Articles
Defined Benefit Plans Under Assault Again
In the past few weeks, one of America's mot venerable corporations, IBM, announced the closure of its defined benefit retirement plan to new participants, replacing it with a 401(k) defined contribution plan. While such reports are common in the private sector, similar suggestions are now being made with increasingly loud voices in the public sector.
In two separate articles on December 5th, the Los Angeles Times reported on a legislative initiative in California to "shut the door" on state's defined benefit plans beginning in 2007. Employees hired thereafter would have only a defined benefit program, much like a private sector 401(k) plan. The same week, a longtime employee advocate of the shareholder rights was unseated from the CalPERS Board of Trustees. The impetus behind the move, which would take the form of a constitutional amendment, is the action of the state and numerous local governments during the current budget to borrow money to meet their rising unfunded liabilities.
The Louisiana State Legislature has been conducting a series of joint legislative workshops to address the same problem of a rising cost from defined benefit plans. Among suggestions offered was also the closure of the defined benefit plans to future employees or the dramatic reduction in benefit levels and features. Five years ago, the Florida Legislature spent several million dollars developing a defined contribution alternative for its statewide retirement system. The collapsing markets during the period of development virtually eliminated any real interest in the plan.
Equally disturbing are continuing suits over intentional underfunding of public retirement systems. The Anchorage Police and Fire Retirement System is suing the plan sponsor ver the effects of large settlements of employment cases on the system after the Municipality refused to make the necessary contributions. The City of New Orleans continues battling several retirement systems over the City's refusal to turn over dedicated property tax monies to the pension funds. Houston had a contentious suit, now settled, over contributions to the Police Retirement System.
Funds and plan participants must be particularly vigilant concerning impending legislative developments designed to dismantle the public defined benefit retirement systems. Particular attention should be paid to those bills that seek to alter funding requirements or direct unreasonable actuarial assumptions. These actions undermine the "contract" for retirement benefits as much as an alteration of the benefit levels themselves. Courts in Florida, Alaska, New York, Oregon, and Wisconsin have invalidated legislation designed to lower pension costs by simply altering the funding formula without regard to the impact on the fund t benefits when promised. By contrast, courts in Illinois, Kentucky, and West Virginia have been less protective of member rights to a particular funding formula.
The trustees of retirement plans are part of the executive branch of government. They do have the power to write the law, only to see that action is taken to enforce it. Trustees must be sufficiently educated on the legal structure of their respective plans and the constitutional rights attaching to those structures. Unlike ERISA plans, each state and local plan is governed by it sown statutory scheme.
The upcoming Legislative Conference sponsored by the National Conference on Public Employee Retirement Systems (NCPERS) offers an excellent opportunity for fiduciaries to become aware of national trends affecting the survival of their plans through seminars and through interaction with fellow trustees from throughout the country.
The threat to public plans isn't isolated a regional issue; it is a national one. Trustees have a fiduciary duty to stay informed on pending developments that may adversely affected the security of the plans they are charged with protecting.