Retirement security activists in Connecticut are urging their unions to contest a decision by the state’s Retirement Commission to delay implementation of an arbiter’s decision that will allow the state’s public higher education employees to withdraw from a defined contribution 401 (k) type retirement plan and enroll in the state’s defined benefit pension plan.
In a hearing last September, an arbiter ruled in favor of the State Employee Bargaining Agent Coalition, a coalition of unions representing Connecticut’s public higher education employee, in a grievance charging that members of the Alternative Retirement Program (ARP), a defined contribution plan (for higher education employees), had been “unfairly steered as new employees into the ARP plan when a much better traditional pension plan was available.”
“They had not been given sufficient information to make informed choices nor had they been told that their decisions, once made, would be irrevocable,” writes James R. Russell on his blog, The Perfect Swindle. Russell is an activist in the Connecticut Committee for Equity in Retirement (CCER), a retirement security group that convinced the bargaining coalition to file the original grievance.
The arbiters ruling was to go into effect on December 31, when the Retirement Commission was supposed to notify ARP members that they could drop out of the plan and enroll in the Connecticut State Employees Retirement System’s defined benefit plan, which unlike ARP would guarantee them a life long pension benefit after they retire. The arbiter’s decision would allow ARP members to use money in their ARP account to purchase service credit in the State Employees Retirement System.
But the commission has dragged its feet in sending the notices. Russell says that the delay ”(benefits) ING, a Dutch multinational financial giant and third-party administrator of ARP, which collects millions of dollars in fees for each year that it maintains control of these retirement savings.”
The original grievance, filed in 2009, says that management at Connecticut’s higher education institutions steered new hires into ARP with misleading and insufficient information about the plan.
CCER says that higher education management exaggerated the potential pay out of ARP, claiming that ARP members would receive a higher pension benefit than those in the defined benefit plan, according to CCER ARP members contribute twice as much to their plan as do members of the defined benefit plan and receive about half of what they would had they enrolled in the defined benefit plan.
The claim that ARP members would receive higher benefits was based on an inaccurate model used to estimate pension payments after retirement. The model used overly optimistic estimates of the rate of return that ARP members could expect from their retirement accounts. The market crash of 2008 caused ARP accounts to lose much of their value, value which for many will never be recovered even though the market has recovered.
CCER also has calculated and compared the benefits that an employee could expect to receive under the ARP plan and the defined benefit plan. According to these calculations, it would be extremely difficult, if not impossible, for low-paid workers in ARP to match a defined benefit pension.
Workers retiring with an annual salary of $30,000 per year would receive an annual defined benefit pension payment of $9,975. In order to buy a commercial annuity equal to this amount a male worker would need to have $178,175 in his ARP account; a female worker would need $203,571 (the commercial annuity market charges women more than men because on average women live longer,.
It would also be a challenge for moderate-income and high-income employees to match the annual pension payment that they would receive from a defined benefit plan. A worker retiring with an annual salary of $60,000 a year would receive a defined benefit pension of $20,600 a year. To purchase a commercial annuity equal to this amount, a male would need $374,786 in his ARP account; a female would need $420,408 in her account.
The Retirement Commission justifies its foot-dragging by saying that it needs approval from IRS to allow ARP members to withdraw, but Russell points out that West Virginia school teachers were allowed to transfer out of their defined contribution plan into a defined benefit plan without approval from IRS.