Pension Plan, Defined Contribution Plans, and Public Workers Compensation

Guest post by J. Grace Liao.

A pension is a form of deferred compensation earned overtime through employee service. Traditionally the pension arrangements were classified as defined contribution plans and defined benefit plans.

A defined contribution plan is a retirement plan whereby the firm contributes a certain payout each period to the employees’ retirement account based on any number of factors including the employee’s age, compensation, profitability, years of service, or even a percentage of the employees’s contribution. In this plan, the employee assumes all of the investment risk.

In a defined benefit plan, the firm promises to make periodic payments to the employee after retirement based on the employee’s years of service and his/her compensation near retirement. Since the employee’s benefit is defined, in this plan the employer assumes the investment risk.

Since 1990s, retirement plans combining features of both defined benefit and defined contribution plans have become increasing popular in the United States. This kind of plans are referred to as hybrid plans.

According to Wall Street Journal report on July 10, State governments are increasingly taking a page from the 401(k) plans that dominate the private sector. That is, the public sectors are shifting from the traditional defined benefit plans to the hybrid plans to cut the cost and reduce the risk the government is bearing. This could make government jobs less attractive because the once guaranteed-retirement payments for government workers now might not be a bedrock benefit anymore.

In Georgia, Act 757 of 2008 (Senate Bill 328) created a hybrid retirement plan for Georgia state employees. The “Georgia State Employees’ Pension and Savings Plan” (GSEPS) provides a defined benefit plan (DB) and 401(k) plan for new hires on and after January 1, 2009. Group term life insurance does not be provided, and the employee contributions in GSEPS correspondingly was reduced from 1.5% to 1.25% for the DB. The Cobb County approved the New Hybrid Defined Benefit/Defined Contribution Plan and, effective January 1, 2010, all new employees are automatically enrolled in this new plan.

By J. Grace Liao:

Finance professional currently working in non-emergency medical transportation industry