemental plans where they choose their investment options."
State, county and local legislators also are under pressure to reduce costs, and there is the perception that DC plans are cheaper than DB plans.
The National Conference of State Legislatures previously encouraged states to consider adopting defined contribution plans to replace defined benefit plans. The NCSL stopped advocating the replacement of DB plans with DC plans in 1995, but service providers have picked up where the legislative group left off.
Vendors that stand to benefit if DC plans are chosen over DB plans are lobbying state legislators to vote for conversions. For example:
* Teachers Insurance Annuity Association-College Retirement Equity Fund and Montana's state universities successfully lobbied the Montana Legislature to pass a law giving members of the Montana Public Employees' Retirement System the option to choose a DB or DC plan by no later than 2002.
* TIAA-CREF, Variable Annuity Life Insurance Co. and Aetna Inc. initiated House Bill 199 in Ohio, which would allow all Ohio public employees with less than five years of service in the state's five retirement systems a one-time chance to transfer to a new DC plan administered by an outside vendor. The bill is under consideration.
The cost issue is one that the vendors have emphasized when lobbying legislators, but they have not told the entire story, said Leslie Finerty, unit leader of Towers Perrin's retirement division, San Francisco.
The vendors say there is no cost to set up a defined contribution plan, but they neglect to mention that expenses paid by individual participants reduce their returns.
"I think they have no interest in giving a balanced view," Ms. Finerty said. "It's not unbiased and I think it is counterproductive.
"It will come down to who has the most political clout to win these arguments."
Switching to a DC plan also won't eliminate disability, survivor, dependent and death benefits that public funds administer; The DB plans' accrued liability will have to be carried along with the costs of a new plan.
TIAA-CREF's Malcolm Campbell said his company does not focus solely on costs when it makes presentations to legislatures about optional retirement plans.
TIAA-CREF's presentation depends on the situation, said Mr. Campbell, chief counsel for government relations. He noted that in Florida, where legislation for an optional plan failed this year, the most important issue was providing a retirement plan that would attract teachers to the state.
"They need 12,000 new teachers a year in Florida," Mr. Campbell said. "They only generate 6,000 each year from the state's colleges.
"They need to import people to be teachers. The teachers' unions, the school superintendents and the boards of education developed a coalition to study the need for a DC plan as part of a recruiting effort to bring qualified teachers to Florida."
TIAA also doesn't initiate lobbying efforts to get legislatures to offer DC plans, Mr. Campbell said.
Lobbying initiated by providers does occur, he said, noting that some Ohio-based companies were very active in the DC effort in that state.
"By and large, we take our lead from active university people or others," Mr. Campbell said. "Lobbying by providers alone won't do the trick. The folks on the ground have to want it."
Jeannine Markoe Raymond, director of federal relations for the National Association of State Retirement Administrators, Washington, suggests hybrid may be too strong a word to describe what public pension funds will morph into to accommodate the different constituencies.
"Some (state plans) have provided more flexibility through the defined benefit program," she said. "There is such a gamut."
Indeed, the most well-known hybrid public plans are in Washington state, Colorado, South Dakota and Wisconsin. They are similar only in that they provide portability within a defined benefit framework.
Cash balance plans -- the private sector's hybrid -- have yet to catch on within the public sector, but Thomas Owens of the Government Financial Officers Association expects that they will.
"It's not a trend yet, but as that trend continues to catch on in the private sector, public funds will look at it as well," said Mr. Owens, assistant director of the Washington-based GFOA.
Ms. Markoe Raymond suggests the goals can be accomplished by providing enhancement to the existing supplemental plans.
According to the National Association of Deferred Compensation Administrators, a number of pension plans are providing employer matches to 457 plans. They include Minnesota, Missouri, Maryland, Oklahoma, Tennessee and Los Angeles County.
Legislation was passed in Colorado, Indiana and Virginia that allowed those state funds to provide 457 matches, according to the NADCA. The issue is being studied in Delaware, Iowa, Mississippi, Texas, Washington, Wisconsin and the city of Houston.