Unintended consequences of changes

The interest in hybrids is a combination of concern about the funding issues facing public sector employers following the recession and market crash and the setbacks seen by early adopters who closed their DB plans in favor of DC plans, Nicholl says. “Entities thought the silver bullet was the DC plan,” she says, “but once they see how they work, they believe they may not be the right approach.”

With hybrids, employers share the risk with the employees, which reduces their liabilities. But implementing a new plan is complicated. “There are many stakeholders in a plan design process,” she says. In a typical plan, stakeholders are not only the employee and employer, but also the legislature and governor and the taxpayer. “There is a need to consider the thoughts of each of the stakeholders from their own viewpoint.”

Advocates of change often miss important considerations that have impact far beyond the initial decision to close a DB plan, such as the proposal now before the Washington legislature, says George Masten, interim executive director of the Retired Public Employee Council of Washington and a 19-year member of the Washington state investment board. Closing a DB plan hurts the remaining employees in the plan, because the investment managers can no longer manage investments for the long term, but only for the remainder of the plan, he says. In addition, managers have to keep a larger-than-usual amount in cash because of the lack of new contributions coming into the plan from new employees.

“The more they push hybrids, the more cautious people will become in investing,” he says, which in turn will reduce investment results and increase liabilities on the remaining fund. “It will have a major impact on the board. Good long-term investing gives the highest returns.”

Pratt says that any DC component “puts the employee’s retirement in the hands of Wall Street instead of a pension system backed up by structure and employers.” He says that teachers who want to take full advantage of the employer match put 12 percent of their pay into the retirement plan, along with health care and other deductions. “It’s not sustainable for young teachers who have to pay down their college debt and want to own a home,” he says. “We want to recruit and retain the best people for the classroom. This climate makes it really difficult.”

Good practices rather than radical design change are often instrumental in keeping the best retirement funds solvent, Boivie says. A June 2011 NIRS study of several plans that have remained well-funded throughout the economic turbulence showed that they regularly reviewed their assumptions with an actuary to evaluate investment assumptions, asset allocations, demographic and mortality changes, and wage growth. Then, they adopted a rather simple solution: They set aside funding consistently. What happened next seems obvious but hard for so many to implement.

“If you pay, you’re OK,” she says.

— Robert Barkin is a Bethesda, Md.-based freelance writer.