Will Switching to a 401(k) Plan Cost You More?

Pennsylvania needs pension reform that provides state workers with a sustainable retirement system that’s fair to new workers, existing employees and taxpayers. What are our options? The current system is a defined benefit pension plan that guarantees a government income for life. Switching to a defined contribution plan would require the government to regularly deposit a guaranteed percentage of a worker’s salary into a personal retirement account, like a 401(k).

This is the sixth in a series of blog posts debunking the myths surrounding Pennsylvania’s pension crisis.

Myth: State pension plans cost less to administer than 401(k) plans managed by Wall Street firms.

Fact: A Deloitte study found that 401(k) plans cost the same or less than traditional plans to administer. SERS and PSERS spent more than $760 million last year on administrative costs and investment fees. As a percentage of assets, these costs exceed the average total fees for large 401(k) plans as calculated by Deloitte.

The fact is, Pennsylvania’s troubled state pension funds already rely on expensive Wall Street investment firms to close looming deficits. For example, in 2006, the State Employees’ Retirement System (SERS) gave $6 billion to six private investment firms to buy risky hedge funds in hopes of earning lavish returns to cover its pension shortfall.

Myth: Converting to a 401(k) pension system would create significant “transition costs.”

Fact: Opponents claim government-mandated rules that require Pennsylvania to pay off unfunded liabilities sooner will cost the state, but the national Governmental Accounting Standards Board (GASB) regulates only the accounting methods—it doesn’t mandate when or how debts must be paid. Taxpayers are already on the hook for the $40 billion unfunded liability for state and public school workers.  Switching to a new plan does not add to this liability.

Pennsylvania state government and school districts currently put less money into the pension plans than the “Annual Required Contribution” mandated under accounting rules.  Regardless of reforms lawmakers may enact for new workers, the current funding system is unsound.