Florida's move to create an optional defined contribution plan for all 600,000 members of the state's $101 billion defined benefit plan could be the catalyst for the public fund defined contribution plan industry to skyrocket, industry insiders say.
At the same time, a recent Internal Revenue Service private letter ruling expanding a smaller 401(k) plan in Idaho statewide also could boost that same market.
Florida's bill, which passed the Legislature this month, gives current and new Florida public employees a one-time, irrevocable option to choose between the defined benefit plan and the new 401(a) defined contribution plan. The program will be 100% employer funded.
Florida's defined contribution plan "will change the industry," said Don Salama, vice president and director of retirement plan solutions for Hartford Life Insurance Companies, Simsbury, Conn. Because current defined benefit plan participants have a one-time option to transfer the present value of their defined benefit assets, Florida's new defined contribution plan could be one of the few to start out with a significant amount of money.
If other states follow Florida's lead, assets in public defined contribution plans could leap.
"The industry today is between $90 (billion) and $95 billion for 457 and 401(a) plans. This could create a market that is 10 times that," Mr. Salama said.
Gov. Jeb Bush has not yet signed the bill, but is expected to do so sometime this month.
Once the bill is signed, searches for the main service providers will be issued in about 11 months, said Richard Herring, senior staff director for Rep. Jim Pruitt, R-Port St. Lucie, chair of the House Committee on Appropriations, where the bill originated.
A third-party administrator, an education provider and managers for the investment options are among the service providers that will be needed, he said.
Search for consultant
The State Board of Administration of Florida, Tallahassee, which runs the state's defined benefit plan and will administer the 401(a), was scheduled to issue a request for proposals May 15 for a "macro-level" consultant in transition planning to help implement the new plan, said Executive Director Tom Herndon.
The 401(a) plan, to be in place by 2002, is likely to include seven to 10 investment options. The State Board of Administration would select the options and decide whether to bundle services, Mr. Herring said.
The legislation also leaves room for an unbundled approach or more than one bundled or semibundled provider, he said. It also allows for investment advice for plan participants.
This is by far the largest public sector plan to give employees the opportunity to roll over their defined benefit assets into a new defined contribution plan, said Matthew P. Lathrop, task force director, commerce and economic development, for the American Legislative Exchange Council, Washington.
Unlike other states, such as Ohio, which has a new defined contribution plan for new teachers, or South Carolina, which has a defined contribution plan for new government employees, Florida will give existing state employees the option of joining the plan. Under the legislation, current Florida Retirement System members have a one-time option to transfer the present value of the accumulated defined benefit obligation to a defined contribution account.
According to a Watson Wyatt survey of Florida public employees compiled before the bill was introduced, half indicated they would switch to defined contribution.
But first Florida officials must decide whether to use a single bundled provider, as do many 401(k) plans; two or three, as do 457 plans; or 50 or more providers, as do many 403(b) plans, Mr. Salama said.
Before the bill was passed on the last day of the legislative session, some defined contribution service providers lobbied unsuccessfully to allow the third-party administrator to also provide investment products, which is not allowed under the bill, Mr. Pruitt said.
"We said from the beginning that the defined contribution plan would be employee-driven," Mr. Pruitt said. "I know if it would have been vendor-driven, they would have eaten their own."
In addition to drafting and maintaining the investment policy statement, the State Board of Administration board -- a group made up of the governor, comptroller and treasurer -- will decide whether the plan's service providers will be selected by RFPs or another way, Mr. Herring said.
The bill provides for both an investment advisory body -- the same entity that advises the State Board of Administration on the defined benefit plan -- and an employee/employer advisory group appointed by the governor, speaker and president of the Senate.
"I think it (Florida's bill) will raise the level of discussion of defined benefit and defined contribution plans," said Tom Hughes, senior vice president with Fidelity Investments, Boston. "Florida is the fourth-largest public pension plan in the country, and when one of the big ones makes the change, other states could emulate it."
Fidelity Investments is among the service providers that have been lobbying Florida legislators for close to two years, Mr. Hughes said.
TIAA-CREF, New York, and Prudential Investments, Newark, N.J., also lobbied Florida legislators, according to a source close to the lobbying efforts who preferred to remain anonymous.
Mr. Hughes said a semibundled approach could be the best for plan participants. A single investment provider doing the administration and the record keeping might not be able to provide enough investment choices, he said.
Mr. Hughes predicts newer employees who do not foresee spending their entire careers with the state will opt for the defined contribution plan, while older employees will be most likely to stay in the defined benefit plan. This leaves middle-age employees with the toughest choices, he said.
Under the legislation, Florida employees will have 90 days after an educational program becomes available to decide whether to stay in the defined benefit plan or move to the defined contribution plan. Employees who fail to make a choice remain in the defined benefit plan.
The Idaho letter
Another governmental action that could further expand the public defined contribution business is an April 20 IRS private letter ruling that allows Idaho to extend its 401(k) plan to all participants in the $7.25 billion Public Employee Retirement System of Idaho defined benefit plan.
Initially, the 401(k) plan was available only to employees of the state department of health and welfare and the department of lands. Now, Idaho will be able to extend its 401(k) plan to all of the local school districts, political subdivisions and other statutorily created entities as well as state employees.
Although the ruling is directed only at Idaho, some in the industry see it as a way to take an existing, smaller 401(k) plan -- grandfathered into the system when the option was removed by 1986 federal legislation -- and convert it into a statewide plan.
It is far easier to expand a small 401(k) plan statewide than to push legislation to create one, said Joe Walshe, principal with PricewaterhouseCoopers Kwasha HR Solutions, Bethesda, Md.
What still needs to be determined is how many states have 401(k) plans that can be expanded statewide, Mr. Salama said.
Public defined contribution plans -- including 401(a)s or 401(k)s -- are fairly rare, said Nick Greifer, manager, policy analysis with the Government Finance Officers Association, Chicago.
Even so, industry observers say this could be a significant development for some states.
Information about public 401(k) plans is scarce, according to a study by the U.S. General Accounting Office. However, of more than 400 state and local public plan administrators responding to a 1993 survey by the Public Pension Coordinating Council, 8.4% sponsored a 401(k) plan, the GAO study indicated. GAO analysts added the percentage probably "under-represented" the actual percentage.