Legislature(2023 - 2024)SENATE FINANCE 532
03/30/2023 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Retirement Income Comparisons - Pensions Vs. 401(k) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 30, 2023
9:02 a.m.
9:02:28 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
Senator Kelly Merrick
ALSO PRESENT
David Teal, Consultant to the Senate Finance Committee
SUMMARY
PRESENTATION: RETIREMENT INCOME COMPARISONS - PENSIONS VS.
401(k)
Co-Chair Stedman discussed the agenda. He relayed that the
committee would consider a presentation from David Teal,
who was a consultant for the Senate Finance Committee after
working as the director of the Legislative Finance Division
for many years.
^PRESENTATION: RETIREMENT INCOME COMPARISONS - PENSIONS VS.
401(k)
9:04:29 AM
DAVID TEAL, CONSULTANT TO THE SENATE FINANCE COMMITTEE,
introduced himself and discussed his background. He had
worked as the Legislative Finance Director for 20 years. He
had been involved with the pension issue in 2004 and 2005
when the state had switched from its Tier III pension plan
to a Tier IV, Defined Contribution Plan.
9:05:24 AM
Mr. Teal discussed a presentation entitled "Comparing
Potential Retirement Income Under Defined Benefit and
Defined Contribution Plans Offered to Non-Public Safety
Employees under the Alaska Public Employees Retirement
System (PERS)," (copy on file).
Mr. Teal turned to slide 2:
Retirement is a straightforward conceptpeople set
aside money while they work so they can eventually
live on sources of income other than work.
While simple in concept, discussion/evaluation of
retirement is complicated by several factors:
• there is no set retirement age,
retirement lifestyle requirements depend on
individual preferences and financial circumstances,
and
• the method of saving money during working years is
not the same for everyone.
9:06:45 AM
Mr. Teal spoke to slide 3:
There are three categories of retirement plans:
1. Social Security is a federal government retirement
plan that most workers joinnot necessarily by choice.
2. At the other extreme, many individuals save on
their own (often in traditional IRAs, Roth IRAs or
deferred compensation plans).
3. The middle ground is employer sponsored retirement
plans that both employer and employees contribute to.
Mr. Teal commented that Social Security was more of a
safety net and was not necessarily meant to be primary
income. He commented that the presentation was a little
"data dense," with many tables and graphs. He relayed that
he would share his conclusions first and then present the
accompanying data.
9:08:27 AM
Mr. Teal referenced slide 4:
Conclusions Public Employees Retirement System
(PERS) only excludes police and firefighters and
those in the Teachers Retirement System (TRS)
1. Available data do not support the conclusion that
Alaska's Tier IV defined contribution plan is inferior
to a Tier III pension, particularly regarding employee
retention.
2. Whether a 401(k) plan or a pension is a "better"
retirement system is not clear.
1. In most cases, a 401(k) plan offers greater
potential retirement income.
2. Individual circumstances and preferences vary.
Some people would prefer the certainty of a
pensioneven if it provides less incomewhile
others prefer the advantages of a 401(k) plan.
3. For those fortunate employees that participate in
the Supplemental Benefits System (SBS) as well as the
401(k) plan, 25% of their salary is set aside for
retirement. Given at least 15 years of service and a
well-managed nest egg, they can look forward to
retirement income of at least 70% of final salary.
4. Some employees have neither SBS nor Social
Security, and retirement options for them could be
improved.
Mr. Teal noted that he would further refer to the Tier III,
Defined Benefits Plan as pension and the Tier IV, Defined
Contribution Plan as a 401k. He noted that no plan was best
for everyone, and that people had various reasons to choose
which plan worked best for them. He said that after 30
years of service an employee would end up with 64 percent
of final salary, not 70 percent, but he believed using a 70
percent target was appropriate.
9:12:28 AM
Mr. Teal continued to address slide 4. He noted that there
were many PERS employers that did not offer either SBS or
Social Security, which he believed was a situation that
could be improved.
9:13:15 AM
Co-Chair Olson considered number 3 on slide 4 and
considered a well-managed nest egg. He queried the rate
of return of a well-managed rest egg.
Mr. Teal relayed that he had looked at several rates of
return. He thought 7 percent was too high He thought 6
percent was a reasonable return over the long term, but to
expect fluctuations.
