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PERSONAL FINANCE / KATHY M. KRISTOF

CalPERS Hatches a Better Plan for Nest Eggs

November 06, 1994|KATHY M. KRISTOF

In what may become a model for public employee pension plans everywhere, the California Public Employees Retirement System has started franchising a low-cost, high-tech supplemental retirement program to 800 agencies throughout the state.

The program, which could eventually serve about 600,000 public-sector workers, will give even the smallest mosquito abatement district the ability to offer a comprehensive retirement savings plan to its workers.

CalPERS appears to be on the cutting edge of a national trend aimed at getting retirement options for government workers up to speed with what's offered in the private sector. Several states, including Massachusetts, New York and Michigan, have already dramatically changed their supplemental retirement plans. Meanwhile, CalPERS has been fielding questions from interested state administrators all over the country.

The increased scrutiny of government retirement programs is being spurred both by apparent shortcomings in the current systems as well as a growing belief that retirement in the 2000s will be drastically different than today.

Individuals are living longer, and people are healthier and more active in their 70s and 80s than ever before, notes Martin B. Walton, manager of the deferred compensation program at CalPERS.

The upshot: Tomorrow's retirees will need far more money to finance their golden years than their parents and grandparents did. Or they will need to keep working.

"What our parents went through with respect to retirement is vastly different to what we will experience," adds Thomas Bieniek, senior vice president of Fidelity Investments Tax-Exempt Service Co. in Boston.

"On a relative basis, they got very generous Social Security payments. They frequently stayed with the same company for long periods, which provided them with nice company pensions. And they bought homes that have appreciated by hundreds of thousands of dollars. A lot of those things just don't apply to us."

While these issues have been largely addressed in the private sector, where employers are often offering tax-deferred savings plans, called 401(k)s, the equivalent government savings plan--so-called 457 programs--are light-years behind.

In a 401(k) or 457 plan, workers save their own money to finance their retirement. Employers offer and administer the plans, giving workers several investment options. Employees then determine how much of their pay they want to save in the plan and what percentage should go into each investment option.

The employer deducts the appropriate amount from the worker's pretax earnings and sends out statements advising workers how well they've fared. The main benefits of these plans are that they are tax-favored and portable. If you leave your job, you take your retirement savings with you.

The public-sector 457 plan differs from 401(k) plans in a few important ways.

For instance, 457 plans are considered the property of the employer--the government department or division--rather than the employee, until the worker quits or retires and claims the funds. In other words, the employer could confiscate employee 457 savings in a budget pinch.

The other major difference is that many 457 plans are more expensive, more complicated and less attractive than the 401(k) plans offered in the private sector. Generally speaking, the annual fees on 457 plans amount to more than 2% of each participant's savings each year, compared to roughly 1% in private-sector plans. Also, small cities, counties and special district workers are often given few investment choices--if they get a 457 plan option at all. And employees of larger government agencies frequently are given so many choices--sometimes more than 100--that making a choice is nearly impossible.

The CalPERS program addresses both of these problems in fairly clear fashion.

First, it puts 457 assets into a so-called rabbi trust. This trust prohibits government employers from seizing their worker's retirement savings in a budget squeeze. The only thing the rabbi trust does not protect against is bankruptcy of the government agency. In such cases, 457 assets would still be at risk. However, on a practical level, government agencies rarely go bankrupt--in fact, some are legally prohibited from filing bankruptcy.

The plan also simplifies investment choices by offering just eight easily explained investment options--funds that invest in stocks, bonds, money market accounts and insurance contracts. There's also a so-called asset allocation account, which is a smattering of all the other funds, allowing workers to easily diversify retirement assets.

Additionally, the program comes with all the bells and whistles of a smoothly operated company plan--next-day fund switching, a toll-free customer service line and detailed brochures that explain investing in general and each individual's specific investment choices.

Initially, the CalPERS plan will be offered to the employees of city, county and special districts all over the state. Roughly 600,000 employees could be eligible, about 150,000 of whom reside in Los Angeles and Orange counties.

However, some experts believe that in the long run, the CalPERS changes will become an industry model and that public employees from here to Florida will benefit from segments of the program, which could make 457 plans safer, less expensive and easier to understand nationwide.

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