States on the move: 401(k)-style pension reform in Utah
Utah’s pension funds had a 50 percent chance of becoming insolvent by 2028 prior to the state’s reform plan. The chance dropped to 10 percent after the state greatly improved the solvency of its pension funds with 401(k)-style reforms.
Incorporating 401(k)-style retirement plans has become common practice in state pension reform. Utah gave public employees more control over their retirements with 401(k)-style plans in 2011.
Utah froze its defined-benefit pension plan and created a new retirement plan that allows public employees to choose between a hybrid retirement plan and a 401(k)-style retirement plan.
Under the new retirement plans, employers contribute up to 10 percent of the employee’s salary into the retirement plan the employee chooses. In the hybrid plan, that contribution is distributed between the defined-benefit and the defined-contribution components. In the 401(k)-style plan, the entire 10 percent is deposited into the employee’s defined-contribution retirement plan.
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.
Moving away from a defined-benefit system makes 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 known cost: a fixed percentage of payrolls each year.
Utah’s pension funds had a 50 percent chance of becoming insolvent by 2028 prior to the state’s reform plan. The chance dropped to 10 percent after the state greatly improved the solvency of its pension funds with 401(k)-style reforms.
Giving Utah’s government workers control over their own retirements greatly increased their financial stability, as they no longer run the risk of seeing their pension benefits slashed like their counterparts in Detroit.
Utah’s reform wasn’t perfect – the 401(k)-style plan only applies to new workers. And the hybrid retirement plan still maintains an element of traditional defined-benefit pensions. But the state made a bold move incorporating a statewide, mandatory pension reform plan for new workers.
It’s time for Illinois to follow Utah’s leadership and give government workers more control over their own retirements with 401(k)-style retirement plans.