Co-Chair Olson was concerned that if a person was managing
their own account (as in a defined contribution account)
the numbers were not as high as someone using professional
investors.
Mr. Teal thought that people using professional managers
should get a higher rate of return. He mentioned the issue
of a pooled retirement account having a longer time horizon
without the same investment restrictions on investments
that a single investor would have. He pointed out that the
other problem with managing one's own money was not the
return on investment, but that there was no return on
investment because people took their money out early. He
reiterated that preferences and circumstances differed, and
that there was not a plan that fit all people.
9:16:48 AM
Senator Bishop looked at number 3 on slide 4:
For those fortunate employees that participate in the
Supplemental Benefits System (SBS) as well as the
401(k) plan, 25% of their salary is set aside for
retirement. Given at least 15 years of service and a
well-managed nest egg, they can look forward to
retirement income of at least 70% of final salary.
Senator Bishop asked whether it was being assumed that the
funds were being kept full for 30 years of service.
Mr. Teal answered in the affirmative.
Senator Bishop considered that not everyone knew how to
manage their own money. He noted that 90 percent of
withdrawals in the last 7 months came from people with only
5 years vested.
Co-Chair Stedman thought some of the issues would be
covered by upcoming slides, such as people that did not
stay employed for the full 30 years.
9:18:15 AM
Mr. Teal relayed that he had intended to address income
under a 401k plan and the pension, but late in the process
had decided to put in slides pertaining to retention, which
seemed to be the topic that was driving the retirement
discussion. He thought some believed that the 401k plan was
so bad that the state could not attract employees. He felt
that the problem was not an employee, but rather an
employer problem, which would lead to a public service
problem.
9:19:03 AM
Mr. Teal turned to slide 5:
Employee Retention
There is little argument that employee retention is a
problem in Alaska.
The question is: How much of the retention problem is
due to the retirement system?
9:19:48 AM
Mr. Teal considered slide 6, which was a graph addressing
employee retention rates, by class year. He noted that the
slide was used with permission from a previous presentation
by current Legislative Finance Director Alexei Painter. He
cited that the graph showed that 30 percent of employees
did not make it past the first year of employment, with 45
percent failing to meet the 5-year vestment time.
Mr. Teal emphasized that retention was not just a state and
or retirement system problem, Rather it was a national
problem and a private sector problem. He referenced Senator
Bishop's question and pondered how much of the retention
problem was due to the retirement system.
9:21:57 AM
Senator Kiehl observed that the slide was prepared with a
limited data set. He wondered whether the retention rates
were better when considering all PERS employees, rather
than only the State of Alaska.
Mr. Teal was not familiar enough with the data to know what
was included. He expressed shock that retention in the
state was such a large problem.
Senator Kiehl explained that he had asked because in the
PERS financial reports, turnover rates were considered, and
the defined benefit and defined contribution were compared.
He said that when the totality of a career of all employees
in the system it had been found that there was a 1.5
percent higher turnover rate with defined contribution
employees than with defined benefit employees.
Co-Chair Stedman asked whether Senator Kiehl was including
police and fire, non-SBS or Social Security, or factoring
them out.
Senator Kiehl thought that the actuarial analysis was based
on non-police/fire but included non-SBS and Social
Security.
Co-Chair Stedman explained that the PERS employees that did
not participate in Social Security or SBS had been
separated out in the data. He referenced Attachment 2 of a
four-page document (copy on file), Employers that
Participate in the Supplemental Benefits System (SBS),
which indicated that 22 of the non-state PERS employers
were included.
9:25:46 AM
Senator Kiehl noted that the actuarial reports broke the
data down and included police/fire.
Mr. Teal pointed out that the graph showed that for non-
police/fire and TRS, the 401k and pension plans barely
differed in retention rates.
Mr. Teal emphasized that the graph only indicated what was
happening but not why it was happening. He stressed that
there was no information on why people left employment. He
said that according to the date people who fell under
defined benefit plans and those who fell under defined
contribution plans, left employment at the same rate.
9:27:49 AM
Senator Kiehl clarified that the slide was state-only, and
the data was limited in scope.
9:28:22 AM
Senator Bishop asked about the defined benefit numbers from
2003 to 2006. He wondered what year what year of service
each tier was in and was their exit the result of a regular
work to retirement cycle.
