Solvent pensions are crucial to local governments and the employees who serve them because they reduce financial instability. And the first step in reducing that instability is becoming informed.
But navigating pension plans for your municipal workforce is no easy task. As several states have reformed their retirement systems since the Great Recession, it is important, now more than ever, for employers and employees alike to understand their pension plan options. City leaders need a thorough understanding of defined benefit and defined contribution pension plans so that their local governments can better attract and retain top talent.
The main difference between the two types of plans has to do with who bears the risk. While a DB plan places the investment and longevity risk completely on the employer, a DC plan places the risk completely on the employee and is typically a tax-deferred retirement plan, like a 401, in which a certain amount or percentage of money is set aside by the employee and employer. But in reality, the situation is much more complex.
To help our cities deal with this critical problem, NLC, in partnership with ICMA-RC, developed the Public Sector Retirement Initiative, a program focused on strengthening the capacity of city leaders to ensure healthy public sector retirement outcomes. The newest feature of that initiative is an online resource center featuring videos explaining the most complicated pension concepts in a bite-size format.
The online resource center will provide cities, towns and villages with information about retirement industry trends, defined benefit plans, 401K defined contributions and 457 deferred compensation plans.
As NLC’s CEO and Executive Director Clarence Anthony wrote in a recently published guide on retirement plans, financial instability impacts everything — housing, nutrition, quality of life, health care and even life expectancy. At the crux of financial instability is financial literacy, and most public servants do not know how much they need to save for a comfortable retirement.
And due to budgetary strains on many state and local governments, changes to pension plan design and financing are making it even more difficult for public servants to save.
According to recent data from the Bureau of Labor Statistics, 17 percent of local government workers stopped receiving contributions from their employers to their defined benefit retirement plans in 2017 (up from 12 percent in 2012). Instead, they were introduced to a new defined contribution plan alternative.
Governments need to use all the tools at their disposal to ensure that the people serving our communities are taken care of. And as our workforce ages, this conversation will become increasingly pressing. Regardless of which pension plan your city has, it is crucial that your employees stay, and remain, informed.
Watch the first video here.
About the Authors: Anita Yadavalli is the Program Director of City Fiscal Policy at NLC. Anita leads NLC’s Public Sector Retirement initiative, with a focus on research and education for city leaders on retiree healthcare benefits, as well as research and programming on other city fiscal policy issues.