HB12 1142- Defined Contribution Access

HB 12-1142 is sponsored by Representative Brian DelGrosso (R-Loveland). The bill would expand to all members the option to participate in the PERA defined contribution (DC) plan in lieu of the PERA defined benefit plan. The option is currently available to certain State Division employees.

CCRS opposes this bill as it undermines the principles of providing a secure retirement for all employees.

You can read the bill in its entirety here.

Learn how the bill will cost the State of Colorado $580 million in the non-partisan fiscal note here.

• The bill is not needed. SB 10-01 addressed the long-term sustainability of the PERA Trusts by changing the benefit and contribution structure such that all of the liabilities of PERA will be funded in a reasonable 30-year time period as currently recommend by the Governmental Accounting Standards Board.
• The expansion of the Defined Contribution (DC) option would jeopardize the sustainability of the PERA Trust funds. Because existing and new members could opt out of the PERA Defined Benefit (DB) Plan and select the DC option, the existing liabilities of the PERA DB Plan would have to be paid by a smaller number of participants, which in turn would result in the escalation of the employer contribution rate.
• It is unwise public policy to allow public employees to invest their entire retirement savings in a DC plan especially when Colorado’s public employees and their employers do not participate in Social Security.
• A DC plan only retirement, without the Social Security safety net, could potentially increase future public assistance costs as employees retire with inadequate account balances or become unable to work.
• DC plans were designed to supplement typical pension plans in addition to Social Security. DC plans were not intended to be the only investment vehicle available to save for retirement.
• The Employee Benefits Research Institute (EBRI) has found that the median value of 401(k) plans for American workers aged 55-64 is $56,212, with 27 percent saying they have less than $1,000 in savings. More than half of Americans surveyed by EBRI report the total value of household savings and investments is less than $25,000 (excluding their home).
• Using the baseline assumption of 15 percent DC participation, the unfunded liability in the School Division of PERA will almost double from $5.8 billion to $9.2 billion and the Health Care Trust Fund will become insolvent in 2027.
• There is no demand from members for this bill. PERA is not aware of members requesting the expansion of the DC option.
• All PERA members and retirees are encouraged to participate in the voluntary PERA 401(k) and 457 plans offered to supplement their PERA DB retirement. PERA runs one of the largest public sector 401(k) plans in the country and offers state-of-the-art investment options for a very low cost.
• The retirement system exists to fund a reasonable retirement benefit for Colorado’s public employees. Research has shown that a DB plan is an efficient provider of a retirement dollar because assets are pooled and invested by professionals at a low cost.
• During the SB 10-01 debate in the General Assembly, several attempts were made to expand the DC option and these efforts were resoundingly defeated along bi-partisan lines.
• A DC plan costs more. Not only are investment and administration fees more (on average above 1.4 percent of assets compared to PERA’s 0.4 percent), but the there is also the cost of educating participants so that they wisely invest their assets in a DC plan.
• The DC option expansion will hurt Colorado. Currently, about 90 percent of PERA benefits are paid to Colorado residents. These benefit payments result in $230 million tax revenue to the State and local governments and generate income for local businesses when retirees spend in their local communities.
• PERA’s professional investment managers have produced annual average investment returns over past 25 years of 9.0 percent. Statistics have shown over this same period that individually managed 401(k) accounts average far less because of higher fees and poor investment decisions made by individuals. The bill does not reduce the contribution rates for employers and members and, therefore, provides no immediate fiscal relief and only increases long-term fiscal burdens.
• The Defined Benefit plan maximizes returns for Colorado taxpayers, governmental entities, and members by spreading longevity risk (the risk that you will outlive your retirement savings) over nearly a half million members and the pooling of $40 billion in retirement savings of public employees over many decades reducing investment risk (the need to move into guaranteed income products when you near retirement).
• DC plans unnecessarily place both longevity and investment risk on the individual.
• The basis of the capitalist system is the power of the specialization of labor. Individuals have different skills that they are inherently better at than other people. The pension system is a shining example of this by specialization of labor through superior investment management so a typical individual doesn’t have to be an investment expert. After plowing roads during a blizzard or teaching 6th graders, do these individuals really have the time, the discipline and the drive to invest funds for their retirement over many decades on a daily basis?

Many of Colorado’s public employees are not prepared to invest for their retirements.

• DC option participants will not have access to group rates for retiree health care which could expose them and their families to one of the fastest growing costs in the economy.
• Employers wishing to provide survivor and disability coverage to their employees will have to pay an additional cost to independently contract for these features that are included in the cost of the PERA DB Plan.
• All Americans should have access to a professionally managed DB plan – that these plans have disappeared from the private sector will only threaten the retirement security of millions, and will also strain public programs to keep elderly Americans out of poverty.
• Research from the National Institute on Retirement Security (NIRS) shows that poverty rates among older households lacking pension income are about six times greater than those with such income.
• Seventy-five percent of Americans believe the disappearance of pensions has made it harder to achieve the “American dream” (NIRS).
• Over 80 percent say government should make it easier for employers to offer pensions and believe that policy makers should ensure that more Americans can have a secure retirement (NIRS).