Mr. Teal agreed with Senator Bishop and relayed that he
would want to consider the age of those represented on the
graph, he admitted that sometimes the data resulted in more
questions than answers.
9:29:59 AM
Mr. Teal displayed slide 7, which showed retention for
defined contribution only, and looked at whether the group
had SBS. He noted that the slide was also sourced from LFD.
He shared that SBS added money to retirement, and without
SBS, the retention rate dropped to 60 percent within the
first year of employment. The curve followed all years of
service. The employers that offered SBS had a much lower
degree of retention problem. He did not know how much of
the difference was due to retirement issues or compensation
issues.
Mr. Teal reiterated that the graph demonstrated what
happened but not why. He lamented that the slide did not
answer questions about retention. He thought the graph
showed that money helped with retention. He explained that
SBS was roughly a replacement system for Social Security.
He recounted that approximately 40 years previously,
governments were given the opportunity to opt out of the
Social Security system and the state replaced Social
Security with SBS; the pension plan was replaced by the
401(k) plan.
9:33:36 AM
Mr. Teal discussed why the state opted out of Social
Security, and thought it was perhaps fear of bankruptcy, or
the payment levels. He discussed potential for SBS to
replace more wages and provide for more flexibility than a
Social Security plan.
9:34:33 AM
Co-Chair Stedman referenced a four-page handout (copy on
file) with a list of employers that were not in SBS and not
in Social Security. There were 52 employers that were in
neither system. There were 22 non-state employers that were
in SBS who employed 11,000 Alaskans. He stressed that there
were large gaps in how communities dealt with the various
plans.
9:36:12 AM
Mr. Teal turned to slide 8. He recalled that Mr. Desai had
had described in his February 23, 2023, presentation
described the characteristics of the two plans and provided
a chronology of the retirement system. He summarized that
both pension plans and 401(k) plans had employer
contributions, one being a pool and the other being
individual accounts. When the state replaced the pension
plan in 2006 with the 401(k) plan it was intended to
provide comparable levels of retirement income and
comparable levels of cost.
He discussed slide 8, Things to Remember:
1. The rate of return on investments is critical to
any discussion of retirement plans.
• Earnings on contributions generally provide far
more retirement income than contributions
themselves. This is true of both pensions and
401(k) plans.
• Example: 10 years of work at $100,000 in
annual pay with 13 percent of payroll
contributed (employee and employer combined)
gives total contributions of $130,000. A
pension for 10 years of work with a 2
percent multiplier for each year of service
gives a pension of 20 percent of salary, or
$20,000. The pension would burn through
$130,000 in 6 ½ years. What magic allows
people to collect a pension for 30 years?
The magic is compound interest on
investments.
2. The rate of return is instrumental in determining
both the payout under a 401(k) plan and the actuarial
soundness of a pension system.
3. Future rates of return are unknown, so must be
projected.
9:40:42 AM
Mr. Teal looked at slide 9:
Things to Remember (continued):
4. If earnings are less than projected, either the
employee or the employer will be disappointed.
a. In a 401(k) plan, the employee bears the risk
that investment returns will not support the
anticipated level of retirement income.
b. With a pension, retirement benefits are not
merely anticipated, they are specified by a
formula that includes years of service and
salary, but not investment returns. A defined
benefit often means that employees bear no risk
of poor investment performance.
5. Timing of service affects a 401(k) payout but does
not affect a pension
Mr. Teal noted that poor investment performance with a
pension plan resulted in the employer making up for the
lower rates of return. A pension does not grow overtime but
loses value to inflation the more time between beginning
work and termination of employment.
9:43:54 AM
Mr. Teal said that the conclusion by the press and others
from information previously presented by Mr. Desai was that
a pension always provided a higher retirement income than a
401(k) plan. He concluded that the idea was not necessarily
accurate.
9:44:45 AM
Mr. Teal turned to slide 10, Salary Replacement for Public
Employees Retirement System (PERS) Employees other than
Police and Firefighters. He said that the slide had been
prepared to help to see and understand the data presented
by Mr. Desai in an easily consumed spreadsheet. He noted
that the 401(k) payout on his slide differed from what had
been previously offered. He explained that Mr. Desai had
used a 5.8 percent rate of return to annuitize payment. He
believed that the rate was too low and that the balance
should not be annuitized but rather treated like a
mortgage. He said that the payout year amount did not
change the conclusions reflected on the slide.
