State and local government retirement plans are usually defined-benefit, final-salary plans. A number of states offer defined-contribution plans either as a complement to the traditional plan or as part of a reform intended to phase out the traditional plan.
FEDERAL, STATE, AND LOCAL RETIREMENT PLANS: Policy
Type of plan and conversions
Government workers should continue to have access to defined-benefit (DB) plans.
States should ensure that cash-balance and other hybrid plans do not discriminate against older workers and maintain important benefit protections of DB plans.
States and localities should require that in a plan conversion, employers provide each affected individual with a personalized benefits statement that compares the projected benefits under the old and new plans. Such information must be shown in a comparable form (e.g., life annuity compared with life annuity) and provided well in advance of the effective date of any plan change.
Changes to retirement plans
Modifications to retirement plans or plan formulas should have as a key objective to hold harmless current beneficiaries and employees, as well as to ensure the retirement security needs of future retirees. Any modifications should be fiscally responsible, ensure the long-term viability of existing plans, and protect the retirement security of workers, especially those who are vested or who are close to retirement.
Changes to DB plans should not discriminate against older workers and should maintain important benefit protections.Retirement funds holding assets exceeding obligations to active employees should consider improving benefits for retirees and their spouses and initiating or expanding health and life insurance coverage for retirees. Plans should give special consideration to the financial needs of those who have been retired longest and whose benefits are likely to have suffered significant erosion of purchasing power. State and local retirement systems should avoid making long-term benefit enhancements with short-term budgetary surpluses, and should address plan design features that allow end-of-career enhancements that negatively affect the long-term health of the plan.
Public retirement systems should establish a maximum vesting period of five years for DB plans and one year for employers’ matching contributions to defined-contribution or hybrid plans.
Public retirement systems should provide prefunded, annual, automatic, and full cost-of-living adjustments based on an accurate inflation index.
Employee benefits applied to full-time federal, state, and local government workers should be available to part-time workers on a prorated basis.
States and localities should improve intrastate and interstate portability of public employees’ service credits, subject to the financial integrity of each system
See also this chapter's section on Integration of Retirement Plans with Social Security, for information about pension integration with Social Security.
Reporting and disclosure
States and localities should improve reporting and disclosure to plan participants. Specifically, states and localities should:
- encourage pension disclosures that are straightforward and understandable for participants, beneficiaries, and taxpayers;
- examine the feasibility of improving the fiduciary reporting and disclosure standards of their plans as a first step in strengthening their soundness; and
- regularly report to a central government review agency reliable and consistent information on the nation’s public-employee retirement system obligations.
States should carefully monitor the reporting, disclosure, and funding practices of local public retirement systems under their jurisdiction and, where appropriate, administer the plans on behalf of local governments. Public employee retirement systems should educate their employees about what their retirement income is likely to be from their public retirement plans as well as from Social Security.
State and local retirement systems should include active workers and retirees on their investment boards to enhance disclosure and expand participation in decision making.
States and localities should move toward full funding of their retirement systems, strengthen the funding of their plans, consider the short- and long-term costs of benefit improvements, and enact such improvements only if accompanied by clearly spelled-out funding plans.
States should make full contributions to retirement plans, as actuarially determined, and avoid taking funding holidays.
In state proceedings for insolvency or receivership by municipal entities and state agencies and instrumentalities, retirees should enjoy statutory priority for all or a part of their earned retirement benefits, in amounts sufficient to ensure that their basic needs can be met.