How We Got Out of a 401(k) and into a Real Pension
After being trapped in an inferior 401(k)-style retirement plan, is it possible for a union to reverse the trend and switch back to a traditional defined-benefit pension?
Connecticut state employees did just that in 2012. Our little-known story, combined with similar victories in Massachusetts and West Virginia, shows it can be done. There’s a small but growing movement to follow suit in other states.
Those of us stuck in Connecticut’s 401(k)-like plan had been contributing more than twice as much as our co-workers who had pensions—yet it was estimated we’d receive less than half the retirement income. Without adequate information, we had chosen this plan when we were hired, thinking it was better than the pension.
How Can an Employer Benefit from Allowing Transfers into Its Pension?
First, for employers who are concerned about the level of retirement incomes their employees will receive, it will cost them less to invest in a properly funded and managed pension than a 401(k) plan.
In the words of a National Institute on Retirement Income report, “for any given level of benefit, a defined pension plan will cost less than a defined contribution 401(k)-type plan… They stretch taxpayer, employer, or employee dollars further in achieving any given level of retirement income.”
But even for employers concerned only with their own expenses, a pension may simply pencil out better. In particular, employers whose pension plans are burdened with unfunded liabilities due to past underfunding—the situation of many public employee pension plans—can save money by allowing their 401(k)-type plan participants to transfer into their pension plans.
The transferees will buy in at full actuarial value. That is, they will pay the full cost of the liability the pension fund is assuming—the cost of their future benefits. Unlike participants already in the pension plan, they will carry no unfunded liabilities. For transferees, employers need only pay normal contributions going forward—which are generally less than what they would be paying to a 401(k)-type plan.
This infusion of new money into a struggling pension plan reduces its percentage of unfunded liability, which also improves the employer’s credit ratings and thereby reduces its bonding costs.
According to one official budget estimate, Connecticut has saved $10 million a year because of the transfers.
Our reform campaign began after stock values plunged in the 2008 Great Recession, liquidating anywhere from 25 to 40 percent of the values of the portfolios of 401(k)-like plans around the country.
A small number of rank-and-file union activists (including me) had long realized that we were in an inferior retirement plan. The stock plunge shocked members—and created an opening for us to raise the issue of changing plans.
Virtually any employee is much better off with a real defined-benefit pension than a 401(k)-type plan.
The retirement incomes are usually much higher—and are guaranteed, unlike in a 401(k), where payout is subject to investing skills, luck, the ups and downs of the market, and how much is drained off in management fees, commissions, and profits for the financial services company that administers the plan.
Many workers don’t know this, which is why much of our group’s work had to be educational, to show people the dramatic differences.
But it’s not only workers who stand to benefit. Contrary to widespread belief, in many cases employers, too, can save money when their employees transfer to pension plans. (See box.)
Transferring to a pension plan is a win-win for employees and employers. But there is a clear loser—the financial services companies that administer 401(k)-type plans, such as TIAA-CREF, Prudential, and Voya.
They stand to lose millions of dollars in administrative fees, commissions, and profits—so they’re likely to use their considerable lobbying power to oppose transfer opportunities.
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In Massachusetts, TIAA-CREF lobbied the legislature against allowing a transfer. In Connecticut, ING issued veiled threats to withdraw from administering the plan if the State Retirement Commission allowed transfers to go through.
HOW WE DID IT
State employee retirement benefits in Connecticut are negotiated between the state and a coalition of 15 unions. When activists first raised the issue of transferring plans, we got a mixed response from our union representatives. Some were very supportive, but others were strongly opposed, in part because they felt the issue wasn’t important or winnable.
So at first the union coalition did not make the issue a priority. To pressure our unions to support the reform, we created a rank-and-file movement.
We formed a statewide organization, the Connecticut Committee for Equity in Retirement, which included members from all the unions that had participants in the 401(k)-like plan. Through a newsletter, a website, and public speaking at worksites, the organization grew and increased pressure on our union coalition to act.
One of our most effective educational tools was a chart that showed people how much they would have to accumulate in their 401(k)-type accounts to match pensions for equivalent years of service and salary levels. Many threw up their hands when they saw that chart, because they were nowhere close to being on track to accumulating that much money.
MAKING THE SWITCH
The union coalition responded in 2009 by filing a formal grievance, arguing that the state had not provided sufficient information to new employees when we made what was supposedly an irrevocable choice between retirement plans.
With our pressure campaign continuing in the background, an arbitrator agreed and ruled in 2010 that employees must be allowed to voluntarily change retirement plans. It took two years for the transfers to actually begin, in 2012.
So far, more than 1,900 employees out of 5,000 have taken advantage of the opportunity, which is still open. Collectively we have rolled over $400 million that had been managed by the private financial services industry to the state pension fund, to purchase credits for years of service.
Four hundred of us have since retired with pension incomes much greater than what we would have received if we had not transferred.
TRY THIS AT HOME
Can the Connecticut victory be repeated elsewhere? Despite some unique ingredients, it contained a lot that’s widely applicable.
One crucial factor that made the transfer possible was that our employer (the state) had an existing pension plan. That’s true in most other states—for state, municipal, public university, and even some private employees.
If an employer has both 401(k)-like and defined-benefit pension plans, there are legal ways to transfer from one to the other, despite beliefs to the contrary and “irrevocability of choice” clauses.
Our state employee campaign played out as a collective bargaining issue. In other states, such as Massachusetts and Idaho, retirement benefit changes for state employees require legislative action.
Perhaps the biggest lesson was that progress began only after rank-and-file proponents enlisted a lot of other employees to support the reform. Just talking to those who had the power didn’t get the job done—it took grassroots organizing. We continued our outreach and education until the reform was implemented.
Last November, members of a university-employee Teachers (AFT) local in Boise started a campaign to allow Idaho public employees to transfer from their 401(k)-like plan to the state’s traditional pension.
You may have the ingredients to try the same in your state. It will take a lot of organizing—but it’s winnable, and well worth it for the security it can provide to thousands of retirees.
James W. Russell advises groups seeking to transfer from 401(k)-type plans to pension plans. He can be reached at jwr5[at]pdx[dot]edu. He was co-chair of the Connecticut Committee for Equity in Retirement. His book Social Insecurity: 401(k)s and the Retirement Crisis contains accounts of the Connecticut and similar retirement justice fights.