Two states approach retirement security from opposite directions.
By Dave Winans
Talk about a Continental Divide. As a result of freshly signed legislation, new West Virginia educators hired as of July 1 last year were channeled into a defined-benefit retirement plan; yet on July 1, 2006, Alaska newbies are to be pushed into a defined-contribution plan.
Is your retirement nest egg in peril? Newly hired teachers in Alaska will be forced into a defined-contribution plan starting in July, while newbies in West Virginia have the security of a defined-benefit pension plan.
One Step Back
In fierce lobbying, NEA-Alaska (NEA-AK) stressed that the state’s new defined-contribution scheme would impoverish teachers and support professionals, force a “brain drain” from Alaska, and remove the “safety net” of the state’s teachers, who do not receive Social Security. But this state affiliate stalemated with lawmakers determined to shirk the state’s 50-year commitment to pay a third of local government retirement costs.
At press time, NEA-AK had a proposal before the Legislature to delay implementation of the plan until July 1, 2008; a vote is expected in the current session. Meanwhile, the state affiliate has joined a coalition of other labor organizations that hired an actuary group to determine the impact of funneling employees into the proposed defined-contribution plan. “We believe that doing this will add to, not reduce, the state’s liability, since a smaller pool of employees will be contributing to the remaining defined-benefit plan,” says Bill Bjork, president of NEA-AK.
The coalition is also interested in having the actuary determine the viability of developing an alternate, hybrid plan that would combine a defined-benefit plan with post-retirement health insurance.
One Step Forward
In contrast, the West Virginia Education Association (WVEA) had the lessons of history on its side. In 1991, the Mountain State made the same blunder as Alaska, herding all newly hired educators into a Teachers Defined Contribution (TDC) retirement plan and closing the older, defined-benefit Teachers Retirement System (TRS) to new participants.
Big mistake. TDC participants were offered no education or training in how to invest their money; investment options were few, limiting participants’ ability to diversify; and the plan’s administrator failed to issue accurate, timely statements. WVEA “tracked the defined-contribution plan’s terrible job,” reports WVEA Executive Director David Haney, “and we lobbied for several years to provide safeguards for TDC plan members and to change the law.”
Their hard work paid off. Last year, WVEA won legislation that places all new hires in the traditional TRS system, closing the defined-contribution plan to new members. In early March 2006, existing TDC members will vote, by a simple majority, whether to stay in the defined-contribution plan or join TRS. WVEA insisted, however, that before a vote is taken, the public retirement board must deliver a comprehensive education program to voting members that includes individualized statements, showing what their benefit would be under TRS and TDC.
The members, of course, will decide, but two facts are undeniable: The entry of new hires has pumped new funding into the defined-benefit plan, and actuaries have predicted that a merger between the retirement plans could save the state some $1.4 billion over 30 years. How is that possible? The state’s cost of maintaining the defined-benefit plan is only 4.3 percent of payroll, compared to 7.5 percent under TDC. This would give members a stable retirement system “that is not contingent on the stock market,” says Haney. WVEA’s goal, he concludes, is to “obtain a safe, secure, and predictable pension plan for all school employees.”