SAN ANTONIO, Texas - The push to replace traditional public defined benefit pension plans is an "11th-hour stealth attack" and, in many cases, based on faulty or misleading information, according to several speakers at this year's National Conference on Public Employee Retirement Systems conference.
How to deal with and combat the political and economic pressures to replace public defined benefit plans with defined contribution plans was the principal theme of this year's NCPERS conference in San Antonio.
Carlos Resendez, NCPERS executive director, set the tone of the conference by telling the nearly 1,200 public pension plan trustees and administrators in attendance that recent defined contribution measures in Michigan and in New Mexico amount to "11th-hour stealth attacks" on established defined benefit plans.
Public employers are facing political pressures from legislators to reduce cost burdens on taxpayers and, in many instances, from younger workers to implement more self-directed plans.
Some NCPERS officials claim the financial services industry, especially mutual fund companies, are fueling the effort in many states to convert to defined contribution plans.
Last year's highly publicized conversion of three state plans in Michigan clearly sent a message to public employers that defined contribution plans are gaining momentum.
In addition, there have been legislative initiatives in New Mexico, Arizona and in Montana to replace defined benefit plans with defined contribution plans or other hybrid plans. Discussions about the use of defined contribution plans also has been noted in Texas, Oklahoma, Colorado and Washington.
The New Mexico legislation to convert the New Mexico Public Employees Retirement Association to a defined contribution plan was killed off in April after a strong lobbying effort by state employees and retirees, but state officials believe the idea will resurface.
Alice Herter, executive director of the New Mexico plan, Santa Fe, said "the war is being waged on the battlefield of good, solid and healthy defined benefit plans."
Ms. Herter said in New Mexico, and in other locations, "major decisions are being made on the basis of misinformation or no information" and that defined contribution proposals for public employees "lack a great deal of thought from what I've seen."
She then described several issues and "fictions" which, she said, are being used to support the trend by public employers to move to defined contribution plans.
First, she said, is the "everyone's-doing-it" syndrome. She said "it is simply not true" that corporate plan sponsors are dumping defined benefit plans in favor of defined contribution and that public plans, therefore, should follow suit.
Citing data from the Employee Benefit Research Institute, Ms. Herter said 75% of corporate plans moving from defined benefit to defined contribution plans had between two and nine participants and that plans with 10,000 or more participants reported "virtually no change."
She also said the notion that today's work force is more mobile than previous generations and more suitable to defined contribution plans is "fiction."
According to Department of Labor statistics, Ms. Herter said, in 1951 the average time spent in each job was 3.4 years and in 1991 the average had increased to 4.5 years per job.
She said even if the evidence supported the idea that corporate and public employers were moving more toward defined contribution plans, "public fund trustees don't and shouldn't manage their plans in a 'trendy' way."
Other drawbacks to switching to defined contribution plan is that investment risk is shifted to participants who may not be equipped or simply don't want to manage a retirement portfolio. In addition, Ms. Herter said inflation risk is shifted to participants along with management costs and fees.
"Management fees are not usually discussed openly or often, but with defined contribution plans employees pay management and administrative costs. Currently in the defined benefit plan, none of the costs is paid by employees," she said.
Citing a NCPERS white paper that was distributed at the meeting to provide information to public fund trustees about the pros and cons of defined contribution plans, Ms. Herter said lump-sum distributions under defined contribution plans may endanger retirement planning efforts.
Again, using DOL information, the white paper said only about 21% of households rolled over lump-sum payments from previous employers into retirement savings when changing jobs, while 30% bought consumer goods and 23% invested in a business or paid off debt.
Ms. Herter also took aim at the claim used by some that shifting from a defined benefit plan to a defined contribution plan would result in cost savings.
"It won't happen," she said. "Employers will be running two pension systems at the same time. Since you can't remove benefits under the current (defined benefit) plan, you have to continue administering that plan. And most administrative costs are paid from the plan," she said.
"If there no longer will be a contributing base for the defined benefit plan, those costs must then come from the members themselves or from the general taxpayer dollars," she added.
But Gerard Miller, president and chief executive officer of ICMA Retirement Corp., Washington, said the "national trend" toward defined contribution plans should continue and that he expects public plans will be allowed to offer 401(k) plans within the next three years.
"It will happen eventually; we are accepting it as an inevitability," he said.
