RPEA Legislative Report - February 26, 2023
Comparing the Defined Benefit Plan to the Defined Contribution Plan
In 2006, the Defined Benefit (DB) Retirement Plan (PERS Tiers I – III/TRS Tiers I & II)) was closed by the Legislature, with all new employees placed in a Defined Contribution (DC) Plan, similar to a 401(k) plan (PERS Tier IV/TRS Tier III). Today, there are nearly 27,000 active employees in PERS Tier IV and approximately 7,000 active employees in TRS Tier III. How do these employees’ DC accounts compare to their counterparts in Defined Benefits? Are they meeting expectations in order to provide enough compensation for their years in retirement?
That was the subject of a recent hearing in the Senate Finance Committee with a presentation from the Division of Retirement and Benefits. The results were sobering.
The Division delved into the accounts of three groups: police/fire, teachers, and everyone else. In each group, the analysis showed the Defined Contribution Plan would provide smaller benefits than the Defined Benefit Plan. The goal of a secure retirement system is one that annually pays a retiree 70% of their high earnings. The study showed that an average employee in PERS Tier IV or TRS Tier III could expect to receive roughly 61%. There were a few ‘over-performers’ but they tended to be those in higher wage brackets and/or worked overtime.
In the Defined Contribution Plan, employees are responsible for their own investment decisions. The employer pays 5% to PERS employees, 7% to TRS employees. By contrast, under the Defined Benefit Plan, the employer pays in 7.5% to the retirement plans of police/fire and 6.75% for all others. Increasing the employer contribution to the individual accounts still would not make up the difference.
The analysis of the retirement systems did not examine health benefits, a major component of the Defined Benefit Plan but lacking in the Defined Contribution Plan.
There are two bills to restore a form of Defined Benefits to these employees and future employees. If passed, HB 22 would help peace officers and fire personnel with a defined benefit and it has passed out of its first committee. SB 11 would provide a defined benefit to all employees but has not had a hearing. It is anticipated that a new bill will be introduced in the Senate soon to encompass all new employees.