TALLAHASSEE, Fla. - Florida's new defined contribution plan could open with about one-third of the assets originally predicted: $4.8 billion instead of $13 billion.
Actuaries arrived at the smaller number by hypothesizing what participants' mindsets would be when making the defined benefit or defined contribution decision, and then putting a 20% premium on the defined benefit assets, said Kevin SigRist, assistant chief economist for the State Board of Administration, which will run the plan when it is launched June 1. He explained the premium by noting employees would place greater value on the guaranteed monthly income of the defined benefit plan because of current market volatility and employee insecurity following the Enron Corp. debacle and Sept. 11 terrorist attacks.
The "refreshed" study also predicts 144,000 employees will participate in the new 401(a) plan, down significantly from the earlier estimate of 226,000.
"The initial estimates were too optimistic," said Tom Herndon, executive director of the board. "From the standpoint of some of the vendors who priced their products based on those volume demand levels, it will be somewhat distressing."
The most recent study, done by William M. Mercer, New York, also lowered the assumed annual investment return to 7% from 8.5%, Mr. SigRist said.
Officials at the board asked Mercer to refresh its estimates based on the prolonged market downturn, the Enron/Arthur Andersen LLP debacle and the Sept. 11 tragedy, Mr. SigRist said.
"The idea for refreshing the estimate was motivated largely by the environment," Mr. SigRist said. "Participants feel the environment they are in has changed. Without having a real good behavioral model to see how it would impact decisions, we went to our actuaries to refresh the results."
A choice scenario
Mercer was asked to create the scenario of a person making the choice between the state's $88.5 billion defined benefit plan and the new defined contribution plan. Then the actuaries set up a series of assumptions as if they were the participants making the choice, he explained. Another factor was the rate of salary growth, now 3.5% annually.
Now that they have this information, board officials are developing strategies for what they would do if these new estimates prove true.
"We recognize while actuaries have reasonably good models, at this point, it's purely speculation," Mr. SigRist said.
The defined contribution plan was set up as a $13 billion plan. If it actually gets a just third of that, money managers could end up with no assets or, at best, far less money in their investment options than originally anticipated when they competed to be included in the plan. Many managers have minimum funding requirements to replicate investment performance, Mr. SigRist said. The amount of money that shifts from the defined benefit plan to the defined contribution plan, as well as asset allocation, could determine whether the board will have to prune some of these unbundled money managers, he said.
A smaller plan also would have substantially less leverage with its providers, he said.
Noting he had not seen the details of the new study, John Brockelman, a spokesman with Fidelity Investments in Boston said: "Regardless of the projected assets, we are committed to this innovative plan. We look at this as a long-term relationship."
A spokesman for Pacific Investment Management Co. said the firm would not comment on individual clients.
Recommendations on hold
SBA staff is not expected to make any recommendations to the board until the first third of employees make their choices by the end of August. Employees must decide whether to stay in the defined benefit plan or move into the defined contribution plan. And if they choose the 401(a) plan, they will have to pick asset allocations.
"We can work out plans, but ultimately it's a paper exercise until we see the money that flows," Mr. SigRist said.
While he acknowledged the SBA has contracts with the existing panel of money managers, "each of the managers understood that we could never guarantee a certain amount of assets because it's the participants' choice to move or not to move."
However, it doesn't make sense to overreact due to a market blip or other factors that might change when the market improves, Mr. Herndon said.
Besides, Mr. Herndon said, the state has 10% to 15% employee turnover each year. "In six or seven years, we'll have an entirely new work force," he said.