After the Republican-controlled Florida legislature voted in June 2000 to introduce a defined contribution plan for the state's 660,000 workers, surveys suggested that about half of them would shift their retirement savings from the traditional defined benefit plan to the new, 401(k)-style offering. If they did, Florida would instantly boast a $13 billion defined contribution plan -- the 11th biggest in the nation.
As the old Hollywood saw has it, they stayed away in droves. Two years later assets in the Sunshine State's defined contribution plan total just $700 million, and only 6 percent of state workers are participating. Why such a disappointing response? By the time the legislature voted to offer state employees a defined contribution plan, the worst bear market in decades was already under way. A year later the meltdown of Enron Corp.'s retirement plan soured many workers on 401(k)s and reminded them of the real value of the guaranteed retirement benefits offered by old-fashioned pension plans.
Still, Florida legislators and state officials insist that they have no regrets. The goals of the new defined contribution offering -- reducing the state's liability for future retiree benefits while providing portable retirement savings plans to workers on the move -- have been met, if only to a limited extent.
"We believe we offer a defined contribution plan with real value," says Kevin SigRist, the senior investment officer for defined contribution plans with Florida's State Board of Administration. "We think growth will continue at a healthy pace."
One problem was that Florida's legislators insisted on an "unbundled" approach to services for the defined contribution plan. This meant that separate firms offered the three basic services: administration and recordkeeping, investment management and education. Many observers say that having multiple service providers is confusing.
It has been an expensive undertaking. Florida spent $30 million setting up the plan in the two years between the law's enactment and the plan's launch.
Though no state has followed Florida's lead and built a defined contribution retirement plan from scratch, at least two of the ten states that already had some form of 401(k)-style plan, Colorado and Montana, have expanded their defined contribution options. Money managers, including TIAA-CREF and American International Group's Valic Retirement Services, have been aggressively lobbying state politicians in pursuit of assets from these plans.
"Next to our core business -- serving educators in higher educational institutions -- state employee defined contribution plans are a logical follow-on," says Timothy Lane, head of institutional sales at TIAA-CREF.
Colorado's $5.1 billion defined contribution plan had only been available to elected officials and was the responsibility of the state's Department of Personnel & Administration. In May, however, Republican Governor Bill Owens signed into law a bill that authorized the expansion of the plan to new state workers. "I strongly believe that offering state employees the choice between a defined benefit and a defined contribution plan for their retirement is a matter of individual rights and responsibilities," Owens tells Institutional Investor.
Under the new law Colorado's existing defined contribution plan, as well as an entirely new defined contribution plan that has yet to be launched, will be open to any worker hired by the state after January 1, 2006. The new state defined contribution plan offers immediate 100 percent vesting, while under the terms of the older plan, participants are not vested in the state's contributions until their fifth year in the plan. New workers will be allowed -- but not required -- to join the defined contribution plan; if they prefer to choose the existing defined benefit option, they may do so.
The new law followed a hard-won compromise between the Republican-controlled state legislature and the Republican governor. The battle began in 2002, when the pension fund, like all plans, found itself hit by falling equity prices, which reduced asset values, and declining interest rates, which increased the present value of future liabilities. To bolster the fund, the legislature voted in the spring of 2003 to increase the state's contribution level from 9.9 percent of state employees' salaries to 10.15 percent.
The governor vetoed the bill, demanding that any funding hike be accompanied by the launch of a defined contribution plan for newly hired workers. "The new law was a real trade-off between those who want to protect the Colorado pension fund and those who believe in defined contribution plans as an option," explains Cathy Walsh, a lobbyist who represents the interests of AIG Valic, a large insurance company whose retirement specialists, she says, "will almost certainly respond to Colorado's request for proposals in November." TIAA-CREF also has lobbied in Denver.
Montana's defined contribution plan, launched in July 2002, has attracted paltry participation and a mere $20 million in assets. So far 3 percent of eligible employees have signed on -- about 1,000 of the 29,000 members of the Montana Public Employee Retirement Administration. Montana's defined contribution program cost $1.5 million in its first year and has cost $400,000 a year for administration since -- a hefty price tag for a program that serves so few workers.
Defined contribution plans for state employees remain a hard sell. Says Regina Hilbert, president of the National Association of Government Defined Contribution Administrators. "The DC option was only popular when the market was rising."
Counters Colorado Governor Owens: "Over the longer term -- say, 15 years -- markets have done well. I simply did not like the lack of choice in offering employees nothing but a defined benefit plan."