9:48:26 AM
Mr. Teal advanced to slide 11, which showed a graph using
the data from the previous slide. The graph showed a
retirement and benefits scenario that assumed a 7 percent
rate of return on a 401(k) balance while employed, but no
change in the balance between termination and age 60. He
noted that the pension line exceeded the 401(k) payout.
Mr. Teal explained that he had expanded the service years
from 30 to 40, out of curiosity.
9:51:00 AM
Senator Kiehl understood the assumption was a 7 percent
rate of return, 25 percent less than what professional
managers would make.
Mr. Teal relayed that he had used the rate used by Mr.
Desai, which was 7 percent. He said that the rate of 7.25
was in actuarial reports, but all of Mr. Desais slides had
used 7 percent.
Senator Kiehl asked whether the assumptions had any
adjustment to investment risk based on the age of the
investor.
Mr. Teal replied in the affirmative; only years of service
had been used.
Senator Kiehl understood that the notion of a 30-year
payout at the age of 60 meant that when you drew your last
dollar when you drew your last breath.
Mr. Teal answered affirmatively.
9:53:33 AM
Co-Chair Stedman asked for assistance understanding the
structural difference of the pension plan versus the 401(k)
plan.
Mr. Teal noted that the pension was determined by years of
service and salary and continued to grow regardless of the
interest rate. The 401(k) payout was determined by interest
rates, and the graph showed a 7 percent rate of return. He
said that at 7 percent the fund grew, and the longer it had
to compound interest, the more it would grow. He noted
that two things affected the 401(k): the rate of return and
time.
Co-Chair Stedman thought that the topic would be discussed
later and in further detail.
9:54:55 AM
Mr. Teal looked at slide 12:
The conclusion that a pension nearly always provides
more retirement income than a 401(k) plan is flawed
because the comparisons reflect a retirement income
based on the balance of a 401(k) account at the end of
service. That is, the conclusion is based on an
assumption that
• a person transitions immediately from
employment to retirement, or
• a 401(k) account earns no interest from the
date of termination until the date of retirement.
• The numbers provided by the Division of Retirement
and Benefits (R&B) are not wrong, they simply show one
scenario. And that scenario is unlikely to occur.
• Scenarios in which the balance of a 401(k) plan
continues to accumulate earnings until age 60 reach
the opposite conclusion.
9:57:34 AM
Mr. Teal showed slide 13, which showed a table
demonstrating how alternate scenarios could be developed.
He pondered a scenario of someone at 10 years of service
with a rate of return of 7 percent; 10 years of services at
a salary would result in the same pension, regardless of
what age the person was when they began working. The 401(k)
balance in the retirement and benefits scenario, which was
10 years of service until the age of retirement, would
provide $14,000 pension and a 401(k) payout of $10,000
because it had no time to compound. He said that younger
employees would have longer for their 401(k) balance to
compound.
Mr. Teal discussed "The Rule of 72," which was a
mathematical relationship that indicated if the rate of
return number were divided into 72, the answer would be how
many years for your investment to double.
10:00:49 AM
Senator Kiehl queried the likelihood of each of the
scenarios considering the demographics of the workers in
the state.
Mr. Teal replied that he had no idea because he did not
have the data.
Senator Kiehl thought the average age of a first-time state
employee was approximately 45 years old. He was curious
about the averages of each potential scenario.
Mr. Teal commented that he had a spreadsheet that he could
bring up that would offer multiple scenarios for rates of
return for various starting ages.
Co-Chair Stedman thought the slide was trying to show that
the mathematical relationship between the two plans was
fundamental. He thought it was clear that an older person
would lean toward a defined benefit plan, and the younger
would lean toward defined contribution.
10:03:09 AM
Senator Bishop commented that the slide assumed that one
could manage their money and not drain their 401(k).
Co-Chair Stedman felt that some of the data was being
cleaned up and organized for better interpretation.
10:03:49 AM
Mr. Teal referenced slide 14:
Does slide 13 prove that 401(k) plans are always
better than pensions?
Not necessarily. 401(k)s can generate higher
retirement income at similar contribution levels, but
returns are uncertain.
And the potential for higher retirement income may not
be the deciding factor.
Preferences depend on individual circumstances.
