Years ago, David Letterman mocked the graphs that a national newspaper had on its sections by joking that: “USA Today has come out with a new survey: Apparently three out of four people make up 75 percent of the population.” This is my moment.
I recently came across an article that said that government employees prefer defined benefit pension plans over 401(k) plans. The article was based on a study from the Washington-based National Institute on Retirement Security (NIRS). The study showed that public sector employees prefer defined benefit (DB) pensions over other forms of retirement plans, such as 401(k)/defined contribution (DC) plans. The study analyzed seven state retirement systems that offer a choice between DB and DC plans, and found that 75 to 98 percent of new employees in those systems preferred DB plans, while 2 to 25 percent choose DC plans.
“The research is clear that public employees highly value their pension benefits and will choose this retirement plan over an individual DC account,” said Ilana Boivie, who was a co-author of that NIRS report. In other news, the sun will rise and set today.
Let me get this straight, public sector employees would rather have a retirement plan where the employer funds almost all of the contributions than a plan where the employees fund the bulk of it? Really? Imagine that. I’m sure you might get the same result by asking private sector employees, except a good chunk of the employees wouldn’t know what a defined benefit plan is. But that’s another story.
I remember when I first started in this business in 1998, as a young, naïve ERISA attorney. I had a paralegal named Marge who taught me a lot more about retirement plans that what I learned in my Tax L.LM program. I told Marge how great I thought 401(k) plans were and how they were the best plan going. Marge told me straight that I was clearly wrong because other plans like DB plans, money purchase plans, and straight profit sharing plans were actually better. The reason those plans were better was because the employer was doing the bulk of the funding for retirement. Under a 401(k) plan, it’s the employee that does the bulk of the funding. 401(k) plans, when they were first designed were implemented as an additional savings plan for employees to supplement a pension plan. As 401(k) plans grew in popularity, thanks to daily valued, participant directed plans (which supposedly eliminated an employer’s liability), employers realized they can save money by phasing these type of employer funded plans out.
The debate over pension plans for governmental employees is always an interesting one. To me, it’s not about politics. I worked for three years at a couple of union side law firms where they confused their work with politics and they let politics kind of cloud their views and their work. As an ERISA attorney, politics never affect my work because I feel there is no Democrat or Republican way to represent my clients.
The debate over public pensions to me isn’t about politics; it’s just the simple nature of the employer-employee relationship. The employee wants to make as much money as they can and the employer wants to pay as little as possible. Doesn’t matter when it’s the sanitation department, the NBA, or a third party administration firm (bringing back such great memories). So when the employee has a great benefit like a pension plan or great health care benefits, they don’t want to give it up. On the flip side, government wants to phase these plans out to save money and close large budget deficits. I see it pretty clearly because I don’t let politics cloud my views on retirement plans.
People complaining about public sector unions state that pension plans should be replaced by 401(k) plans. Like that has served private sector employees so well over the last 30 years. Of course, those people are correct in noting how expensive defined benefit plans are and how tenuous local, state, and federal budgets are these days in this terrible economy.
Empathy is the capacity to recognize and, to some extent, share feelings that are being experienced by another person. Let’s face it when it comes to political debate or collective bargaining between employees and employers, there is more yelling and less empathy. But that’s another story too.