BOSTON - Massachusetts Gov. Mitt Romney has proposed a mandatory defined contribution plan for new state employees.
He also suggests the state reduce its cash contribution to its $26 billion defined benefit plan by contributing up to $180 million worth of state land that fund officials could keep, sell or develop.
The defined contribution plan idea is still evolving; no information was available, for example, on whether existing employees would have to choose between the DB and DC plans. If the idea becomes a reality, Massachusetts would be the first state to implement a mandatory defined contribution plan for new employees since Michigan did so in 1997.
Such a move would fly in the face of a trend toward traditional defined benefit plans at the expense of defined contribution plans. For example, the $4.7 billion Nebraska Investment Council, Lincoln, converted its defined contribution plan to a cash balance plan because it found the defined contribution plan was not providing adequate retirement benefits.
Professionally managed defined benefit plans are in a much better position to weather market volatility than an individual managing a defined contribution plan, said Tom Cavanaugh, national practice leader for governmental consulting services for Buck Consultants Inc., New York.
Officials from Gov. Romney's office say a defined contribution plan would be more cost-efficient than the defined benefit plan, which is saddled with an estimated unfunded liability of $12 billion. "Our pension system, which is modeled after 1950s-style corporate America, demands updating," states the executive summary of the proposed budget.
The governor also believes the plan is fairer to all state employees because of its portability, said Nicole St. Peter, spokeswoman for Mr. Romney. Under the existing defined benefit plan, employees must have 10 years of service to be fully vested; the defined contribution plan would feature shorter vesting, although no details are available yet.
Eric Kriss, secretary of administration and finance, is working on the proposal. Mr. Kriss was not available for comment.
Some are skeptical about the governor's proposal.
State Treasurer Tim Cahill, chairman of the Pension Reserves Investment Management Board, Boston, doesn't think a mandatory defined contribution plan works for employees, especially in Massachusetts, where state workers don't get Social Security benefits, an aide said. Treasury spokeswoman Karen Sharma said Mr. Cahill has a lot of questions and is looking forward to getting more information on the proposal.
"Clearly we're skeptical," said Ms. Sharma.
"That is one change that I don't think is of benefit to public employees," said Roxanne Fleszar, principal at Financial Resources Management, Peabody, Mass., a defined contribution consulting firm. If the state does move to a mandatory plan, she said, it's imperative to provide access to financial advice, as most plan participants do not understand the basics.
Ms. St. Peter said the governor would examine all the issues involved. "We want to have a fair system for all employees. We don't want to pass costs on to future generations."