The role of retirement plan design in recruiting workers to the public sector
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Commentary

The role of retirement plan design in recruiting workers to the public sector

Colleges and universities have recognized professors need portable retirement plans, but other public sector employers have been slow to adapt.

With today’s competitive job market and public and private sector employers trying to attract and retain talent, there’s a lot of discussion about what types of employer-sponsored retirement plans could aid in the recruitment of employees and what types of retirement plans could hinder recruitment efforts. To be clear, an employer’s retirement plan is typically a secondary, at best, issue in recruiting. The job and salary are the primary considerations for most prospective employees. The employer’s reputation and ability to provide a welcoming and productive workplace is often another primary decision point.  Health care benefits, not retirement benefits, are usually the most important benefit area for employees. For some workers, retirement benefits are an important decision factor and they probably should be prioritized even more given the long-term financial implications.

The reality of what kind of retirement plan could best aid public sector employers in recruiting desirable employees comes down to an examination of the following questions:

  • Does the worker foresee him or herself changing jobs and employers several times during their working career, or do they expect to stay with one employer for 30 or more years? 
  • If the worker does change employers during their working career, does he or she want to be able to take all of their accumulated retirement assets with them and continue to control them? Or does the worker want to rely on a future retirement benefit that is based on their age and years of service when they left the employer (if they were vested in the retirement plan at all)?
  • Is a lifetime income benefit how the worker want to receive retirement income, or do they want the flexibility to receive a lifetime income or utilize other distribution methods tailored to their retirement needs?

Many state and local government employers have been convinced that only a traditional defined-benefit pension plan helps the recruitment of workers. While this may have been true for many public sector jobs a generation or more ago when staying in one job or with one employer for an entire career was far more common, it certainly is not the case today. The vast majority of today’s public sector employees, like their private sector counterparts, will change jobs and employers multiple times in their careers. This is the simple reality of the modern workforce.

Thus, a retirement plan that does not recognize the reality of employee mobility is not maximizing its potential in recruiting workers. If public sector employers continue to just repeat the mantra that a traditional pension is the only type of plan that helps to recruit workers, then they are likely hindering their efforts to recruit by not understanding the employment marketplace and why workers would appreciate the portability of some retirement plans.

A long-standing case in point in recognizing the need for mobility is the retirement plan that was developed for higher education (both public and private) more than a century ago. The traditional pension, with future benefits based on past salary and years of service, only rewarded employees who stayed at one university for a long time, given the back-loading of benefits. But a key ingredient in maintaining excellence in higher education was the mobility of faculty. Good professors were, and still are, encouraged to move to different academic environments several times during their teaching careers.

So to help facilitate this academic mobility and aid educational institutions in the recruitment of their desired professors from a nationwide pool, colleges and universities designed retirement plans to specifically address the need for portability. These retirement plans designed to embrace the mobility of professors have been adopted, over time, by almost all public and private higher education institutions in the country.

The plans were defined-contribution in nature but were also focused on lifetime retirement income. This is a significant differentiator from the typical 401(k)-style plan that defined contribution critics are wont to point to. These higher education plans were designed and administered as retirement plans, not supplemental savings plans. While not perfect, the plans in this nationwide system have performed exceptionally well over the more than a century of their existence. With all the discussions about the inadequacy of retirement benefits across jobs and industries, do you ever hear about college and university professors suffering from inadequate retirement benefits? Perhaps this is the best example of a retirement plan understanding the characteristics of the workers it was designed to serve.

A clear reality of the 21st century is that employees across the spectrum are mobile in their careers. While employment tenure in the private sector is even shorter than in the public sector, the difference is irrelevant as far as retirement plan design goes. Recognizing reality is an important step in retirement plan design.

If a retirement plan is going to aid in the recruitment of quality employees, it must, like it does in higher education, recognize the realities of the workforce being recruited and appeal to those workers. Career mobility is a clear characteristic of the modern workforce and a retirement plan that recognizes this mobility and provides benefit portability is essential in aiding recruiting efforts. The traditional public sector pension plan does not recognize this mobility and, thus, is a weak aid in recruiting.

A defined-contribution structured retirement plan that recognizes employee mobility, is structured to focus on income adequacy in retirement, and can be tailored to individual situations, is the type of plan that public sector employers should strive for, either as a primary retirement plan or a valuable option among a menu of other types of plans. This proven plan design better meets the needs of the modern workforce and could serve as a recruitment tool for the majority of modern employees.  

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