Orange County, Calif., has adopted a novel retirement plan in which new union employees can choose between participating only in the $4.7 billion defined benefit plan, or participating in both the DB and a new defined contribution plan.
Those choosing the combination pay a lower contribution to the defined benefit plan, but also get reduced benefits. On the DC side, they get a small employer match.
Although some state government plan sponsors and a few municipal ones offer defined contribution plans, Orange County's version — where all new employees participate in the defined benefit plan — is rare.
More common approaches include closing the DB plan to new employees and allowing them to participate only in a DC plan, or giving them a choice between a defined benefit or a defined contribution plan.
An analysis last year by the Center for Retirement Research at Boston College found that 18 of 126 mostly state plans studied had some form of DC component for new employees, said Jean-Pierre Aubry, a research associate at the center.
In Orange County, the Orange County Employees Retirement System, Santa Ana, administers the plan, but the new approach was developed by executives of the union — the Orange County Employees Association — and management.
Officials from both sides say the new design will reduce the county's defined benefit plan expenses.
William Campbell, vice chairman of the Orange County Board of Supervisors in Santa Ana, said an actuary hired by the county calculated the new plan could cut annual costs by about 2% over time, assuming half of the new employees choose the combination of a DB and a DC plan.
Keith Brainard, research director for the National Association of State Retirement Administrators, Baton Rouge, La., noted that plans with a defined contribution component “present lower, long-term liabilities for the employer.” The problem, however, is usage. Mr. Brainard said he believes most new employees select traditional DB plans over other types.
The new plan is unique to California, and required passage of a state law last year to authorize it. The county and the union agreed to the plan in June 2009; enrollment began last month.
Neither Mr. Campbell nor Lisa Major, assistant general manager for the union, could recall who made the first move toward proposing the new approach when union and county negotiators starting discussing a new contract in the spring of 2009.
“It seemed like we came to it at about the same time,” Ms. Major said said.
“It was both of us,” said Mr. Campbell. “We wanted to reduce the (DB) plan for new employees. The union wanted to give new employees a choice.”
The defined contribution portion was developed — and will be administered — by TIAA-CREF, New York.
The DC component “works in tandem with, rather than supplements” the defined benefit plan, said Richard Hiller, vice president for government and religious markets at TIAA-CREF. “The overall pension plan is structured to help employees replace 70% or more of their income in retirement. The DB (formula) doesn't accomplish that on its own, so the DC plan is layered on to help achieve the necessary income in retirement.”
The standard employer match is 50% on up to 2% of the employee's contribution. In the plan's first year of operation, however, the match is 100% on up to 2% of the employee contribution. On the defined benefit side, those choosing to enroll in the DC plan will make a smaller contribution to the DB plan. In exchange, the benefit payment will be less. In addition, they must work until age 65 to get their full benefit payment. Those sticking with the original DB-only approach may retire with full benefits at 55.