NCPA - National Center for Policy Analysis

States See Pluses and Minuses in Switch to 401(k) Plans for Public Workers

March 3, 2011

Policymakers across the country are considering scrapping guaranteed retirement benefits for public workers in favor of 401(k)-like plans.  In pursuing the switch, some state and local governments hope to shift more responsibility and risk -- as well as potential reward -- to employees.  But some are discovering that closing down a pension plan can carry hefty costs, says the Wall Street Journal.

Many say 401(k)-style plans can yield meaningful cost savings over time if employer contributions are substantially reduced from what they were, and relieve governments of the obligation to make guaranteed payouts.  Many government-worker unions, however, oppose a switch to 401(k)-type plans.

  • A switch can increase the payments a public employer has to make to any pension fund it closes, particularly if the pension is underfunded, which many are.
  • That is because when a fund closes, over time there are fewer workers contributing.
  • The burden can fall on the public employer to make up shortfalls.

Some officials see a benefit in a hybrid plan, which maintains a pension, typically a less generous one for new hires, and a 401(k)-type component, says the Journal.

Source: Jeannette Neumann, "States Mull Shift in Worker Pension," Wall Street Journal, March 1, 2011.

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