Archive for Sunday, July 3, 2011

Making sense of KPERS, 401(k) plans

July 3, 2011

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Lawrence teachers seek higher wages, in part to boost their pension prospects for retirement.

State officials, meanwhile, search for ways to make financial sense out of the pension plan, Kansas Public Employees Retirement System, that is a key retirement component for thousands of people in the Lawrence area, whether it’s at Kansas University, through local governments or elsewhere.

And taxpayers? Many — both inside or outside the system — are wondering what will come of KPERS in the years ahead, as it struggles with underfunding while the market remains sluggish, unable to keep pace with the system’s pledged future commitments.

As talk swirls of giving state and other public employees more control over their requirement plan investments — perhaps through a swing to defined-contribution plans, in the form of 401(k)s or others — financial planners can find themselves answering questions about how the systems work, or where they might be going.

But comparing the benefits and disadvantages of each option often depends on where the person doing the comparing is sitting.

Short version:

• Employees appreciate KPERS because it provides a defined benefit — essentially a guaranteed rate of return — that is backed by the system’s provider, the state of Kansas.

• While the state reaps the benefits of offering a strong retirement plan, it also is forced to replenish funds when investments can’t keep up with payouts.

“It’s a no-lose proposition for the employee,” says Rusty Thomas, who retired last month after 10 years as owner of Rusty Thomas Financial and Insurance, having advised clients on their retirement plans. “But it costs the state some bucks to fund it, to make sure the money’s there.”

Here’s a look at some of the pluses and minuses of the two types of plans from a financial planner’s point of view, both for employees and for the government.

KPERS

A “defined-benefit” plan, KPERS is financed by the state of Kansas and using contributions from qualifying employees’ wages. The system guarantees the amount of money an employee will receive upon retirement, based upon the average of the employee’s highest wages over a three-year period. An employee can take payments as an ongoing annuity, or as a lump-sum payment.

Pros (for an employee): Employees automatically contribute a percentage of their wages into the KPERS fund, then watch their nest eggs grow at a defined rate until it’s time to retire. No thinking. No shifting investments. Just put money in, and reap a guaranteed rate of return. “It’s a no-brainer,” Thomas says. “You know it’s going to be there when you retire.”

Cons (for an employee): None, really. “If the state goes bankrupt, that’s the downside,” Thomas says. “But what do you think the chances of that are? That’s pretty remote.”

Pros (for the state): “It’s a great incentive to get somebody to come to work for you: ‘By the way, you get KPERS when you retire,’ ” Thomas says.

Cons (for the state): Because the state defines the benefit, it is responsible for seeing that the fund has enough money to pay out the promised benefits. And when the market’s down, or the state has used KPERS funds to finance other needs with the intention of replenishing the funds later, the bills ultimately come due. “If the amount is not there that you promised your beneficiaries, you have a problem,” Thomas says. “You’ve got to come up with the money, and it comes from the taxpayers.”

401(k)

A “defined contribution” plan, a 401(k) allows employees and employers to contribute money toward an employee’s retirement, with the money put into mutual funds — with the employee’s contributions going into funds often chosen by the employee, from a collection of funds offered through the plan. As such, returns are not guaranteed. Employees draw money from their 401(k) upon retirement. By law, annual contributions are limited.

Pros (for an employee): “You get matching dollars (from your employer) up to a certain point, and after that you can put in your own money,” Thomas says. “As long as you continue, you have a nice nest egg at the end of that time, provided you’ve invested wisely.”

Cons (for an employee): The plan’s benefits can turn negative in a hurry if an employee doesn’t put money into the account or the investments end up being somewhat less than wise. Returns are not guaranteed. “It’s the discipline factor,” Thomas says. “When a person doesn’t have enough discipline to contribute consistently, every paycheck, the plan never grows. Then they don’t have any money when they retire.” If investments in the fund decline, the 401(k) account balance drops.

Pros (for the state): Under such a plan, the state would know exactly what it would need to pay, upfront, depending on how much it would be willing to pay to match each employee’s own contributions. And that contribution could be changed every year, with proper notification. And the state contributions would match contributions, or a share of contributions, not require them. “It’s all provided employees put money in there,” Thomas says. “If they don’t, the state doesn’t have to put any money in, and that saves them even more money.”

Cons (for the state): “You still have expenses,” Thomas says. And the state could be subject to additional regulation if it got into 401(k)s or similar defined-contribution plans. It’s also possible that employee morale could suffer with changes to retirement benefits.

