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Summary of Action on State Legislation to Convert Defined Benefit Plans to Defined Contribution Plans

By Cynthia L. Moore
Washington Counsel
National Council on Teacher Retirement

January 13, 1999

Defined contribution plan legislation was introduced in 13 states in 1998. Most of the bills were killed. The only legislation enacting pure defined contribution plans affected narrow bands of highly mobile employees or expanded coverage of an existing defined contribution to additional employees. An effort involving the New Mexico Public Employees' Retirement System was defeated. In Arizona and Florida proposed legislation failed to pass, but a study on defined contribution systems will be conducted. A study was also authorized in Wisconsin regarding the possibility of an optional retirement system for certain university employees. In three other states (Colorado, Vermont, and Virginia), a defined contribution plan is an option (not a requirement) for a narrow band of high level employees who are in positions with frequent job turnover, i.e., political positions, higher education jobs, and school superintendents. A similar effort in Illinois died in committee. In two states (Louisiana and Maine), where higher education employees already have an Optional Retirement Plan (ORP), which are set up as defined contribution plans, additional higher education employees will be covered by such a plan. In Washington, educational support personnel (i.e., non-teacher school personnel) will have the option to move from a pure defined benefit plan to a hybrid consisting of an employer-funded defined benefit plan and an employee-funded defined contribution plan. Finally, study commission on defined contribution plans were killed in Indiana and North Carolina. Some details follow.

Arizona. Proponents made a big push in early 1998 for an optional defined contribution plan for employees covered by the Arizona State Retirement System. The proposal evolved into a study. The study failed to be authorized through the regular legislative process, but a study will be conducted, nonetheless, by an interim committee.

Colorado. After an unsuccessful attempt to authorize a defined contribution alternative to the existing defined benefit plan offered by the Public Employees' Retirement Association (PERA) of Colorado, the legislature approved a considerably scaled-back approach. Specifically, statewide elected officials, legislators, most of the Governor's staff, and the legislative staff can now choose a defined contribution plan instead of the PERA plan. The typical short service nature of such individuals drove the revised version: term limits cut off the years of service for elected officials and potential change in political party control affects the longevity of legislative and gubernatorial staff. The PERA Board of Trustees opposed the initial version of the bill. It argued that the bill would force down the retirement system's funding level below the minimum actuarial standards set by law. In addition, employees choosing the defined contribution plan would receive an unfair advantage by personally receiving the part of the employer contribution that is used to amortize the unfunded liability of the plan. The narrower version does not affect PERA's actuarial soundness, according to the Board of Trustees, because it applies to a small number of individuals only. The bill has been signed into law by the Governor.

Florida. As in Arizona, both an effort to create a defined contribution option and a proposed study on the issue failed to pass. The issue will be reviewed before the next legislative session, however, because the Division of Retirement has requested its consulting actuaries to complete a study on the implementation of a defined contribution plan.

Illinois. Legislation was introduced to create an optional defined contribution retirement plan for supervisory employees of cities and villages. The bill died in committee.

Indiana. Legislation was proposed to create a Pension Management Oversight Commission to conduct a study on defined contribution plans. Specifically, the Commission was to study the relevant advantages and disadvantages of defined benefit and defined contribution pension systems for public employees. It was also to study the effects on both employers and employees that would result from the conversion of the Public Employees' Retirement Fund (PERF) from the current defined benefit plan to a defined contribution plan. The proposal died in committee.

Louisiana. Both chambers of the state legislature extended the existing optional retirement plan (ORP) available for academic and administrative employees of public institutions of higher education to employees of various boards that govern higher education, for example, the Board of Regents. ORPs, which are usually designed as defined contribution plans, are common for higher education employees. This action in Louisiana is simply an extension of the existing program. The bill is awaiting the Governor's signature.

Maine. The legislature enacted a bill that allows new employees of the Maine Technical College System the option to participate in a defined contribution retirement plan instead of the Maine State Retirement System. Existing employees may make an election to participate in the new plan. The Governor signed the bill into law. Some higher education employees in Maine already participate in a defined contribution plan. Thus, as in Louisiana, this action merely expands such coverage.

New Mexico. A bill was introduced to set up a portable retirement plan for newly hired employees of certain public employers in New Mexico. The employees could elect to participate either in the new plan or in the existing Public Employees' Retirement Association (PERA). The measure died in committee.

North Carolina. A bill to authorize a Defined Contribution Pension Plan Study Commission died at the end of the session. South Carolina. Legislation has been introduced to establish a public employees' defined contribution retirement plan. It is currently pending in committee.

Virginia. The legislature approved two measures authorizing defined contribution plans for a narrow group of employees. First, it authorized any county or city with a population of over 200,000 to provide a defined contribution plan for a school superintendent. If the superintendent so wishes to participate in such a plan, rather than in the Virginia Retirement System (VRS) which provides a defined benefit plan, the relevant jurisdiction is authorized to make contributions on his/her benefit. Second, the legislature passed a bill to establish a defined contribution plan for state employees in exempted positions. The plan allows such employees to participate in a defined contribution alternative to VRS. Exempted positions include certain officers appointed by the Governor, officers elected by vote of the General Assembly plus chief deputies and confidential assistants for policy or administration in executive branch agencies. The Governor signed both bills into law.

Vermont. By way of background, the General Assembly mandated the State Treasurer to review the options and fiscal implications of shifting the State Employees' Retirement System and the State Teachers' Retirement System from defined benefit to defined contribution plans. A study was completed in 1996 by the Segal Company. A second study was completed in mid-1997, also by Segal, that presented specific design options for both retirement plans. Based on the results of the two studies and comments from the retirement boards and the respective employee unions, the State Treasurer recommended to the Joint Fiscal Committee in January that no changes be made at the current time to the State Teachers' Retirement System. The State Treasurer also recommended that all classified State employees remain in the current defined benefit plan, but that legislation be enacted to establish an optional defined contribution plan for all exempt State employees. His recommendation was based on the premise that exempt employees tend to have short-term tenures and therefore might benefit from the flexibility and portability of a defined contribution plan. As a result of these recommendations, an Act was approved that gives the State Treasurer the authority to establish a defined contribution plan effective January 1, 1999 for non-classified state employees. A one-time window will be offered for all current exempt employees who wish to transfer from the defined benefit to the defined contribution plan. After January 1, all newly hired exempt employees must elect either the DB or the DC plan at date of hire. All elections will be irrevocable.

Washington. The legislature created a new pension plan for school employees, which has been signed into law by the Governor. Specifically, school employees (i.e., classified workers, not teachers) who were in the Public Employees' Retirement System Plan II (PERS Plan II) are transferred to School Employees' Retirement System Plan II (SERS Plan II). As members of SERS II, they will be eligible to transfer to a SERS Plan III. This latter plan is similar to the Teacher Retirement System Plan III (TRS Plan III), under which employees receive an employer-funded defined benefit and an employee-funded defined contribution. According to the preamble of the bill, the legislature intends that all education employees achieve similar retirement benefits regardless of whether they are teachers or classified workers.

Wisconsin. Legislation mandating a study on the possibility of an optional retirement system for certain university employees was signed into law on June 2, 1998. An actuarial study of the impact of an ORP on the WisconsinRetirement System was completed and submitted to the Legislature no later than June 1, 1999.