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Guaranteed retirement plan protects thousands from market woes

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BY NANCY HICKS / Lincoln Journal Star

Friday, Oct 10, 2008 - 11:53:21 pm CDT

Pat Schuttler is probably going to work a few years beyond traditional 65 retirement age.

But not because her retirement funds tanked in recent days.

Last year, Schuttler switched from a 401(k)-type plan for state workers to a plan that guarantees her at least 5 percent earnings on her retirement nest egg.

Story Photo
(Photos.com)

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10.07.08: Retirement accounts have lost $2 trillion -- so far
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Retired Nebraskans -- or those nearing retirement -- are watching their nest eggs take a hit. And some are being forced to change their plans. But financial advisers warn that quick-fix decisions could lead to further problems.

“It’s guaranteed, and it’s not going to go away,” she said.

And this week she’s ever so glad a friend convinced her to switch.

“I can’t thank her enough.”

Sixty-eight percent of state and county workers — 18,830 people — are in the guaranteed plan and don’t have to worry as the market sinks.

In 2002, the Legislature changed the retirement plan for the bulk of state and county employees. It had been a more traditional “defined contribution” plan, through which employees make their own investment decision, much like private company 401(k)s. Both employees and employers contribute to the retirement account.

The new plan, begun in 2003, guarantees a return of at least 5 percent on the retirement accounts. Employer and employee  still contribute to individual accounts, but the state’s investment agency makes investment decisions.

Ideally, higher interest earned during good years by the state investment council will make up for bear markets.

But the guarantee means that state government, thus state taxpayers, will make up the difference when  the market tanks,  as it is right now.

Other state employee groups, including the Nebraska State Patrol, judges and school teachers and staff, have a “defined benefit” retirement plan through which they are guaranteed a specific monthly pension based on their salary at retirement and years of service.

“Nebraska is a bit unusual,” said Keith Brainard, an expert on public employee retirement programs, about the cash balance plan. 

The defined benefit plan is the prevailing state and local government retirement program, he said.

Some states also offer a garden variety 401(k)-type plan, said Brainard, research director at the National Association of State Retirement Administrators.

Texas and Nebraska are the only states with the cash balance  plan as their sole retirement plan, and Nebraska has the most pure cash balance plan, Brainard said.

All new Nebraska state and county  employees automatically go into the cash balance retirement plan, said Phyllis Chambers, director of the Nebraska Public Employees Retirement System.

Long-term employees had a choice: They could stay with the old plan and make their own investment decisions and take the risk, or join the guaranteed plan.

“At the moment, it appears to have been a very good decision,” Gerry Oligmueller, the governor’s budget director, said of his decision to move to the cash balance  plan five years ago, the first of two option periods.

“But it wasn’t an easy decision.  I thought about it for a considerable period of time. You are effectively giving up control,” he said. 

The Legislature’s decision to move to a plan that guaranteed the interest showed foresight, said Nebraska Attorney Gen. Jon Bruning, who was a state senator and chairman of the Legislatures’ Retirement Committee when the cash balance plan was put into law. 

“I have to give (former Sen. Bob) Wickersham the credit,” Bruning  said. “I just happened to be the committee chair.”

A study of the retirement plan showed that many employees weren’t very knowledgeable about investments and were not moving their money around to take advantage of growth opportunities,   said Joe Schaefer, legal counsel for the Nebraska Public Employees Retirement Systems.

In addition, senators wanted a more stable retirement plan for employees, Bruning said.

“We didn’t want employees betting their retirement savings on the stock market,” Bruning said.  “We  wanted to have it more stable than that.”

If the market continues to fall, the Legislature could be required to make up the difference for the defined benefit plans and for the cash balance option.

The Legislature has always pitched in to maintain the soundness of the defined benefit plans of teachers, judges and patrol when the market dropped.

This would be the first time taxpayers are asked to help on the defined contribution plan, said Chambers, director of the state retirement system.  

State contributions are based on annual actuarial reports for each plan, she explained. 

The state’s costs are calculated  using a five-year rolling average, which smoothes out the state’s  costs related to  dips in the market.

The Legislature spent about $15.6 million in fiscal years 2007 and 2008 helping the defined benefit plans meet actuarial requirements after the market dip in the early 2000s, according to budget documents.

Reach Nancy Hicks at 473-7250 or nhicks@journalstar.com.