Comments

Alceste 3 years, 9 months ago

And, did everyone know that our ever so dedicated Legislators in Topeka participate in KPERS, too? After all, they're state workers also. But, guess what? These legislators set up a very special system for how they get their KPERS benefits. Here it is in a nutshell:

Legislators have given themselves one heck of a sweetheart deal in how their own KPERS benefits are calculated. 372 days in a year! Leave it to a political hack to figure that one out!

For the legislator listing all income - the daily rate, subsistence and allowance - this is how annualization is calculated:

•$88.66 (daily rate) x 31 (days) x 12 (months) = $32,981.52

•$123 (subsistence) x 31 (days) x 12 (months) = $45,756

•$7,083 non-session allowance.

Altogether, that equals $85,820.52, and that's the pay figure that would be used for that legislator retiring now.

The Senate president and House speaker are at the top of the pay scale, and annualized pay for those posts could be as high as $99,859.74, depending on their enrollment choices.

This guy Morris who is the President of the Kansas Senate has even been quoted as saying he DESERVES that kind of KPERS benefit because he is so underpaid!!! Man, this is some AMUSING stuff!!! Aren't legislators supposed to be servants of the people? Isn't the common thinking that people run for office, not to get rich, but to serve? We sure do think stupid real good like in this state: The people who do the day to day work which make Kansas run have their KPERS figured one way.....and the galoots who pose for 3 months a year as "legislators" get to figure their KPERS benefit in a totally different manner.....to the point where they've invented a new calendar: 372 days in a year and they work each and every one of them!! Woo Hoo!!!

average 3 years, 9 months ago

I want to point out one misleading point in the article. A majority of KU employees are not on KPERS. Faculty and unclassified staff (and many jobs have been unclassified the last 20 years) are on a 401k-like-system. A very nice one mind you (8% employer contrib), but not KPERS.

Also, unlike private-sector 401ks, the public-sector equivalent (403b) can require a mandatory employee contribution percentage of income. The KU/Regents plan does so, and it's quite likely a statewide 403b would do the same.

Alceste 3 years, 9 months ago

VERY good point/"catch" average. Isn't it curious/interesting/amusing/sad how the wealthy and privileged always take care of themselves (or are taken care of by their own; and anybody who is on KU faculty or in an unclassifed slot are both....wealthy and privileged....as are the Regents themselves) and find all manner of ways to point to the working schlub and blame her/him for their own financial plight....particularly with respect to retirement matters?

verity 3 years, 9 months ago

"anybody who is on KU faculty or in an unclassifed slot are both....wealthy and privileged"

Exactly what do you consider wealthy? and privileged?

For unclassified staff, it means that every year they have to wait to see if their contract will be renewed and I'm pretty sure most of them are not anywhere near what would be considered "wealthy."

Alceste 3 years, 9 months ago

verity states: "For unclassified staff, it means that every year they have to wait to see if their contract will be renewed ....."

Huh? So what? That's what they signed up for. They knew it when they started walking down that road. If they don't like it, let them get a private sector job where we all know they're going to be paid ever so much more because they are so ever in demand, right? That's what most "unclassified" will tell you....how much more they can make in the private sector. Fine. Let 'em leave.....there are plenty more who will do the same job; probably do it better; and for less money. Or, they could get a swell classified job where you get to raise your hand when Mother Nature calls.....

People in the "Regents Institutions" have had it too good for too long when compared to the regular state worker. "Unclassifed" means you take the money; milk the gig for all it's worth; all the while lining up the next "jump" using work time to "network" by going to one festival (conference, workshop, whatever you want to call 'em.....they're all just one big drunk and party situation) after another, generally on taxpayer dime.....and if not on the dime directly, indirectly because they're given paid "administrative leave"....which ends up costing everyone money. Try doing that in the classified service.

verity 3 years, 9 months ago

Wow! Don't even know where to start. If there are plenty of people who would do the job better and for less money, why do the contracts get renewed?

Quite frankly, of all the people I've known who were unclassified state employees, I've never known one to complain that they would be paid more in the private sector. I must be talking to a whole different group of people than you are. I certainly don't know anything about the constant partying.

Alceste 3 years, 9 months ago

The "contracts" get renewed because the process is FIXED. It is NOT competitive: It's RIGGED.

The people YOU know don't complain because they know how good they've got it and the REALITY that private sector frequently, if not generally does NOT, contrary to Kansas thinking, PAY MORE than cushy contract jobs at the "University" of Kansas.

