Proposed Legislation Would Change Public
Pension Systems
On December 6, 2004 and January 6, 2005, Assemblyman Keith Richman (R-Northridge) introduced Assembly Constitutional Amendments 5 and X1 1 to the California State Legislature. If passed, they would eliminate the defined benefit plans of California public agencies (including LACERS) and require that they be replaced with defined contribution plans. On January 5, 2005, the Howard Jarvis Taxpayers Association filed a similar ballot initiative with the State Attorney General.
New public employees hired on or after July 1, 2007 would be required to enroll in a defined contribution plan established by their public pension or retirement system. It would also establish the California Public Employee Defined Contribution Plan.
In addition, public employees hired prior to July 1, 2007 would have the option of converting their defined benefit plan account into a defined contribution plan account within a specified timeframe.
A defined benefit plan provides retirement benefits based on age, service credit and final compensation. Retirement benefits are guaranteed and stock market volatility has no material effect on these benefits. LACERS is currently a defined benefit plan.
A defined contribution plan provides retirement benefits based on the combined employer and employee contributions and net investment earnings and interest (minus administrative fees) of an employee's self-directed retirement account, similar to a 401(k) plan. Market volatility could significantly affect the value of benefits upon retirement and the employee bears all the risk. |
The LACERS retirement benefit provided to our 27,092 active and 14,137 retired Members is a defined benefit, which means that the pension benefit provided is predetermined by a formula based on the highest year’s salary, age and years of service credit. The average monthly benefit amount for LACERS retirees and beneficiaries is $2,354, which is approximately $28,248 annually.
Under a defined contribution plan, workers would be responsible for making investment choices related to their retirement accounts and the amount of money available upon retirement would be dependent upon investment performance.
It is estimated that changing to a defined contribution plan could cost LACERS as much as $400 million over the first 8 years. To learn more about potential costs, view the links located under Pension Legislation Reports.
LACERS is following the progress of these legislative proposals and reporting to the Board and City Council (see links under Pension Legislation Reports). Look for updates at lacers.org and in future newsletters.
DIFFERENCES BETWEEN
LACERS DEFINED BENEFIT PLAN AND THE PROPOSED
DEFINED CONTRIBUTION PLANS
ITEM |
LACERS DEFINED BENEFIT PLAN |
PROPOSED DEFINED CONTRIBUTION PLANS |
| Existence of Plans |
Negotiated between the City and labor |
Would be mandated for all California public employees hired on or after July 1, 2007 |
| Employer Contributions |
Varies, based on costs of plan |
Capped at different rates depending on amount of employee contributions. Low rates may trigger mandatory Social Security coverage. |
| Basis of Monthly Retirement Benefit |
Based on a formula which includes age, service credit, and final compensation |
Based on combined employee and employer contributions, net investment earnings, and interest (minus administrative fees) |
| Investment Decisions and Risk |
Investments made by LACERS’ Board of Administration, staff, and investment managers who have investment expertise. The System bears investment risk. |
Investment decisions made by individual employees, who also bear the investment risk |
| Administrative and Investment Costs |
Currently, 0.47% for LACERS |
Usually 1.00 to 2.00% of assets |
| Health Benefits |
A subsidy for a LACERS health plan is provided to qualified individuals |
Not included |
| Disability Benefits |
Included in LACERS’ plan for employees with more than 5 years of service or duty-related death |
Not explicitly included in proposed defined contribution plans |
| Death Benefits for Active Employees |
Varies, depending on length of service |
None |
| Benefit Portability (from plan to plan) |
Somewhat portable due to reciprocal agreements among some California public pension plans |
Very portable |
| Duration of Retirement Benefits |
Lifetime monthly allowance for employee and potential survivor |
Until employee funds are exhausted. Longevity risk-employees can outlive their retirement accounts. |
| Retirement Inflation Protection |
Cost of living adjustments are included |
None |
To learn more about this legislation, visit the California State Legislature website at www.legislature.ca.gov
To find out more about your benefits, click on these links:
Calculating Your Monthly Retirement Allowance
Funding Your Retirement Benefits
|
