Monday, June 10, 2013

Illinois Pension Reform Conspiracy (or why a 401(k) is a foolish option, especially when it's your only retirement plan as in HB 3303)

Don’t be fooled by organizations like John Tillman's Illinois Policy Institute and some Illinois politicians’ saccharine prevarications about stabilizing the public employees’ defined-benefit pension plans. What some of them really want to do is reduce and weaken them so they are inevitably eliminated. Defined-benefit plans are lucrative opportunities for corporate predators when they turn them into defined-contribution savings plans.

Watch the 13-minute 60 Minutes: 401k Recession segment, especially an interview of a lobbyist for the 401(k) industry named David Wray (who is also president of the profit-sharing 401(k) Council of America); then read about the differences between a Defined-Contribution Savings Plan and a Defined-Benefit Pension Plan and Cash-Balance Plans.

“What kind of retirement plan allows millions of people to lose 30 to 50% of their life earnings?” Click here for video.

What is the difference between a Defined-Contribution Savings Plan and a Defined-Benefit Pension Plan?

A Defined-Contribution Savings Plan (Tom Morrison & Jeanne Ives HB 3303):

1) A defined-contribution savings plan (401(k), 403(b), 457) was not initially created as a retirement vehicle but rather as a supplementary savings account;
2) A defined-contribution savings plan shifts all the responsibilities and all of the risk from the employer to you; thus, your benefit is not guaranteed for life;

3)  Your benefit ceases when your account is exhausted;
4) There are no survivor or disability benefits and guarantees;
Your benefit is based upon individual investment earnings;
You assume all funding, investment fees, and inflationary and longevity risks;
7)  A defined-contribution savings plan does not have the pooled investments, professional asset managers, and shared administrative costs that a defined-benefit pension plan provides;

8) Though you bear no portability risks, accounts are not always rolled over when you change jobs;
9) Changeover costs to this plan could be significant;

10) Your employer (state) will have to bear the administrative costs of both defined-benefit pension and defined-contribution savings plans when you switch over;
“Payments to amortize unfunded liabilities for the defined-benefit pension plan may be accelerated” (National Institute on Retirement Security (NIRS);
The Governmental Accounting Standards Board “requires [an] acceleration of unfunded liability payments when the defined-benefit pension plan is closed to be recognized on financial statements” (NIRS);
13) “No unfunded obligations [liabilities] for existing members are reduced when new members go into a defined-contribution savings plan” (NIRS);
14) “The loss of new members makes it difficult to finance the unfunded obligations of the defined-benefit pension plan” (NIRS);

15) The State of Illinois will not save money. Most of the State’s obligation to TRS is for contributions not paid during the past several decades; therefore, the deferred cost of underfunding cannot be eliminated by switching to a defined-contribution savings plan;
16) Shifting to a defined-contribution savings plan can raise annual costs by making it more difficult for Illinois to pay down existing liabilities. The plan will include fewer employees and fewer contributions going forward;
17) Even with a defined-contribution savings plan option, states and localities are still left to deal with past underfunding;
18) There is a several trillion dollar deficit between what 401(k) account holders should have and what they actually have.

A Defined-Benefit Pension Plan:

1)  You cannot outlive your benefit;
2) Your defined-benefit pension plan is more cost efficient than the defined-contribution savings plan;
3)  Your defined-benefit pension plan offers predictable, guaranteed monthly benefits for life;
Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies;
The large-pooled assets reduce asset management and miscellaneous fees;
Your defined-benefit pension plan provides spousal (survivor) financial benefits;
Your defined-benefit pension plan provides disability benefits;
The state is responsible for funding, investment, inflationary and longevity risks;
9)  Because you are not affected by Market volatility, your defined-benefit pension plan is a more effective protection than the defined-contribution savings plan;

10) Because teachers understand the value of such a plan, they are willing to give up higher wages;
11) A defined-benefit plan encourages a long-term career and stable workforce;
Your defined-benefit pension plan provides you with self-sufficiency in retirement; it is associated with far fewer households that experience food privation, shelter adversity and health-care hardship;
Your defined-benefit pension plan is less expensive for taxpayers than Social Security – a reason why legislators, et al. had negotiated for Illinois teachers to not pay into Social Security;
The Teachers Retirement System of Illinois is the 39th largest in the U.S. with 366,000 members (2012) (TRS);
15) The average investment returns for TRS: 9.6% (1982-2012) (TRS);

16) Your defined-benefit pension plan has an economic impact of over $4 billion on Illinois; the effect on Gross Domestic Product is $2.38 billion; jobs that are created: 30,448 (Teachers Retirement System of Illinois, TRS);
Defined-benefit pension plans contribute over $100 billion to annual local, state, and federal revenue in the U.S. and provide capital to financial markets (NIRS).

Sources: the National Institute on Retirement Security (NIRS), Center for Retirement Research at Boston College, National Conference on Public Employee Retirement Systems, Center on Budget and Policy Priorities, and the Teachers Retirement System of Illinois (TRS)

Cash-Balanced Plans (Dan Biss & Bill Cunningham SB 35):

The cash-balanced plan [that Cigna] implemented [in 1997] was initially developed by Kwasha Lipton, a boutique benefits-consulting firm in Fort Lee, New Jersey, as a way to cut pensions without making it obvious to employees… [Though] pension raiding became more difficult as Congress began implementing excise taxes on the surplus assets taken from plans [or in the case of Illinois, “diverted”], Kwasha devised the cash-balance plan as a new way for employers to capture the surplus” (Helen Schultz, Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, 2011).  

“When companies convert their traditional pensions to cash-balance plans, they essentially freeze the old pension, ending its growth… [At Cigna,] 'Employees didn’t realize that there was no actual ‘account’ receiving actual employer ‘contributions’ or ‘interests’ – just a frozen pension, with no leverage… From the beginning, the cash-balance plan’s ability to disguise the pension cuts was one of its selling points with employers… [In essence, it’s] a pension plan ‘masquerading as a defined contribution’ savings plan, like a 401(k)… [And it’s a way to disguise the cutbacks in benefits… Corporate America uses cash-balance plans to mask significant reductions… Short of outright theft of pension assets, employers have been fairly free to make a lot of self-interested decisions when it comes to managing pensions” (Schultz). (Read John Dillon’s article: Cash-Balance Plans).

“The alternative of trying to cut public employees’ retirement plans down to the private sector level… just ensures that most Americans [public employees] face a bleak old age” (Alicia H. Munnell, State and Local Pensions: What Now? 2012). 

For additional information, please read Cash-Balance Plans: Just Another Form of Pension Cutting  

To [Cash Balance] or Not to [Cash Balance]” (from the United States Department of Labor) 

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