Much of the debate on some governments switching to 401(k)-styled pension plans in recent years has centered upon whether it will save them money in the long run. But an interesting side effect of this trend could be its role in shaping the government workforce of the future.
The current defined benefits system that applies to most government employees is weighted toward the long-term worker -- the longer you stay, the better your pension. According to the Center for Retirement Research, a 35 year-old employee who works a 30-year career will earn a third of his or her lifetime pension benefits in the last five years of employment. Add in the fact that many states and municipalities are increasing their pension vesting periods to 10 years (from five years, in many cases), and one wonders what incentive there is to work for a government at all unless you’re in it for the long haul.
Which brings us to workplace diversity: Studies show a shift among modern workers away from the notion of career employment at any one institution. Additionally, Department of Labor statistics show that the older an employee is, the more likely he or she will stay at a new job longer. Conversely, younger workers tend to switch jobs every few years before settling down. So what does all this mean? Governments that offer only the traditional defined-benefits pension plan cater more to older, career workers rather than younger (and more likely short-term) employees.
In many states, workers who leave before their pension has vested receive only their own contributions plus some low rate of interest. But some states don’t even go that far. Robert Clark, a professor at North Carolina State University’s Poole College of Management, recently equated short-term worker pension plans to no-interest loans as the state gives back employees only the contributions they made if they leave before their pensions vest. North Carolina is among a handful of states that raised its vesting period to 10 years from five, over the last two years.
“So you can work in North Carolina and pay your employee contribution for three, four, five, six, seven years and you leave and we give you the money you contributed back with no return on investment and that strikes me as a very poor way to craft a retirement system -- if we’re interested in those kinds of workers,” said Clark during the Center for State and Local Government Excellence's Future of Retirement Summit held this spring in Washington, D.C. “If we don’t care about them, then we just ought to say it and maybe that’s what we’re doing with our retirement system.”
So why should governments be interested in short-term workers, other than in an attempt to get a little age diversity? At that same retirement summit, Steve Kreisberg, director of collective bargaining for the American Federation of State County & Municipal Employees, noted that the best person for the job isn’t always the career employee.
“There’s a belief right now that the best teacher is one who does it for three years and then goes on and does something else,” Kreisberg said. “Therefore we need to have short-term, portable types of investment vehicles, [the] types of retirement vehicles that don’t fit well with the traditional defined-benefit model.”
Andrew Huff is one of the lucky ones. He is a former District of Columbia employee, where the vesting period is still five years. Huff, who now works as the director of community relations for American University, parted ways with the city in 2012 after five and a half years of service working for the mayor's office and then city council.
“I knew I needed to reach five years,” he told Governing. “That was definitely a factor in determining that it was time for a job hunt.”
Huff, whose pension package was roughly $10,000, added that he would have stayed 10 years at the District if the city’s vesting period was longer, but only if cost-of-living raises were included in the package. The city suspended such raises during Huff’s tenure there.
The retirement center’s Alicia Munnell notes in a recent co-authored brief that the current state and local system may be poorly designed if governments want to attract a diverse workforce. A full career in the public sector may be ideal for both the employer and the employee in some situations, but that’s not always the case, she said.
“For example, social workers, who face burdensome caseloads and constant stress, are often exhausted long before retirement age,” states the brief, How Retirement Provisions Affect Tenure of State and Local Workers. “These workers need to move to new jobs in either the public or private sector. Therefore, a plan that disproportionately rewards long-service workers may lead some to stay who would be much better off elsewhere.”
According to the center, the somewhat recent movement toward hybrid pension arrangements “is likely to improve outcomes for state and local workers who need to change jobs” as 401(k)-styled retirement accounts typically have a shorter vesting period (comparable to the private sector). Offering such a plan reduces the incentive of an employee to risk burnout in some cases and stay until their plan vests, as they’ll have something to take with them should they leave.
Additionally, defined contribution plans have the advantage of being portable, meaning a former government worker can roll over his or her pension into a 401(k). Still, the National Association of State Retirement Administrators cautions that portable plans also give employees more chances to dip into their retirement savings and in a white paper notes that ‘the majority” of employees cash out their assets instead of rolling them over. Retirement and labor advocates are also against entirely replacing defined benefit plans with defined contribution plans, saying that offering both allows for better retirement security for workers.
“It seems like 30 years ago -- 20 years ago -- we wanted all our workers to work for 30 years,” Clark said. “Is that what we want, is that what they want today?”