I really think verity and the persons known by same need to get a grip by working in the real world. After that....then you/they, perhaps, will realize just how good you've/they've had it; show some solidarity to classified staff; and be part of the solution.....not part of the problem......

Randy Leonard 3 years, 9 months ago

"It’s also possible that employee morale could suffer with changes to retirement benefits." It's very difficult for the moral to get much lower than it is now, after years of no raises, threats of pay cuts, furloughs, layoffs, constant demands to do more with less, and constant insults and attacks from the very people they serve, State employees in Kansas are the 49th worse paid state employees in the country. Twenty five years ago KPERS was one of the top public employee retirement plans in the country, it is now near the bottom. Twenty five years ago the state workforce was for the most part highly dedicated and proud to serve the citizens of Kansas. Today, after many years of abuse by the legislature and the public it is a poor reflection of what it used to be. There is still many caring, dedicated people, but the number is dropping. Many of the jobs require high levels of education and training, such as attorneys, engineers, scientists, doctors, and nurses. They chose government service because of their belief in giving something back to the community and not just becoming rich. They made a decision to trade immediate salary for future benefits like KPERS, job satisfaction, and security. Twenty five years ago most of those highly educated people salaries were about 5-10% behind their professional counterparts in the private sector, but KPERS and other benefits, as well as the satisfaction of serving the public offset that. Today that salary difference, even given the current state of the economy, is about 30-40% (I can site cases where that salary difference is more than 100%), KPERS is almost certain to be taken away, and they are constantly under attack by those they chose to serve.

verity 3 years, 9 months ago

"It's very difficult for the moral[e] to get much lower than it is now . . ."

That was exactly my thought when I read this article. Beating the horse may get more speed for awhile, but eventually they wear out.

Alceste 3 years, 9 months ago

bear1956:

I agree 150% with what you've written. I assume you're emailing the selected who are going to validate the rape and pillage of KPERS which is surely set to happen....but needs a "legitimizing process" first. Here are the contact email addresses for those on the "panel"

William Buchanan, wbuchana@sedgwick.gov

Jeff King, jeffkingks@hotmail.com Jeff.King@senate.ks.gov

Edward Condon, econdon@sterneckcapital.com chris@palmersquarecap.com paul@sbhlaw.com Richard Stumpf advisors@finben.com Brian Winterm, brian@cattleusa.com

Our very own Rep. Paul Davis....right here in River City, shall be naming a couple to the panel as I recall and I don't recall seeing any names, yet. However, who can trust Paul Davis given he probably signed up for that sweet 372 day year payoff; and given he's got ....what....ten (10) years in already? And he's the House "minority leader", right? I expect he gets even more money in those 372 day years. It's good to be King, eh? shrug

Alceste 3 years, 9 months ago

You mock the seriousness of the retirement system for those who do the work for the people of the state of Kansas; those who shovel the sh**, "....Tote that barge, lift that bale.....".

Then again, why not? ALL ANIMALS ARE EQUAL, BUT SOME ANIMALS ARE MORE EQUAL THAN OTHERS (especially the animals that work for KU....)......

pittstatebb 3 years, 9 months ago

Mark - your article covers the pros and cons for a traditional 401k. This is not the type of 401k being proposed by the state to replace KPERS. That plan is a hybrid 401k, similar to the regents plan. The subtle difference is that employee and employer contributions are defined by law. The employee MUST contribute a set amount of salary and the employers match is set by law (not able to be changed year to year without the same legal fight we will go through if and when KPERS is changed).

Even for the traditional 401k you left off one of the biggest cons for the employer (state). How to fund the remaining KPERS retirees and what to do with those currently in the system. And then what to do about the lawsuit that will emerge if those currently in the system are forced to move to the 401k plan.

sciencegeek 3 years, 9 months ago

KPERS: "...or the state has used KPERS funds to finance other needs with the intention of replenishing the funds later" 401k : "...the state would know exactly what it would need to pay, upfront, depending on how much it would be willing to pay to match each employee’s own contributions"

Both options depend on the state, through the legislature, living up to its promises, which it hasn't done for years. Had the state contributed their share into KPERS, there wouldn't be the huge problem that exists now. So you really think that anything will change in the future if the 401K option is "depending on how much it {the state] would be willing to pay"?

