OLYMPIA, Wash. - Washington state is working its way toward offering its employees a hybrid pension plan that is part 401(a), part defined benefit.
The state's Department of Retirement Systems is expected to hire a third-party administrator in November. The department plans to issue an RFP for an education provider by the end of the year.
As of March 1, 2002, existing and new state and higher education employees will be eligible for the hybrid plan, which will give them an alternative to the state's $40 billion defined benefit plan. Their counterparts in local governments will get the opportunity to join six months later, said Jeff Wickman, strategic initiation manager of the Department of Retirement Systems, which administers the plans.
The new optional plan is expected to have 150,000 participants, or 40% of eligible state employees, PERS officials told legislators before they passed the bill in May. Employees hired after March 1, 2002, will be allowed to choose between the defined benefit plan and the new hybrid plan, Mr. Wickman said.
The new plan's investments likely will mirror those in the state's two existing 401(a) plans, according to the system's website. The investment options, which have not been set, will be chosen by the board.
Employees in the hybrid plan will be allowed to choose between a self-directed investment program that is expected to include nine investment choices, three of which likely will be pre-mixed portfolios; and the Total Allocation Portfolio, managed by the Washington State Investment Board. The board will determine the investments and select money managers by year-end. The managers will not provide education.
The two other state 401(a) plans - one instituted in July 1995 for the Teachers Retirement System that now totals $50 million, and one launched Sept. 1 for the School Employees' Retirement System - have identical investment options. Both offer the Total Allocation Portfolio. The self-directed investment program offers: a money market fund and an international stock index fund, managed by State Street Global Advisors, Boston; the Washington State Bond Fund, run by the investment board; and the U.S. Large Stock Index Fund, U.S. Stock Market Index Fund and U.S. Small Stock Index Fund, managed by Barclays Global Investors, San Francisco. Three pre-mixed portfolios - the short-horizon, mid-horizon and long-horizon funds - are run jointly. SSgA manages the international equity component; BGI runs the domestic equity component; the investment board manages the fixed-income component; and Provident Institutional Funds runs the cash portion, Mr. Wickman said.
The Total Allocation Portfolio is commingled with assets of the Washington state defined benefit retirement plans, which are invested: 40.8% domestic equity; 26.6% domestic fixed income; 17.7% foreign equity; 8.5% private equity; 5% real estate equity; 0.8% mortgages; and 0.6% cash equivalents.
Like the two other plans, the hybrid plan will be unbundled, with the record keeping and most education provided by a third-party administrator, he said. ICMA Retirement Corp. is the third-party administrator for the teachers' and school employees' plans.
The defined benefit portion of the hybrid plan is funded solely by employer contributions. The defined contribution portion is funded mainly by employee contributions.
Employees eligible for the School Employees Retirement System have until Feb. 28 to switch to the new plan, Mr. Wickman said. Those who choose the new plan will receive a one-time 130% transfer payment in March. For example, a participant who had a balance of $10,000 as of Jan. 1, 2000 - based on what he or she would have been entitled to in the defined benefit plan - will have $13,000 added to his or her new account as a transfer payment. After that, employees in the defined benefit plan will be offered a transfer window every January, he said.
Participants in both plans have to choose a contribution rate of 5% or more and will be unable to change their contribution rates unless they change employers.
The Total Allocation Portfolio is the default investment option for participants who fail to choose an investment program. The money market fund is the default option for participants who choose the self-directed investment program but fail to choose investments.