Some policymakers in Alaska are proposing a return to a defined benefit pension plan to help address the state’s problems with recruiting and retaining public employees. They posit that a defined benefit pension plan would provide better benefits and make it easier to attract and retain qualified public employees. They are wrong on both counts.
As with most defined benefit (DB) pension plans, the main problem with this DB proposal is that the employee must spend their entire career (20-to-25 years for public safety workers and 30 years for teachers and other public employees) in Alaska state employment to receive a lifestyle-sustaining income in retirement. This length of employment with a public employee rarely happens today. In Jan. 2022, the median state employee tenure was only 6.3 years nationally, so most employees will have several employers during their 30-to-35-year careers.
Public defined benefit pension plans, like the old Alaska pension plans, are designed to be backloaded and are not portable. In other words, only in the later years, when a worker is nearing retirement, would an employee’s benefits significantly accrue. Those benefits and accrued assets do not travel with the employees as they change employers throughout their careers. Instead, they remain static with the fund while the employee waits to become eligible for retirement.
Defined contribution (DC) plans like the current Alaska retirement plan, however, are designed to be portable and move with employees as they switch jobs, and there is no backloading of benefits. The value of benefit portability to modern workers should not be overlooked or minimized. A retirement plan that does not recognize this reality may seem to provide adequate benefits on paper, but the benefits are often below what members could be getting in other plan types.
A complete view of retirement benefits examines who is best served by a particular plan design. A Pension Integrity Project analysis of Colorado Public Employees’ Retirement Association (PERA) School Division data, for example, shows that only 37% of newly hired teachers remain in the pension system after five years of service.
In Alaska itself, the Alaska Beacon recently reported that some 20% of state jobs are vacant. Governments around the country are seeing high rates of separation in the 15 years after employees are hired, but this isn’t the result of the retirement systems they offer. Rather, it reflects the ongoing national trend—both in the public and private sectors—of workers becoming more mobile and less likely to stick with one employer for as long as they once might have. The inescapable reality is that Alaska’s public employees are not remaining in their state positions long enough to receive a meaningful DB benefit, so why bring back that type of plan in Alaska right now?
One reason given by DB proponents in Alaska for reinstating a DB plan is to address the challenge of recruiting employees into vacant state positions. With its strengths in portability, however, the existing defined contribution plan is the optimal approach to meeting the real needs of employees in the modern workforce.
The portable nature of defined contribution retirement plan benefits better fits the modern workforce than traditional defined benefit plans. But typical 401(k)-style defined contribution plans still could be improved. Alaska’s DC plan and most other government-run DC plans are focused on wealth accumulation rather than income replacement, which is needed in an effective retirement plan.
Reason Foundation’s Pension Integrity Project recently released a proposed new plan design called the Personal Retirement Optimization Plan, or PRO Plan, that is built on a defined contribution foundation but is focused on income replacement. The PRO Plan further focuses on DB-type lifetime income benefits at the individual participant level–producing previously unavailable customized benefits. The PRO Plan can be implemented today using market-available products and is not cost prohibitive.
Employees care if a retirement plan fits within their career plans and lifestyle. The PRO Plan is designed to meet the needs of today’s employees and, when communicated properly, could prove to be a substantial recruiting aid. Making the PRO Plan part of employee recruiting efforts would express to prospective employees that Alaska, as an employer, understands them and wants to meet their needs.
Retirement plans that can move with employees from job to job and meet their long-term financial needs are more critical than ever. Instead of shoehorning Alaska’s employees into a retirement plan design that does not suit the majority of new hires, policymakers should focus on realistic retirement benefits and meet workers where they are in order to recruit quality employees.
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