PERS works and 401(k) Plans Do Not

Unfortunately, American workers have collectively lost more than a trillion dollars in 2008 from their 401(k)s and it is getting worse. Tragic as this is, it need not have happened except for business greed and short-sightedness. The current market collapse has made the 401(k) plan system a failure and we need to change the way pensions are structured and we need to do it now.

The plans started in 1978 when the IRS code was changed to allow all employees to put something extra away for retirement. They were never meant to entirely fund retirement or become a pension plan in of themselves and yet millions of workers now have them as their sole pension resource. 

So, how did we get here?

Well, years ago big companies and then some states decided they did not want to fund their defined benefit plans as originally promised and focused on 401(k)s to reduce costs. In the short term, costs were lower but in the long term they were much more.

Because of their size and long term investment goals, pension plans like PERS (Public Employees Retirement System) cost about half as much over the long term as a defined contribution plan such as a 401(k). As for PERS, the employer’s (taxpayer’s) portion is just 25 percent overall. The rest of the plan’s assets are from employee contributions and most importantly earnings on investments within the plan.

PERS looks ahead many decades and operates accordingly and it is now one of the most stable pension plans in the United States. Because of its efficiency relative to a 401(k) plan, Nevada taxpayers currently save about $150 million a year and employees the same amount.

 Management is a significant and fatal weakness of a 401(k) plan because owning a 401(k) is one thing but managing it is another. A well managed fund is always desirable to one that is not.  Seriously, the average American does not have the ability, desire or time to actively and successfully manage their retirement plan. Because “defined benefit” plans are  efficient and business-like, the Federal Government should mandate all retirement plans be like Nevada’s Public Employees Retirement System (PERS).

FYI:

Did you know that Nevada government workers do not contribute to Social Security* while employed and for most, the only retirement they receive is from PERS? And if they do have enough work quarters with Social Security from jobs held previously, the Federal Government will reduce their benefit by two thirds because they were once a government employee?  Imagine that, a tax specifically targeting government employees because they were government employees!  Its called the Windfall Elimination Provision.

The Social Security Act originally excluded all government workers from any pension benefit. The State of Nevada adopted PERS in the late 1940’s.

* Since the 1980s the Federal Government forced newly hired government employees to contribute to Medicare to prop up that failing health plan.