If public pensions are such a good deal, why are a surprising number of state workers, 44 percent, leaving the first two years of their retirement contributions in a 401(k)-style individual investment plan rather than moving them to CalPERS?
The early returns on a little-known cut in state worker pension costs, enacted six years ago as part of the first Schwarzenegger budget, touched off a brief pensions-vs.-401(k) exchange at a CalPERS board meeting last month.
Members representing labor were mystified about why workers would ignore the obvious financial advantage of moving their money to CalPERS and getting two years of service credit for pensions.
A member representing the Schwarzenegger administration suggested that a changing workforce may now have a number of young workers who do not plan to stay in state government, making a 401(k) transferable to another employer a good choice.
The board was told that CalPERS staff could only speculate about why 44 percent of the workers failed to submit a choice, which leaves the first two years of their retirement contribution in a 401(k)-style plan.
For example, the workers may not have understood the material asking them to choose, the material may have been discarded unopened, or workers may have known that not submitting a choice is the same as choosing a 401(k)-style plan.
“But again, we are not sure,” Darryl Watson, the California Public Employees Retirement System member services chief, told the board.
The Alternate Retirement Program for state miscellaneous and industrial workers was created in 2004 by the first Schwarzenegger budget, part of a plan to pay some of the annual state pension cost with a $949 million 20-year bond.
To settle a lawsuit filed by the Howard Jarvis Taxpayers Association, the administration agreed to enact pension savings to offset the cost of the bond. But the bond was never issued.
Nevertheless, a bill in the budget package still puts the employee retirement contribution of most state workers, 5 percent of pay, into a 401(k)-style plan during their first two years on the job.
The state saves money during the two years by not making the employer contribution, now about 17 percent of pay. But the state must pay any additional future pension cost resulting from skipping the employer share for two years.
A legislative committee analysis of the bill, SB 1105, said the plan was expected to save the state $2.5 billion over 20 years. Interest payments could have pushed the cost of repaying the $949 million pension bond to around $2 billion.
Now the bill gives Schwarzenegger some immediate reduction in pension costs, but far less in the long run than his briefly backed proposal in 2005 to switch new hires to 401(k) plans or his proposal last year to give new hires lower retirement benefits.
The Alternate Retirement Program has $82 million invested from 35,000 workers, said Lynelle Jolley, a spokeswoman for the Schwarzenegger administration’s Department of Personnel Administration.
The department also administers the tax-deferred 401(k)-style investment option available to state workers, the Savings Plus Program, with $7.2 billion invested from 143,000 active workers and 27,000 retirees.
Both programs, the Alternate and the Savings Plus, offer a range of low-cost investment choices. There is no employer contribution to Savings Plus, but workers can invest up to $16,500 a year.
New workers entering state employment are told that their retirement contribution, 5 percent of pay for most, will go into a 401(k)-style plan for the first two years. In the 25th month, the contribution automatically switches to CalPERS.
Because of rules for tax-deferred plans, the money cannot be taken out of the 401(k)-style plan until two years after contributions stop. Then workers get a three-month period (months 47 through 49) to choose one of three options for their investment account:
Transfer the money to CalPERS and receive two years of service credit for a pension, take all of the money in a lump sum, or convert to a 401(k) Savings Plus plan that remains with the Department of Personnel Administration.
And as noted, if the worker does not select an option during the three-month period, the money stays with the department in a 401(k)-style account.
The CalPERS board was told that workers get a series of alerts about the three-month decision period: a postcard from the department, a marketing letter from CalPERS, and two postcards from the largest state worker union, SEIU Local 1000.
The “election” packet offering the three options goes out on month 47. The CalPERS board received a report on the decisions of 7,467 workers, beginning with the first in September 2008 and continuing through January of this year.
The number who chose CalPERS, 46 percent, was nearly matched by those, 44 percent, who made no choice and remained in a 401(k)-style plan. A lump sum was chosen by 9 percent, and only 1 percent chose a 401(k) plan.
A breakdown of the 44 percent who did not choose an option showed that 32 percent or 2,366 were active CalPERS members and 12 percent or 908 were no longer working for the state.
Most of the response to a limited follow-up survey after the option period, 88 percent, came from members who made a choice. Among those who did not make a choice, the top reasons were not understanding the election material and missing the deadline.
After the skewed response to the mail survey, the CalPERS staff tried again with a month-long telephone survey of members who did submit a choice.
“We ran into a lot of difficulty there too in terms of being able to contact them and them being willing to talk to us,” Watson, the member services chief, told the board. “It was a very frustrating process. But again, we will endeavor to continue to determine why they did not submit a form.”
Board member Priya Mathur, correcting herself when told the Alternate Retirement Program was not created through labor bargaining, asked if a change could be made so that not choosing resulted in the CalPERS option, instead of the 401(k).
“I don’t believe that’s something DPA would support,” said Greg Beatty, a board member representing the Department of Personnel Administration. He said CalPERS could, of course, sponsor legislation to make the change.
The two board members also asked for additional information about the workers who do not make a choice for their retirement investments during the three-month window.
Beatty asked if it would be possible, maybe a year from now, to see how many had changed their minds and decided to buy service credits later.
Mathur said it would be interesting to know how many leave their state jobs sooner than average “to see if the assumption that they might be short-term employees actually bears out.”
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 1 June 10
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