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Steve wrote on October 11, 2008 6:22 am:
" Everyone ought to work for the government,oh but who would be left to pay
these people.What makes a government job so special? Guess I will never know, but at least I know when I get up in the morning my neighbor is not
changing my diaper every morning to guarantee its dry. "

 Ray-J wrote on October 11, 2008 7:10 am:
" I hate to put it this way but there are NO gaurentees when it comes to benifits, no matter who you are. Just ask any of the saleried retirees of G.M. who are about to lose thier health benifits. "

 but.... wrote on October 11, 2008 7:45 am:
" In good times when the market is rocking this fund earns just 1.5% above the federal interest rate so you don't earn nearly the returns on a bull market that the average investor would. Basically it's jus a low-risk high-security retirement fund, much the same as buying savings bond, t-bills, or high rating municipal bonds would be. You get the upside of virtually no risk but the downside of lower returns when the market rockets. When the market recovers from this crash everyone holding stocks will see their portfolio rise again dramatically, but those state workers will see theirs rise at around 5 or 6% once again. The smart worker uses this retirement fund as their low-risk and likely low return portion of their portfolio and chooses some other mutual funds, IRAs, stocks, or whatever that are a bit riskier but offer greater return when the market makes that sudden upward swing. "

 Greed wrote on October 11, 2008 9:50 am:
" Just like the bunch in Washington. Its wonderful as long as the citizens
who struggle to live make sure these people get the "golden age". The
heck with the rest of the citizens that pay their salary and pensions when
they don't even sell a product for revenue and income!!!! While bad times
like now, people have lost their jobs and are struggling, where does the
state think they are getting their money to provide the state workers
with a "golden age" come hell or high water???? I see no difference in
this and the govt. bailing out AIG so they can go to Calif and live up
a half million in a swankey resort!!! Yeah the crooks that come up with
these "inventions" are the same ones destroying our country!!! Wouldn't
it been nice if corporate employees had those kind of "give-a'ways." "

 Galen wrote on October 11, 2008 1:32 pm:
" It's nice to know that my tax dollares are going to pay for the retirement of stat employees. They should be in the same boat as everyone else, instead of having he citizens foot the bill. Another great idea brought to us by the Unicameral..... "

 Outraged in Omaha wrote on October 11, 2008 2:06 pm:
" I think Barack Obama has a good economic and tax plan. He proposes to exempt retirees/senior citizens from paying income taxes, and I hope someday the State of Nebraska will exempt all retirees/seniors from paying income taxes, too. We've already been taxed once during our working years, and the impact on the IRS and Nebraska would be minimal. Respect your elders and please exempt us from paying income taxes on our retirement pensions and investments. "

 To Galen wrote on October 11, 2008 5:01 pm:
" As a state employee I'd love to be in your shoes where I could actually choose how to invest both my contribution and the employer match, instead I'm stuck with this cash plan that provides a safety net but very poor returns when the market has any positive side to it at all. For someone nearing retirement it's a good safe plan, for a younger person trying to build that nest egg it absolutely sucks and I have no choice but to have 5% of my paycheck go into it every time I get paid. I also can't pull anything out and transfer it to any other retirement plan unless I quit my job. In order to take advantage of the bull cycles I have to dip further into that paycheck and do my own investments that have a chance to pay off decent. Even with the market crashing right now most analysts are suggesting to invest anything you can afford to let sit a couple years because it's bargain prices now and it will eventually rebound big for great returns - those in this plan will continue to collect 5 or 6% while others reap several times that. "

 to clarify..... wrote on October 11, 2008 6:49 pm:
" It is my understanding that the "taxpayers", through the legislature, would only have to help fund this particular retirement plan if markets continue downward, and would get that money back from the retirement plan when markets improve and the rates of return begin to far exceed what the plan will pay out to the employees in the plan. However, I am baffled by one thing the article doesn't mention. Yes, these plan participants are only guaranteed 5% per year, but they have received well over 20% in dividends since 2006 on top of their "guaranteed" return because the markets were doing well, I guess. In this case, I don't think it's fair to the taxpayers to help fund this plan at all when these large dividends should have been maintained by the plan as a cushion to cover potential downturns in the market rather than given to the employees. "

 clarify wrote on October 11, 2008 8:45 pm:
" where are you getting this "well over 20%" number? I just checked my statement and my dividend for the calendar year 2007 (which was finally just payed in October of 2008) was for 5.18% so I have no idea where you're getting this 20% since 2006 stuff? "

