If passed, the proposal would be the second major change in the Florida Retirement System (FRS) since Gov. Rick Scott took office two years ago. A law passed in 2011 requires public employees to contribute 3 percent of their earnings to the system.
The proposal is considered a major priority of Gov. Scott and House Speaker Will Weatherford. Legislators said when the state Department of Management Services completes its study this Friday, they will know how much the proposed change will cost the state.
Ray Edmondson, CEO of the Florida Public Pension Trustees Association, said this decision by state lawmakers is purely political, and has nothing to do with the finances of the state's pension plan.
"The only people that benefit from those plans are the people that sponsor them, and the people that invest in them" Edmondson said in a conference call on Wednesday afternoon.
Speaking about 401(k) plans, he said that "individuals have to contribute $14,000 a year to get the same benefit that they would get from a defined benefit plan. Now If you're average salary is $50,000, you're not going to contribute $14,000 into an IRA or a defined contribution."
He also said making this conversion wouldn't save taxpayers money, but actually cost more money.
"You're looking at saving money maybe 40-50 years from now," he said, implying it might be that long before every current state employee who would be grandfathered into a new plan would no longer be alive, thus would no longer receive funds from the state.
Gary Rainey, president of the Florida Professional Firefighters, said the goal of any retirement system is to be at least 80 percent funded, and in the case of the FRS, it's never been below 86 percent. He said the Legislature pulled $12 million out of the pension plan for other state projects last year.
"This is a solution looking for a problem is what we have here," he added.
The Palm Beach Post's John Kennedy reported last week that:
The Florida Retirement System has 623,011 currently employed members, including teachers, state workers, and many local government employees, police officers and firefighters. Within the system, workers currently can choose between the traditional pension or, for the past decade, an optional 401(k)-like plan. The pension remains the favorite, though, with more than 500,00 employees enrolled, compared with only about 100,000 in the investment plan.
Diane Oakley, executive director at the National Institute on Retirement Security, said that switching to a defined contribution account for new hires is less cost efficient than a defined benefit plan.
She said providing a lifetime income is part of the nature of a defined benefit plan. She said when an individual does that on a 401(k) account, they have to save not just for the life expectancy of themselves but they have to save for a higher level. She said her group found that defined benefit plans will provide the same level of benefits to an individual at 46 percent of the cost of what you'd have to pay in a 401(k) plan.