Defined-Contribution Pension Reform Act Exposed

The Defined-Contribution Pension Reform Act was adopted by ALEC's Tax and Fiscal Policy Task Force,approved by the Board of Directors on January 7, 2011 and amended on January 16, 2011. According to ALEC.org, the Act was amended by the Tax and Fiscal Policy Task Force at the Spring Task Force Summit on May 3, 2013, approved by the Board of Directors on August 5, 2013. Language removed from the original draft bill is indicated with strikethrough text, additions given in bold.(Accessed June 16, 2016).

ALEC Bill Text

Intent Section

The Legislature finds that the defined-benefit model of retirement benefits for state and municipal employees is not fiscally sustainable. It is the intent of the Legislature, therefore, to direct the [state retirement board] to create and maintain a defined-contribution program in which all state and municipal employees hired on or after [date], 2011 will automatically enroll after [X] months of employment to become eligible to accrue retirement benefits.

Short Title

This Act shall be known and may be cited as the “Defined-Contribution Retirement Act.”

Section 1.

(A) Definitions:

(1) “Defined-contribution retirement system” means a compensation system of post- employment benefits which are accorded based upon

(a) The percentage of salary the employer contributes

(b) The percentage of salary the employee contributes

(c) The investment return of the 401(k) plan to which the employer and employee contributions are made

(2) “Vested” or “vesting” refers to the point at which an employee has become eligible to receive benefits upon retirement.

Section 2.

(A) Enrollment of current employees:

(1) All current employees shall be transferred to the new defined-contribution retirement plan

(2) All employee accrual in the existing defined-benefits retirement plan shall be immediately frozen and the accrued sums transferred to employee accounts in the new defined-contribution retirement plan.

(3) {Insert state} shall issue bonds of up to twenty years maturity period to pay off the accrued benefits of employees currently enrolled in the existing defined-benefit retirement plan.

(B) Enrollment of new employees:

(1) State and municipal employees hired on or after [date], 2011 will automatically enroll after [X] months of employment.

Section 3.

(A) Contributions

(1) Upon enrollment, the employer shall contribute [X] percent of each employee’s salary toward a defined-contribution plan qualified under section 401(k) of the Internal Revenue Code.

(2) Upon enrollment, the employee must contribute [X] percent and may voluntarily contribute up to [X] percent of salary to the same 401(k) plan which receives the employer’s contributions.

Section 4.

(A) Vesting

(1) The full amount contributed by the employer to the employee’s plan vests after [X] years. The employee contribution to the plan vests immediately and is not subject to forfeiture.

Section 5.

(A) Investment

(1) {Insert state} shall sponsor [X] investment funds eligible for use in the 401(k) plan, including a default fund into which contributions flow prior to vesting.

(2) Prior to vesting, the employer contributions will be directed into a default investment fund.

(3) Upon vesting, the employer contributions may be directed by the employee into a combination of available investment funds at [X] percent increments.

(4) The employee contributions which vest to the employee immediately are directed into a default investment fund but may be redirected by the employee into a combination of other available investment funds at [X] percent increments.

(5) Investment of such funds shall be self-directed and shall be administered by an agency of {insert state} on behalf of the employees and subject to annual audit by the state Comptroller, the results of which shall promptly be made available to all state and municipal workers and citizens of the state.

Section 6.

(A) Redemption

(1) Upon completion of service, all vested contributions and returns in the 401(k) plan are eligible for redemption in full or in the form of an annuity by the employee.

(2) At the employee’s election, all vested contributions and returns may be paid out in the form of an annuity for a time certain, for life, or for a joint and survivor annuity.

Section 7.

(A) Forfeiture

(1) If employee terminates employment prior to vesting, employer contributions are subject to forfeiture.

(2) Such contributions may become eligible for vesting again if the employee enters employment with the same or participating state employer within [X] years, at which point previous years worked are used to determine the vesting eligibility.

(3) The retirement board shall set up a forfeiture account and specify its uses, which may include the subsidy or employer contributions.

Section 8.

For any pension or retirement system controlled by the state of {insert state} benefit enhancements must be concurrently funded at the time the benefit is authorized.

Section 9. {Severability clause.}

Section 10. {Repealer clause.}

Section 11. {Effective date.}