Just as private-sector employers have
moved away from traditional pension plans in favor of hybrid plans, some states
have done the same.
Kansas, Kentucky, Louisiana and Nebraska
have passed legislation creating cash balance plans for new state employees,
though Louisiana's effort is on hold following a legal challenge by a group of
Like their private-sector counterparts,
public employers moving to cash balance plans are driven by several factors,
such as trying to reduce costs and making the benefit more understandable,
In a cash balance plan, the benefit
earned is equal to a percentage of current pay with interest, such as the rate
on the 30-year U.S. Treasury bond, being added. Participants typically take the
benefit immediately as a lump-sum when they retire, rather than a monthly
annuity, a potential cost savings to the plan sponsor.
“Since benefits are frequently paid as lump sums, the employer
bears no longevity risk and the investment risk ends at the point of
distribution,” said Sheldon Gamzon, a principal at PricewaterhouseCoopers
L.L.P. in New York.
While cash balance plans' benefit formulas resemble defined
contribution plans, they are different in one key way: Employees are shielded
from investment risk.
Among states, Nebraska took the lead in 2002 when it passed
legislation enrolling employees hired on or after Jan. 1, 2003, in a cash
balance plan where employees contributions equal 4.8% of compensation and the
state contributes $1.56 for every dollar contributed by employees. Participants
get a minimum interest credit of 5%.
In 2012, Kansas passed legislation creating a cash balance plan
for state employees hired on or after Jan. 1, 2015. Under the plan, employees
will contribute 6% of pay, while employer contributions will range from 3% to
6% depending on employees' years of service. Interest credited will be at least
Last year, Kentucky approved a measure creating a cash balance
plan for employees hired on or after Jan. 1, 2014. Most new workers contribute
an amount equal to 5% of pay. Employers contribute an amount equal to 4% of
pay, with employees' account balances earning 4% interest annually.
But Louisiana's 2012 attempt to create a cash balance plan was
blocked last year by the state's Supreme Court, which ruled the measure
violated the state constitution by failing to win approval from at least
two-thirds of state lawmakers. “We think the cash balance plan is good for the
people of Louisiana because it helps get our retirement liabilities under
control, protects taxpayers and provides new state employees with a portable
retirement account that realizes investment earnings,” Louisiana Gov. Bobby
Jindal said in a statement at the time of the June 2013 court ruling.
for the original article from Business Insurance News.