Cash Balance Plans - Daniel Biss

STATE REPRESENTATIVE DANIEL BISS HOUSE BILL 6149 AND CASH BALANCE PLANS FREQUENTLY ASKED QUESTIONS 1. What is a defined benefit plan? A pension plan in which the benefits are based on a formula. For instance, the employee might receive 2% of their final salary for each year served, so that after 35 years of employment their pension would be 70% of their final salary. Therefore, the employee can depend on a minimum benefit, but the employer carries all the risk and controlling cost-growth is difficult. 2. What is a defined contribution plan? A 401(k)-style pension plan in which benefits are paid entirely out of an investment account the employee controls. For instance, the employee and the employer might each pay

6% of each paycheck into the account, and the employee would be responsible for investing it. Therefore, the employee carries all the risk and if the employee is not receiving Social Security benefits, has no guarantee of any minimum benefit. However, these plans have much more predictable costs for the employer. 3. Is HB6149 a benefit cut from Tier II? No. The benefit is actuarially more generous for many employees. However, the plan is also better for the state because it’s predictable and easily manageable, avoids abuses, and complies with federal law. Plus, it will always remain affordable, even as life spans and retirement ages change. 4. Is this constitutional? Yes. It only affects future employees. 5. If this is so great, why doesn’t anyone else do it? They do! Nebraska and Sweden, among many others, utilize cash balance plans. 6. Would HB6149 require the state to begin participating in Social Security? No. Because cash balance plans provide a minimum benefit to employees, it is both legal and fair to offer this in lieu of Social Security. This helps keep HB6149 affordable for the state, since it avoids the requirement of making expensive employer payments into the Social Security system. 7. What happens if the pension fund collects interest below 5% or above 10%? The employees’ accounts will never collect interest outside of the 5% - 10% range, even when the actual fund does. The 5% floor is necessary to guarantee the minimum benefit and the 10% ceiling is necessary to counterbalance the floor and keep the system stable and affordable for the state. 8. Will monthly checks stop if the account reaches zero? No. The annuitant will continue to receive monthly checks as long as they live. The account balance is used to calculate the size of the benefit based upon actuarial averages, so that the additional cost of paying benefits to individuals who outlive expectations is balanced against the reduced cost associated with individuals who do not live as long as expected. Thus, no retiree is penalized for longevity. 9. What if an employee retires and then goes back to work? If a person returns to full-time work after initiating their pension, the annuity ceases and employees and employers resume payment into the system. The notional account continues to grow until the employee retires again, at which point the annuity is recalculated. STATE REPRESENTATIVE DANIEL BISS * 847-568-1250...

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