Mr. Teal pondered if it was the state's responsibility
versus the individual to manage their own money. He noted
that employees did not get to make a choice of plans upon
employment. He suggested that the state could offer a
choice of plans, but that was currently not an option.
10:06:06 AM
Mr. Teal turned to slide 15, "Pension versus 401(k)
Payout," which showed a graph utilizing the data from slide
13 in bar graph form. He observed that the 401(k)
consistently and substantially paid more than a pension.
Mr. Teal emphasized that the two plans would join and
eventually cross. He said that 401(k) plans eventually
turned downward because money earned at the end did not
compound, while the pension continued to grow. He noted
that the issue could cause some confusion and that starting
salaries did not change the numbers. He stressed that rate
of return, and age of service, were the drivers.
10:08:10 AM
Senator Kiehl asked how the chart would change when one did
not know when they would die.
Mr. Teal stated that it did not and indicated that there
was no math to knowing when one would die. He contemplated
that if one retired, and then died two years later, 50
percent of the pension would go to the spouse. He provided
several hypotheticals for each plan. He stressed that the
scenarios would be based on individual choice.
Senator Kiehl asked what financial advisors suggested
people do regarding payout rates when faced with outliving
their 401(k) account.
Mr. Teal cited various ways to manage the retirement funds.
He said that one could do a required minimum distribution
approach, which would mean that the amount drawn would
decrease over time, but the money would never run out. He
10:11:58 AM
Mr. Teal considered slide 16, "Pension versus 401(k)
Payout," which showed a graph utilizing the data from slide
13, but with an assumption using retirement and benefit
values for salary, contribution rates and pension formula
with the payout beginning at age 60. He stated that if the
employee started work at age 25 and worked the indicated
number of years, the rate of return for the entire period
was 6 percent. He pointed out that under the scenario the
pension provided a stable income.
10:13:24 AM
Mr. Teal displayed slide 17, "Pension versus 401(k)
Payout," which showed a graph utilizing the data from slide
13 but with the assumption of a 5 percent rate of return.
He thought that 5 percent might be low, but using the lower
rate of expected return could result in less
disappointment.
10:13:40 AM
Mr. Teal highlighted slide 18, "Pension versus 401(k)
Payout," which showed a graph utilizing the data from slide
13, with the same graph with the assumption of a 6 percent
return starting work at age 40. He commented that time was
an important aspect and starting young was better for
compound interest and rate of return.
10:14:57 AM
Senator Kiehl asked about the earlier start ages.
Mr. Teal went back to slide 15 and explained the pension
would be decided by how much the employee made, their
contribution, and their rate of return.
Senator Kiehl pondered whether another conclusion from the
graphs could be to start young and work a little while,
then go do something else while the money compounded.
Mr. Teal thought the best opportunity for a Tier I employee
would be to start young, let the money sit for a long time,
then come back at 55 years old as a special assistant to
the governor and use those later years as your high
three.
Co-Chair Stedman asked Mr. Teal to explain the significance
of the "high three" and how it might affect the pension
when returning to service.
Mr. Teal explained that a pension was based on the years of
service and the years at the highest rate of pay. For Tier
I, it was the highest three years. If an employee came back
into service, the pension would be based on the most recent
highest paid years.
10:19:31 AM
Mr. Teal continued that the smart thing with a pension was
to work young, leave for a while, and come back later. If
one had a 401(k) the same system advantage was not
available. He noted that a 401(k) plan was a percent of
actual salary accounting for the entire working career. He
agreed that it was the interest rate of return that
determined a 401(k) payout.
Co-Chair Stedman thought that working the pension system is
such a way created unfunded liability. He thought there was
nuance that was not being addressed.
10:21:22 AM
Senator Kiehl appreciated Mr. Teal's description of the
Tier I system. He mentioned Tier III did not allow for such
flexibility. He thought that the smart financial move for a
person would be setting up a 401(k) plan with the state and
then leaving for federal employment and a federal pension.
Mr. Teal did not know how much employees scrutinized the
matter. He agreed that if one sat down and did the math,
which he thought few people engaged in, one could determine
a financial life plan. He noted that life does not often go
as planned. He thought that people made employment
decisions more based on how much they will make per
paycheck, rather than what kind of retirement is offered.
