Ericksen's pilot project prompts questioning
In Our Opinion
This past week, state Sen. Doug Ericksen, R-Ferndale, announced his intentions to introduce a bill in legislative session in regards to a $10,000 incentive to state workers who agree to switch from their state pension plan to a 401(k)-style retirement plan.
Ericksen’s proposed bill is similar to Boeing’s recent campaign of paying up to 31,000 machinists a $10,000 signing bonus for training their pensions as part of the contract extension that guarantees assembly of the 777X in Washington state.
As a result of the contract extension, the machinists gave up their pensions in exchange for a 401(k)-style contribution plan. The senator’s reason for wanting current employees to make the switch: “If it’s good enough for Boeing, it should be good enough for the employees of Washington State.”
Ericksen’s proposed bill only applies to workers in Washington’s Public Employees Retirement System. Public employees such as teachers and state patrol officers have their separate pensions and would not be affected. According to Ericksen, state lawmakers would move off their pension and into 401(k) plans after their next election.
The proposed bill is not on Ericksen’s list of “preferred bills” for the 2014 Legislative Session. Instead, he intends to launch it as a pilot project.
While Ericksen seems to have his intentions for this proposal, as he gets ready to launch his project, he needs to answer several questions.
The first would be what kind of structure would the 401(k) plans for public employees be under? Would it be similar to plans that other states who have switched to 401(k)s for their public employees?
Utah has two systems: a Tier 2 Hybrid Retirement System that provides a possible 401(k) contribution if an employee’s pension contribution is below 10 percent and a Tier 2 Defined Contribution Plan. Would Washington state public employees get a similar choice for plans?
In most businesses, the employees rather than the employer fund 401(k) retirement plans from contributions. If public employees do make the switch to 401(k) plans, would the state put anything toward their retirement or would they be solely responsible for their own contributions?
Under the Utah Retirement Systems Tier 2 Defined Contribution Plan, employers contribute 10 percent of an employee’s salary to their 401(k). Under Tier I Defined Benefits plan, employers donate 1.5 percent of the employee’s salary to a 401(k).
Employees that would have to make their own contributions would essentially be taking a pay cut because they would have to use their own wages.
Another question is who will be in charge of administering these 401(k) plans? Would lawmakers appoint a state-run agency to handle the plans, like the Washington State Department of Retirement Systems?
Would employees have to purchase their own plans?
If workers have to search the market to find someone to administer their plan, they may find themselves in an insecure market where dishonest people could take advantage of them.
Another question is what would happen after the incentive payments reach the cap of $20 million, which means only 2,000 employees would receive the incentive for moving off their pensions? Would future employees who move off their pensions receive some type of incentive for making the switch from their pension plans to 401(k)?
One argument against pension systems is that lawmakers and critics argue that the state’s actual debt could prove much higher if the systems’ investments does not achieve the assumed 8 percent rate of return.
Can Ericksen prove if, and how much money Washington state would save by having employees switch from their pensions to 401(k) programs?
If Ericksen wants to present his pilot project and hopes that the rest of the state will be on board, he should present reasons, other than because Boeing is doing it.
If Ericksen finds it difficult to answer some of these questions, perhaps he could take the $20 million and use it toward finding and fixing the inefficiencies in the state’s current pension, instead of using it for his pilot project.