About a dozen chief executive officers of public employee pension funds met in Chicago last month to get acquainted and discuss ways to defend the traditional pension model.
It was an unprecedented gathering called by the new CEO of CalPERS, Anne Stausboll, who in January became the first woman to hold the top job at the nation’s largest public pension fund.
After an historic market crash last fall erased a third of the value of many pension funds, the CEOs might have talked about adjusting investment portfolios or “smoothing” techniques that could avoid contribution rate shocks for state and local governments.
But professional staffs can present those options to decision makers on pension boards. What the CEOs did was compare notes on handling a public discussion about retirement security that may be pushed by the Obama administration and others.
“I’m anticipating that when that discussion heats up, they will be coming to the public pension funds to talk about the defined benefit model, how has it worked historically,” said Stausboll. “So it’s a good opportunity for us to be giving some messages about the relevance of the defined benefit design.”
A “defined benefit” is the monthly payment guaranteed for life in a traditional pension. It’s opposite is the “defined contribution,” a 401(k)-style plan that puts money into a tax-deferred individual investment plan that can rise and fall with the market.
The “defined benefit” is the standard retirement plan for government employees. Critics contend that powerful public employee unions have negotiated generous retirement plans that are straining government budgets and may be unsustainable.
Businesses that offer retirement plans (about half of U.S. workers only have Social Security) are moving toward 401(k)-style plans, avoiding the potential for a massive pension debt that has hurt the auto industry and other old-line corporations.
The 401(k)-style plan is portable, moving with workers as they go from job to job in the new economy, where career-long employment with one firm is said to be increasingly less likely.
But critics say the 401(k)-style plan was only intended to be a supplement, and the stock market crash dramatically revealed its shortcomings, devastating the holdings of older persons who cannot wait for investment earnings to rebuild their retirement funds.
So, if it’s “defined benefit” versus “defined contribution,” who’s winning? Both sides sound as if they are feeling a little besieged.
“In addition to talking about the national discussion, we did talk about the negative focus that we have seen in the media and various forums around defined benefit plans,” Stausboll said of the Chicago meeting.
“We talked about what we could do to balance those negative stories,” said the new CEO of the California Public Employees Retirement System. “But again, in an educating kind of way based on our experience.”
The Profit Sharing/401k Council of America shares Stausboll’s view about a coming national discussiion of retirement, calling on its website for a stronger voice because “the future of the 401(k) system” may be determined by the current Congress.
“Not only have investment returns recently been poor, but the media has piled on with story after story about how 401(k) itself is the problem,” David Wray, the council president wrote on his web log. “However, the real story is that 401(k) participants continue to save and invest in their plans even in what some term the worst of times.”
The debate over retirement models, with its subtext of government versus private-sector control, takes a number of forms.
A CEO who attended the one-day Chicago meeting on May 4 in an airport hotel, Chris DeRose of the Ohio Public Employees Retirement System, said in recent years he has discussed retirement issues with the Legislature, Congress and system members.
“We have reached out to all of our stakeholders in helping them to understand that there is this challenge and there are people who want to change our plan, whether they want to change how we invest our money or whether they think a mandatory defined contribution plan is the way to go,” DeRose said.
Comment on Calpensions posts from “Bull,” often denunciations of government pensions with words in all-cap letters, are e-mail that can be traced to a large financial firm in New York that sells retirement products.
A new group, Retirement USA, which includes the Service Employees International Union and several think tank-like organizations, launched a drive earlier this year for a new plan to supplement Social Security.
The new group, seeking ideas to be considered at a conference this fall, has proposed a framework that combines traditional pensions and 401(k) plans (with perhaps some new wrinkles) that would be supported by employers, workers and the government.
The California Assembly passed a bill this month authorizing CalPERS to handle the investments for a new savings retirement plan for workers who do not have an employer-sponsored plan.
AB 125 by Assemblyman Kevin De Leon, D-Los Angeles, would allow automatic deductions from paychecks, an option regarded as a key to getting people to save. A similar bill, also opposed by the financial industry, cleared the Assembly last year and died in the Senate.
U.S. Treasury Secretary Timothy Geithner said last month that his office wants to work with Congress “to flesh out the initiatives” in the president’s budget to help the half of working Americans who only have Social Security.
“These proposals would make it easier for people to save for their own retirement, either through their workplaces or on their own, and would move us toward universal retirement savings coverage,” he told the House appropriations committee on May 21.
A hybrid plan that would use an annuity to convert part of a 401(k) savings account into guaranteed monthly income is being discussed by a Geithner assistant, Mark Iwry, who formerly was with the Brookings Institution.
“It’s in the early stages, but there has been a fair amount of interest in our ideas and the core concepts so far,” Iwry told Investment News last month.
A legal affairs newsletter said the appointment of Iwry in late April signals that retirement has become a higher priority in the Obama administration’s Treasury department.
“Policy issues Iwry will be working on include a possible overhaul of rules for private defined contribution plans, funding relief for defined benefit plans, a direct-deposit IRA program for employers that don’t offer retirement plans, and expansion of the saver’s tax credit,” said the CCH Financial Crisis News Center newsletter.
That would be a sweeping agenda. And as with the current health care debate, there would be plenty of room for political conflict over whether retirement programs should be run mainly by the government or by the private sector.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 15 Jun 09