10:23:53 AM
Mr. Teal looked at slide 19:
Takeaways:
1. Projected income at retirement age is the only
appropriate way to compare pension benefits to 401(k)
payouts.
a. Pensions are not affected by rate of return or
timing of service and do not gain value over
time.
b. Income from a 401(k) plan is affected by rate
of return on investments and timing of service.
c. Comparing a 401(k) balance at age 40 to a
pension earned at age 40 is biased in favor of
pensions because doing so ignores the continued
compounding of earnings applicable to a 401(k)
plan.
2. As the rate of return on investments falls, 401(k)
payouts fall but pensions are unaffected.
a. That point should now be obvious, and some use
it to conclude that a pension generally provides
greater retirement income than a 401(k).
b. The conclusion is not supported by data.
c. In most situations (even with investment
returns as low as 5%) a 401(k) payout is greater
than a pension.
10:26:00 AM
Senator Bishop asked to discuss number 1 on the slide and
asked for help unpacking the takeaway. He understood that
rates of return mattered regarding funded or unfunded
status.
Mr. Teal relayed that the presentation did not dig very far
into unfunded liability, which he acknowledged was
critical. He noted that the presentation compared
retirement income rather than the actuarial soundness of
the systems. He stressed that pension benefits were not
affected by rates of return. He agreed that from an
employer's perspective, Senator Bishop was correct in that
the system generates unfunded liability, which the was the
employers responsibility.
Co-Chair Stedman reminded that there was a constitutionally
protected provision for the pension plan.
10:28:58 AM
Mr. Teal addressed slide 20:
Takeaways (continued):
3. A less obvious point is that the same low returns
that reduce 401k payouts could throw a pension system
out of actuarial balancemeaning that the trust fund
balance would be insufficient to pay projected
pensions.
4. Failing to consider the costs of maintaining an
actuarially sound pension system is a dangerous path.
a. Benefits matter. But they are not the only
thing that matters.
b. Employer costs also matter.
c. Projected contribution rates and projected
rates of return on investment can make a pension
system appear to be much cheaper than it can be
when assumptions do not match reality.
d. In comparing retirement plans, the big issue
is risk, not merely contribution rates.
Mr. Teal thought that point 3 and point 4 addressed Senator
Bishop's question. He highlighted that it did not take an
investment loss to generate unfunded liability.
10:30:50 AM
Mr. Teal advanced to slide 21:
Takeaways (continued):
5. Anything that increases salaries also increases
employer and employee contributionsand eventually,
retirement income.
a. For this reason, we should not expect to be able to
return to a pension system at the former levels of
contributions.
• Contribution rates under the former pension
system were designed to fund benefits based on
salary schedules in place when rates were set.
That schedule had 5- 6- and 7-year holds at
longevity steps. Within each salary range, the
maximum step was reached at 20 years of service.
• Salary schedules now in place provide increases
every two years with no cap on steps. With each
step increase equivalent to a 3.25% raise, final
salariesand pensionscan be 20% or more above
the amounts achievable under the old salary
schedules.
6. As legislators, you must balance employee benefits
and state costs.
a. Unfortunately, these move in opposite directions.
10:33:46 AM
Senator Kiehl asked whether Mr. Teal was comparing the cost
of plans, or risk of plans.
Mr. Teal did not think it was possible to have a full
discussion of cost without considering risk.
Senator Kiehl thought that the comparisons in the
presentation had de-risked the 401(k) plan by 100 percent.
He thought Mr. Teal had given oblique answers to questions
at the table and wondered whether Mr. Teal was interested
in having a balanced conversation on the matter.
10:34:55 AM
Mr. Teal continued to address slide 21.
10:35:08 AM
Mr. Teal looked at slide 22, "Pension versus 401(k)
Payout," which showed a graph depicting the 401(k) plan and
pension with assumptions of retirement and benefits values
for salary, contribution rates, and pension formula for an
employee starting work at age 30 and working the indicated
number of years at a rate of return for the entire period
of 6 percent. Payout would begin at age 60. He pointed out
that neither the pension or 401(k) plan reached the target
of 70 percent, even after 30 years of service, which meant
benefits would flatten out. He noted that neither system
climbed to a 70 percent wage-replacement. He thought that
there was some weight in the argument that retirement
income was insufficient with both plans. He summarized
that returning to a Tier III pension plan did not address
the issue for anyone with service of less than 25 years and
going back to a pension plan would reduce potential
retirement income. He pointed to the dotted lines
representing SBS. He said that SBS approximately doubled
the retirement available under a 401(k) plan.