If you believe that, I've got some oceanfront property in Dodge City I'd like to sell you.

giveitback 3 years, 9 months ago

As one of those who is about to retire in a couple of years on KPERS, I can't help but say, SO WHAT? No body was complaining when I HAD to pay into this fund. No body wanted goverment jobs when the economy was booming. No body took notice that the very people they elected was causing this disaster. And now when the smoke clears the tax payers want to bail. I pay taxes and I paid into KPERS. Interesting to note that the very same thing is happing overseas right now. People want accountability from the Law makers. Hope it doen't get that bad here!!

Katherine Greene 3 years, 9 months ago

With a defined benefit plan, the state can get away with offering lower wages, because the employee knows what to expect in retirement.

With a 401(k) defined contribution plan, employees will want higher wages since the returns on their retirement funds are much less certain.

notanota 3 years, 9 months ago

That's exactly how that works, only they'll use it as a vicious cycle to underpay workers and then complain that government employees are all low quality.

verity 3 years, 9 months ago

Last I heard, AIG was handling faculty and unclassified staff retirement funds. From the people I talked to, those funds took a much bigger hit than my retirement savings which are invested through an agency of my choosing. Does anybody know if people have a choice as to what company they can use?

It seems to me that moving from KPERs to a 401(k) benefits Wall Street, not the employees. Another case of privatization for the profit of corporations.

Alceste 3 years, 9 months ago

Oh, BOO HOO for last was heard by poster "verity". The "funds took hits", yeah...but why were the Regents' using AIG and not "keeping them honest"?

And, NO...the participant does NOT get a choice of which company is chosen to "manage" the monies. Participants have an OBLIGATION to monitor what's going on; monitor the track record of the company being paid to do the stuff.....and then get involved.

Why don't people who get access to such a superior benefit complain in the first place instead of waiting to the end? The simple answer is they live too large; make too much money; and have a "...let them eat cake...." attitude towards all others.

Of all the people LOSING....it's KU participants that I take personal glee from with respect to them losing their shirts! hahahahahaahahhahaahhahahaahhaaha......they make too much GD money in the first place......

Perhaps staring at a retirement investment gone bust will help them understand why they needed to support the common folk. shrug

average 3 years, 9 months ago

Not AIG. A choice between ING and TIAA-CREF. With some semi-costly funds, but a whole lot of Vanguard index and target-date funds. Not quite the absolute best 401k I've ever seen, but near it (the S&P 500 index is at 0.20%... you could obviously find that at 0.05% yourself, but a lot of 401ks would have a kickback-laden fund with 0.90% or so ER for a bloody S&P 500 index).

notanota 3 years, 9 months ago

I take issue with pinning the investment choices all on the employee by calling then "wise investments." There's some wisdom, but there's also a lot of luck. The stock market could crash, the fund manager could be an idiot, the bubble could burst on another previously safe investment area. If it were merely a matter of wisdom, we'd have a system that automated the process, and there would never never be bubbles or stock market crashes. For that matter, if the system were immune from ups and downs, nobody would be complaining that KPERS is currently suffering a shortfall, because all those investments would be just fine, too.

If big investment firms can go south, why do we expect janitors and kindergarten teachers to know the ins and outs of retirement investing and call that a good plan?

Alceste 3 years, 9 months ago

....and....notanota....let us not leave out how KPERS boss man Glenn Deck and his appointed cronies gross upwards of $150k per annum and have their OWN special retirement plan.

Why hasn't DECK taken on the Legislator as the Executive responsible for KPERS? Why has he only tepidly made suggestions? Answer: He's getting PAID large sums of money; has a different retirement plan for those large sums.....and....well....is just sitting there and taking in the money as long and as possible as he can.....

JayhawkFan1985 3 years, 9 months ago

As an 18 year state employee, the two biggest CONs for me are 1) that state law COMPELS me to contribute 4% of my gross income but the Legislature OPTS to not make its annual contributions, and 2) even though 1/2 of the money invested annually comes directly out of employee not taxpayer pockets, the employees only get two votes on the KPERS Board of Directors but Politicians and Political Hacks make up the majority of the Board setting policy on how investments are made, recommending how benefits should be determined, etc. Basically, it is TAXATION WITHOUT REPRESENTATION. Taxpayers should be represented on the KPERS board but only in proportion to the share of money taxpayers contribute.

