States on the move: 401(k)-style pension reform in Georgia

The Peach State has been keen to modernize their public pension system.

Incorporating 401(k)-style retirement plans has become common practice in state pension reform. Georgia froze its traditional defined-benefit pension plan and created a new retirement plan that incorporated elements of the defined-benefit plan as well as a 401(k)-style retirement plan in 2009.

Georgia public employees who started working before 2009 could either remain in the traditional defined-benefit plan or opt into the new hybrid retirement plan.

Starting in 2009, new public employees were given more ownership and control over their retirements with the 401(k)-style portion of the hybrid plan.

Under the 401(k)-style portion, the employer contributes up to 3 percent of the employee’s salary into the employee’s individual retirement account. And employees contribute between 1 and 5 percent. Employees own and control the money in their accounts. Public employees and the state also make contributions into the defined-benefit portion of the hybrid plan.

There are more than 2,100 public employees enrolled in Georgia’s hybrid retirement plan today.

Atlanta followed the state’s lead in 2011 and passed a similar, more comprehensive reform that included a 401(k)-style component. That plan was projected to save the city $22 million in the first year, more than $270 million over the following decade and more than $500 million over 30 years.

The transition to 401(k)-style retirement plans is great news for public employees. Not only do these plans give public employees more control over their retirement, but they’re also helping people retire comfortably.

401(k)-style retirement plans also make it much easier for state and local governments to budget for retirement costs. Instead of the quickly growing and unpredictable costs associated with traditional pension plans, 401(k)-style retirement plans are a known cost – a fixed percentage of payrolls each year.

Georgia’s state-level reform wasn’t perfect – it only applied to one of the state’s three large pension systems. And a portion of the new retirement plan maintains traditional, politician-run pensions. But the state made a bold move incorporating a statewide, mandatory hybrid retirement plan.

Illinois would be wise to follow Georgia’s leadership and give government workers more control over their own retirements with 401(k)-style retirement plans.