10:38:21 AM
Mr. Teal turned to slide 23:
The graph prompts many questions:
1. Does any state offer a retirement system as
financially attractive as Alaska's "401(k) plus SBS"
system?
1.Have proponents of returning to a pension plan
come forward with plans from other states and
said "this is why Alaska's retirement plan isn't
competitive"?
2.Do employees understand how attractive Alaska's
retirement system is?
Co-Chair Stedman considered the graph on slide 22 and
thought it was important to recognize employees and
employers that were not included in SBS or Social Security.
He contended that there were substantially different
results for those who were included versus those that were
not. He did understand how an employer could not be
included in Social Security or SBS.
Co-Chair Stedman referenced Senator Kiehl's comment about
age of employment, and duration of employment. He noted
that the committee had asked the administration to
investigate and refine the data.
Co-Chair Stedman thought slide 22 was important. He
suggested that the committee could change some of the
assumptions but that the conclusion would not change.
10:41:48 AM
Mr. Teal shared that he did not believe that there was
another state that offered a retirement system as
financially attractive as the one offered to state workers.
Mr. Teal continued to address slide 23:
2. Are considerations other than the potential amount
of retirement income driving the controversy?
3. Is the push to return to a pension driven by
employees who work for employers that do not offer
SBS?
4. Would returning PERS workers (with SBS) to a
pension plan fix a part of the retirement system that
isn't broken?
5. Can the State encourage employers without SBS or
Social Security to offer a retirement system in
addition to the PERS 401(k) plan?
Mr. Teal suggested that roughly 18,000 workers in PERS had
a 401(k)k plan, plus SBS, but there were many employers in
the state that did not offer SBS. He asserted that those
working for a government employer that did not offer SBS or
Social Security, he offered the example of teachers and
Anchorage firefighters and police, were in a broken system.
He was unsure how the state could get those employers to
add SBS or Social Security to the 401(k) plan.
10:45:44 AM
Mr. Teal referenced slide 24:
Recap
1. Available data do not support the conclusion that
Alaska's 401(k) plan is inferior to a Tier III
pension, particularly regarding employee retention.
2. Whether a 401(k) plan or a pension is a "better"
retirement system is not clear.
1. In most cases, a 401(k) plan offers greater
potential retirement income.
2. Individual circumstances and preferences vary.
Some people would prefer the certainty of a
pensioneven if it provides less incomewhile
others prefer the advantages of a 401(k) plan.
3. For those fortunate employees that participate in
the Supplemental Benefits System (SBS) as well as the
401(k) plan, 25% of their salary is set aside for
retirement. Given at least 15 years of service and a
well-managed nest egg, they can look forward to
retirement income of at least 70% of final salary.
4. Some employees have neither SBS nor Social
Security, and retirement options for them could be
improved.
Mr. Teal asserted that there were no clear answers as to
which plan was better.
Mr. Teal thought Co-Chair Stedman had some attachments that
were not part of the presentation.
Co-Chair Stedman shared that his office had prepared the
document available on the back table (copy on file). He
stressed that the state had a retention issue at the lower
end of the salary scale. He hoped to gather data and dive
deeper into the issue.
10:49:50 AM
Senator Kiehl thought some of the conclusions were
indisputable. He thought it would be helpful to examine the
risk factor and how it impacted employee behavior.
Co-Chair Stedman offered that the unfunded liability
created under the pension system was also part of the
discussion about risk.
10:51:32 AM
Senator Bishop asserted that legislation would be necessary
to address the problem. He thought that employees should
have options to choose from.
Co-Chair Stedman noted that the subject was broad and would
require more analysis and discussion.
Co-Chair Stedman discussed housekeeping.
ADJOURNMENT
10:52:59 AM
The meeting was adjourned at 10:52 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 033023 DCR PERS TRS MEMBERS BY EMPLOYER_DCP_SBS_SS (For Teal Handout) 3-30-23.pdf |
SFIN 3/30/2023 9:00:00 AM |
PERS/TRS |
| 033023 SFC Teal Retirement Presentation 3.30.23 Final 2nd.pdf |
SFIN 3/30/2023 9:00:00 AM |
PERS/TRS |