Topeka Republican legislators and GOP Gov. Sam Brownback’s administration on Monday launched a campaign to create a 401(k)-style pension plan for new Kansas teachers and government workers with a pitch from former presidential candidate Bill Bradley and a Nobel laureate. Bradley, a retired U.S. senator from New Jersey and former New York Knicks standout, and Robert Merton, a professor of finance at the Massachusetts Institute of Technology, were star witnesses for a Kansas House Pensions and Benefits Committee hearing.
Both advise a Texas company that manages 401(k)-style plans in the private sector, where such plans are the norm, and they said innovations in managing them can reduce uncertainty for employees about their retirement benefits. If legislators opt for a 401(k)-style plan, that firm and others could seek a contract to manage it for the Kansas Public Employees Retirement System.
The committee has been working quietly for weeks on legislation aimed at improving the long-term financial health of KPERS, which has a projected $9.3 billion gap between its anticipated revenues and the benefits promised to public employees through 2033. Legislators enacted a major overhaul of the pension system last year, but it did not include a new 401(k)-style plan, favored by Brownback and other GOP conservatives.
The House committee’s proposals would start a 401(k)-style plan for teachers and government workers hired after 2014 and authorize the state to issue $1.5 billion in bonds to bolster the pension system, an idea the panel reviewed Monday evening after its hearing with Bradley and Merton. KPERS now operates traditional plans that guarantee retirement benefits up front, based on an employee’s years of service and career-end salary.
Bradley and Merton said such traditional plans are no longer sustainable, but they acknowledged that 401(k)-style plans have defects as well. Merton said such plans tend to focus on building up an overall nest egg and investment returns, rather than on the amount of income a worker wants in retirement. He said it’s possible to design a 401(k)-style plan that gives workers simple-to-use guidance on how much to save to have an adequate income in retirement.
“This is an innovation that is desperately needed in the pension area,” Bradley told the committee. “Your choice is: Do we really try to innovate here and in this case make Kansas really the cutting edge?”
The committee’s proposals still face strong skepticism from retiree and public employee groups and their Democratic allies.
A 401(k)-style plan would base retirement benefits on the amount of money workers and their employers contributed to the plan and the earnings from stocks, bonds and other investments over time.
Public employee groups worry that volatility in financial markets — or a crash — could slash benefits for employees as they near retirement age.
They’ve also noted that starting a new plan doesn’t address how the state will close the long-term funding gap in its existing pension system. Supporters of such plans say creating one will at least keep the gap from growing.