St. Tammany News

Proposed legislation that would change the defined benefit plan to a 401-K-type defined contribution benefit won’t affect those already in the state’s retirement system—or will it?

The Louisiana State Employees’ Retirement System North Shore chapter of the Retired State Employees Association got an earful Monday from executive director Cindy Rougeou and State Rep. John Bell Edwards on the proposed legislation that would change the way those entering state employment would have their retirement money invested and a separate move to consolidate all the state employee’s various retirement systems into one. Edwards cautioned the attendees, numbering about 100, to “be on guard to changes to the system you rely upon. These changes will be to your detriment if passed. A consolidation of all the systems will not save the state money and I will definitely not support this bill.”

He said that he is very fearful this year of budget impacts in the legislature and a consolidated system will affect everyone.

“The threat of changes is more real this year in the legislature . . . due to looming budget deficits,” he said. Edwards also explained that since retirees do not receive social security, in most cases, this is their only pension. He also said, “Many newer legislators do not understand the ramification of proposed changes.”

The change from a defined benefit plan to a defined contribution plan has not worked in other states and transfers the risk of the investments of retirements funds from the state to the employee. In fact, Rougeou said it may well cost the state more money if the retirement system fails and retirees have to go on public assistance. There is also a chance retirees would outlive their contribution benefit that would partly be based on actuary tables of average life spans.

Another concern to consider is the cost of living adjustment, or COLA.

At present, the contributions of those already retired and vested have a enormous economic impact in the state. Rougeou said that $800 million a year is paid to state retirees, 90 percent of which remains in the state. The lion’s share of this money is derived from investment made with retirement contributions from active contributors, those still in the work force.

“The retirement system is in the fight of its life against misinformation,” she said.

A comparison of the two types of plans shows the benefits and detriments of each.

In the defined benefit plan, DB, qualified investment managers invest the pooled assets while in the defined contribution plan, DC, the investment risk is borne entirely by the employees.

In DB, the return is historically 1 to 2 percent higher than in a DC plan.

Investment in a DB plan are managed over the long term, therefore asset allocation does not have to become more conservative over time. In a DC, employees are generally advised to transfer to more conservative asset allocations as they age they lessen the chance of losing a large amount of assets prior to retirement.

In a DB, investment returned are smoothes to reduce volatility and give a guaranteed known benefit for the life of the retiree. With a DC, social costs may be created due to poor investment or those who outlive retirement benefits. There is also no guarantee of retirement income in a DC plan.

In addition, in a DC plan, the employee’s participation is not mandatory—employees can remove and spend funds before retirement. Funds are also subject to market downturns that could delay retirement and/or reduce retirement funds.

In a DB plan, funds are less portable and require mandatory participation. COLAs may also be given as protection for inflation.

The DB also provides ancillary benefits such as disability, survivor and spousal benefits.

There are cons to the DB, including a situation that is benefits are granted but not funded, the plan will accumulate an unfunded accrued liability.

Retirees and active state employees are advised by both Rougeou and Edwards to stay in contact with their local legislators on the issue as the session opens March 29.