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.
• 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.
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.”
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.