 Whiners wrote on October 11, 2008 10:39 pm:
" If you're that upset about it....apply for a government job and stop
whining about it! "

 20yearNAVY wrote on October 12, 2008 12:00 am:
" To Clarify-
I don't know where you are getting your facts, but you are flat out wrong. The max this plan has paid in the last 5 years is just under 6%. That is a far cry from your mythical 20%. This plan isn't paid for by the tax payers, it is funded by the 5% of my paycheck that I put in every two weeks. For your information Nebraska's state employees make a lot less than state workers from surrounding states, like Iowa,Kansas, or even South Dakota. The plan is no different than investing in a stable bond type fund, found in many 401k plans.
Steve if you think a state job is so lucrative, why not go get one?? My pay corrected for inflation is down about 3% ( I had a higher Real Wage ten years ago when I started), and the health care cost has quadrupled. Also Steve my pal, I didn't see you changing my diaper in the early 80's, when I was putting in 100 hour weeks for the military at the whopping salary of 7,000 per year. Sadly I think the average American today is more clueless than anytime in our countries history. "

 re clarify wrote on October 12, 2008 8:31 am:
" The dividends issued to State employees in this plan were 13.5% in 2006, 2.73% in 2007, and 5.18% in 2008. In total, that is 21.41% in dividends issued since 2006.

Here's the link showing all rates of return and dividends issued under this plan:
http://www.npers.ne.gov/public/aboutus/CashBalInfo.jsp "

 Pie in the Sky wrote on October 12, 2008 10:38 am:
" Someone has forgotten that the money has to come from some where it just doesn't grow on trees. Well, some people think it does. "

 more stats for clarify wrote on October 12, 2008 6:43 pm:
" According to the Employee Benefit Research Institute (www.ebri.org) the average 401k grew 17% in 2006 alone while this plan gained 13.5%. and the average 401 grew an average of 8.7% per year from 1999 through 2006. Still wish you could get in on this wonderful plan with the state employees? Any financial manager will tell you to diversify and take higher risk options while you are young and have time to recover if you have a couple misses, with this plan it's nothing but safe safe safe and slow slow slow. "

 clairfy wrote on October 12, 2008 7:18 pm:
" As the one who initially through out the "more than 20%" dividend figure (which is correct when looking at TOTAL dividends issued in 2006, 2007, and 2008), I want to make it clear that I think the employees who are FORCED to be in this plan are NOT being given the best options for growth, especially those who are more than 15 or so years from retirement age. My comments were only meant to clarify that there is more than the 5% guaranteed rate of return involved with this plan, and the taxpayers shouldn't have to fund any deficits when excess dividends have been issued above and beyond what was guaranteed by this plan.

Honeslty, all new State employees should have the choice of this plan or the more traditional 401K type of plan rather than being forced into a plan that the legislature believes is best. "

 thank you clarify wrote on October 12, 2008 8:07 pm:
" Looks like we agree, for the person nearing retirement it's a great safety net but for those building it it's really a poor option especially when they are required to have their check deducted to contribute to it. "

 nemo wrote on October 12, 2008 8:17 pm:
" "the legislature could be required to make up the difference" For legislature read taxpayer. I'm glad someone's retirement account is ok. "

 former state employee wrote on October 12, 2008 11:41 pm:
" I think the state patrol gets 75% of their salary at retirement. Not too bad. "

 20yearNAVY wrote on October 13, 2008 10:15 am:
" Someone should "Clarify" these statements. I don't know where some of you learned your math skills.
2003- 5.04%, 2004- 5.19%, 2005- 5.45%, 2006- 6.27%,2007- 6.12%, 2008- 5.02%. You don't add 4 years of interest together, then say 'ya he's getting 20% rate. Hit the link-http://www.npers.ne.gov/public/aboutus/CashBalInfo.jsp "

 re 20yearNAVY wrote on October 13, 2008 10:58 am:
" You are listing the INTEREST RATES earned each year, not the DIVIDENDS earned. The dividends issued, which are listed in the website you mention, are above any beyond those interest rates you mention.

Bottom line......dividends TOTALING over 20% have been issued in 2006, 2007, and 2008 (an everage of just over 7% per year). When adding the dividends issued for each year to the interest earned for each year, the total return in 2006, 2007, and 2008 averages out to just over 12% in each of those three years. "

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