How about a quick case study on a charming little seaside town that recently switched from a defined benefit pension plan to a defined contribution plan?
Located only 90 minutes from New York City, Old Saybrook, Connecticut is one of the oldest towns in New England, settled in 1635 where the Connecticut River meets the Long Island Sound.
With a population barely north of 10,000, the town was looking to lower its long-term liability when, in 2017, it approved a change from a DB plan to a 401a plan frequently used by government employers and non-profits. Local officials were worried about unpredictable costs from obligations to cover pensions for the rest of its retired employees’ lives.
Two years on and it sounds like the objective is being met, according to an Aug. 27 article on Zip06.com in Madison, Conn.
The updated enrollment numbers for Old Saybrook show the transition is proceeding as hoped, with incremental changes heading in the right direction.
The article says the town’s 401a plan requires employees to contribute at least 5% of their annual salary up to a maximum of 8%; that contribution is matched by the town.
When the employee reaches the age of retirement, 62, he or she is then able to start drawing on the account. The town, having paid its matching contribution, has no further obligation.
The following excerpt from the Zip06 article reveals the progress:
In April 2017, at a special meeting of the town’s Pension and Benefits Board (PBB) to discuss the transition, the DB plan had 95 active town employee participants and 53 retirees. There were also 28 active school district employee participants and 20 retired. Certified teachers and administrators participate in the Teachers Retirement System administered by the state’s Teachers Retirement Board.
As of July 1, 2017, the DB plan was closed to most town employees, who were instead placed in the DC plan. In mid-July 2018, the DB plan had 82 active participants and 62 retired. On the school district side were 26 active participants and 23 retirees. In the DC plan, there were 13 town employees and zero school employees enrolled.
By the end of June of this year, the number of active town DB participants had dropped to 76, and there were 60 retirees on the plan. The school employee numbers were 19 active participants and 22 retirees. The number in the DC plan had increased to 20 town and 2 school employees.
“This is the reason we put the plan into place: to lower the town’s long-term liability,” said First Selectman Carl P. Fortuna, Jr. “And it would appear to be having that effect.”
The article notes that volunteer fire fighters and police officers were not included in the transition and remain on the DB plan, as is common for public safety professionals to encourage retention.
Change didn’t happen overnight
Obviously the change from a DB plan to a DC plan doesn’t happen overnight, particularly when it comes to public employees.
Fortuna worked with ICMA-RC, a provider of supplemental retirement savings plans and other retirement-related products and services exclusively to the public sector, to come up with a plan to submit to the PBB for approval.
The article reports it took PBB three years to approve the change, formally adopted in April 2017. Fortuna said the PBB wanted to do its due diligence before endorsing it; an attorney had to be hired to draft a plan document; he had to negotiate with unions to incorporate it into their collective bargaining agreements; and had to make sure plan administration was set up through ICMA-RC.
A lot of work to be sure, but it appears that long-term liability has indeed been mitigated.
“If a town pension plan is not well funded, then the taxpayers are going to have to come up with more money to meet that payroll of retirees,” Fortuna said.
About that 401a…
While 401a plans are extremely similar to 403b plans intended for non-profits (with the only difference being who is permitted to sign up), they do have some significant differences from a 401k.
A 401a plan is typically provided only by government employers, educational institutions and non-profit organizations, and can be either a supplemental or core retirement plan for employees who meet eligibility rules. However, a 401a plan does not permit employees to make 401k contributions.
The employer must make financial contributions to a 401a plan (contributions can be pre- or post-tax), but an employee contribution isn’t always mandatory. The employer sets contribution limits for 401a plans, and, as of 2019 the maximum allowable contribution to a 401a plan is 100% of the employee’s income or $56,000, whichever is smaller. There is no provision for catch-up contributions for those age 50 or older.
401a plans are usually custom-designed and can be offered to key employees as an added incentive to stay with the organization.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
