//PERS Solution #3: Rebalance the system: Pension plan or savings plan, but not both.
PERS Solution #3: Rebalance the system: Pension plan or savings plan, but not both.2019-02-28T04:41:23-08:00

PERS Solution #3 – Rebalance the system: Pension plan or savings plan, but not both.

Why is PERS requiring all public employers to provide both a pension plan and a 401(k)-style retirement savings plan – especially when the pension plan is chronically underfunded and exorbitantly expensive?

The fact that PERS requires all public employers to offer both a pension plan and a retirement savings plan is an artefact of changes made to the system in 2003. Those changes were needed to limit the growth of excessive Money Match benefits that were generating pension payouts of 80%, 90% and even 100% of pre-retirement salaries. A new retirement savings plan was added to the system at that time to separate employee contributions from the Money Match program.

Since then, however, the costs of the pension plan have more than doubled for employers, while employee contributions to the new savings plan have generated additional benefits for employees. And, ever since the Oregon Supreme Court ruled in 2015 that changes to the pension plan can be made on a going forward basis, it has become clear that the Money Match program can be changed without resorting to the diversion of employee contributions to a separate benefit account. So the rationale for the separate retirement savings plan has disappeared.

Meanwhile, where public jurisdictions have been given latitude by the legislature to experiment with the new plan designs, the 401(k)-style retirement plan has proven to be a popular alternative to the traditional pension plan. Oregon Health and Sciences University offers one example.

OHSU Employees have the option of:

Defined contribution plan fully paid by the Employer at 12% of pay

          -OR-

PERS pension, with employees paying 6% for the IAP

Results at OHSU

  • The defined contribution plan is the default option, enrolling 95% of new hires.
  • Only 26% of OHSU employees remain in the PERS pension plan.
  • Savings on the 74% of OHSU employees in the defined contribution plan equate to 2.5% of payroll for post-2003 hires.

Also, Oregon’s seven public universities now offer an alternative 401(k)-style retirement savings plan for faculty and administrators. At the University of Oregon, 23% of employees have chosen this alternative.

It can be argued that a pension plan, if well managed and properly funded, can be the best alternative for career employees, especially those who expect to stay in the public sector and move to higher-paid positions in the course of their employment. But employees who work in the public sector for shorter periods, especially those who fail to meet the five-year vesting requirement of the PERS pension plan, can be better served by a 401(k)-style plan. In such a plan, contributions can vest on day one and balances can be rolled over to other plans.

So why not give employees the choice between the pension plan and a more robust 401(k)-style plan?

In fact, this was the top choice of public employees we consulted in focus groups conducted in 2018. And it polls as the most popular reform among Oregon voters.

PERS Solution #3 and the 2019 Legislature

Senate Bill 148, sponsored by Sen. Tim Knopp, proposes that all employees be given the choice of the PERS pension plan or a 401(k)-style retirement savings plan at 12% of pay (6% paid by employers and 6% paid by employees or picked up by their employers).

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