KPERS in principle is a good thing. Unfortunately, it is underfunded by people serving their own interests...getting reelected. One thing to keep in mind is that state employees and even more so, teachers, are underpaid relative to their education and value to the general public. KPERS is only PART of a total compensation package. Let's not forget that current KPERS retirees have had their benefit increased only once in the last 15-20 years and that inflation erodes the value of that benefit over time.

Having said all this, I am in favor of migrating thoughtfully toward a defined contribution plan. I would likely choose to participate in it given the chance provided their are guarantees from the legislature about matching contributions and choices on how the investments are made.

The big problem is the legislature and governor only really care about this is because they want to cut taxes and KPERS is a huge unfunded liabilty for them because of choices they made over the past several decades. This won't end well...

verity 3 years, 9 months ago

But, but, but . . . didn't you know that all state workers do absolutely nothing and are only sucking at the taxpayers tit? Of course, they don't pay taxes either.

(I've been told that I am supposed to label my remarks as sarcasm, so if my sarcasm wasn't heavy-handed enough, I hereby do so.)

notanota 3 years, 9 months ago

They don't REALLY pay taxes, because they're just paying back the same source that gave them the money. Grocery store employees don't really pay for food, either, and auto workers all drive for free.

Alceste 3 years, 9 months ago

http://www.dailywav.com/0201/paytaxes.wav

"Everybody has to pay taxes. Even businessmen that rob and steal and cheat from people everyday, even they have to pay taxes."

notanota 3 years, 9 months ago

Moving current workers to a 401k style plan would essentially be punishing workers for having made wise financial choices ten to twenty years ago: lower pay for guaranteed retirement benefits. Hey, there's your lower pay, now you get lower benefits, too. Surprise! Meanwhile, transitioning new employees to the 401k system while keeping old ones on KPERS would make KPERS even less funded and force another funding crisis - one that would likely not end well for retirees.

No, I don't see any way to fairly switch systems on this, especially not right now. This is something to discuss when the state is looking better revenue-wise and can set aside the funding to pay for a transition. If something must be done now, shore up the current system. We don't have the money for a switch, not that I'd advocate for a switch if we did.

Alceste 3 years, 9 months ago

Compelling current participants to go "backwards" is absurd.

It's not so hard to see NEW HIRES required to participate in the wonderful new system that the "panel" will be rubber stamping.....given it's already been given same to rubber stamp.....

So, there will be 2 OR 3 tiers of KPERS participants....and that excludes the luxury crowd who "work" for "Regents Institutions"......the NEW HIRES should be compelled to deal with the 4th tier plan.....leave the rest be....even the arrogant who get "Regents" benefits.....and it makes me SICK to type just that.....

jafs 3 years, 9 months ago

Guarantees from the legislature are unlikely to be followed through on, given the disastrous lack of funding for KPERS.

3 years, 9 months ago

"The system guarantees the amount of money an employee will receive upon retirement, based upon the average of the employee’s highest wages over a three-year period. An employee can take payments as an ongoing annuity, or as a lump-sum payment.."

Not exactly true.

The average salary is anywhere from 3-5 years of the employees wages depending on when they were hired into a KPERS covered position. The average salary x the statutory multiplier x the years of service is how a KPERS retirement benefit is calculated.

A retiree can't take the entire benefit as a lump sum payment upon retirement, the maximum lump payment is 50% and the rest is a reduced monthly benefit.

As a current KPERS member, I have been required to contribute to the program without any say in the investment of these funds. In return I was promised a benefit when I reached the retirement qualifications. I think the State is going to have a huge lawsuit on it's hands for breach of contract should it force any of the current members to accept a change in the plan.

Alceste 3 years, 9 months ago

Lawsuit in support of workers????????? HAHAHAHHAHAHAHAHAHAHAHAHAAHA.....good one! As if it could even have a CHANCE to "win".

And....as for the 3-5 years calculator....hope you don't get the pink slip....because....and trust me on this....it gets calculated a LOT differently........

Alceste 3 years, 9 months ago

....and how many posters (and lurkers) have actually sent emails to the people on Brownback's panel who most surely will recommend what Brownback tells them to....UNLESS WE FLOOD THEM WITH IDEAS?????????

irvan moore 3 years, 9 months ago

i sure wish somebody had told me about kpers instead of telling me about weed when i was young.

Alceste 3 years, 9 months ago

!!!! Your (our>>>>?????) "investment" in the "alternative commodity" was a dang sight more "progressive"....eh?! hahahahahahahahhahahahaahahahahahhahahaa

Afkansistan.......oh yeah......I'm looking for it on the globe as I type this.....

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