Lawmakers are touting the 401(k) element in House Speaker Mike Madigan’s proposed pension reform bill.
But a close look at the bill shows this 401(k) option is a disaster waiting to happen.
Participation in the 401(k) plan is limited to 5 percent of Tier 1 membership (meaning workers hired before 2011) on a first-come, first-serve basis. Once 5 percent of people are in the plan, it is closed. No one can transfer in or out of the plan. The reaming 95 percent of Tier 1 and all Tier 2 workers are entirely cut out.
The participation cap on the 401(k) option reveals that lawmakers know the current defined benefit pension plan is nothing more than a Ponzi scheme. If a larger portion of workers chose the 401(k) option, the defined benefit plan could collapse – further highlighting the structural issues with defined benefit pensions.
What’s worse, the proposed bill allows the state to cancel the 401(k) plan at any time. If the state decides to cancel this defined contribution plan, the state can raid (“recover”) the money in the 401(k)s. This injection of funds back into the defined benefit system would only serve to float the pension scheme a little longer. That means the 401(k) accounts effectively don’t belong to the workers; they belong to the state.
This is not a real defined contribution plan. In the private sector, the employer can’t go back and raid your fund; once the money is contributed and you are vested, it is yours. This is a fake 401(k) tucked in the bill to make the bill appear like a compromise.
Any plan that doesn’t give all employees the choice to move to real 401(k)s and puts retire accounts under the control of the state is not a real 401(k) plan.