Nevada Retirement News

Public Employees Retirement System
Summer 2000

Governor Guinn has, over the past 9 months, engaged in a fundamental review of State Government in which suggestions for improving State Government have come from many different sources. One collective source, the Nevada Taxpayers Association and the Chambers of Commerce suggested changing the Public Employees' Retirement System from a defined benefit (DB) program to a defined contribution (DC) program for all hires after a certain date.

The Retirement Board opposes such a conversion for a number of reasons.

• Defined contribution plans have inherent weaknesses as the core benefit for overall retirement security, especially in Nevada were public employees do not participate in Social Security;

• DC plans increase overall risk (investment and predictability) when compared to defined benefit plans;

• In a DC plan, employees are responsible for account management, making them subject to the whim of the market. Employees may see tremendous fluctuations in the value of their account over the course of their employment, and should they retire during a market down period, their account will be diminished in value. They cannot counteract this potential timing issue and have no ability to regain some of the value of the retirement savings after retirement, as cost of living adjustments are not typically available in a DC plan. This represents a significant risk to an employee's retirement security;

• Lump sum distributions, as a key feature of defined contribution plans often result in retirement monies being used for other purposes, thus reducing overall retirement savings for our members;

• PERS is a well-managed, stable fund providing a reasonable base income for our members in retirement at a cost-effective price;

• DC plans may actually have higher administrative costs than comparable DB plans. Instead of directly itemizing and identifying these large DC plan expenses, they are hidden in the return that the participants receive on their investments, making it difficult to determine whether they are reasonable.

Defined benefit pension programs, like PERS, provide significantly more comprehensive benefits than defined contribution plans. Early retirement, disability benefits and post retirement increases are not normally available in a DC plan, but are part of a defined benefit program.

The amount of benefit in a defined contribution plan rests solely with the account balance and therefore, is subject to the whims of the market at the time of retirement. No minimum benefit can be determined.

Defined benefit programs offer guaranteed benefits, regardless of investment income. The employee under a DB plan knows what their income will be in retirement. DB programs offer comprehensive benefit packages including beneficiary protection and post retirement increases. Post retirement increases help protect against inflation's effect on fixed income. During active employment the benefit is also inflation protected because of salary increases experienced by the employee over their career. Additionally, employers and the general public receive the benefit of the training and experience an employee receives over the course of their career, because PERS encourages longevity in the public workforce.

In our efforts to protect your benefits, the Retirement Board adopted the following Board Resolution on August 16th 2000:

   Whereas, efforts to convert state and local government retirement plans from defined benefit to defined contribution have taken place; and

   Whereas, state and local government employees traditionally participate in defined benefit plans that provide a pension benefit based on the employee's length of service and salary at retirement; and

   Whereas, some state and local government employees have in addition to defined benefit plan coverage a supplemental defined contribution plan, such as a Section 403(b) tax sheltered annuity, a Section 457 deferred compensation plan, or a Section 401(k) plan, in which they may voluntarily participate; and

   Whereas, Nevada PERS' defined benefit plan helps to attract and retain productive employees, which helps produce a high performance work force for taxpayers; and

   Whereas, Nevada PERS' plan provides employees with an effective means of building retirement income; and

   Whereas, Nevada PERS offers a predictable lifetime retirement benefit that can never be reduced; and

   Whereas, Nevada PERS is a long-term investor and averages the bad periods against the good, therefore, the amount of a retiree's benefit is not reliant on the health of the stock market as could be the case with defined contribution plans; and

   Whereas, Nevada PERS' plan offers plan participants the opportunity to purchase service credit which affords portability; and

   Whereas, the funding policy of Nevada PERS is intended to produce relatively level rates of funding that will accumulate sufficient assets to meet the cost of promised benefits; and

   Whereas, Nevada PERS is reviewing plan modifications to address the issue of short service employees and to enhance portability within the structure of the existing defined benefit plan; now therefore be it

   Resolved that the Board of Trustees of the Public Employees' Retirement System of Nevada supports the defined benefit plan structure as the primary retirement plan for public employees in the State of Nevada and supports employer offered voluntary defined contribution plans as supplemental retirement savings programs.

We will keep our members and beneficiaries updated as to the status of this issue, as we move closer to the legislative session.

What is a Defined Contribution (DC) Plan? DC plans define the employer contributions to the plan There is no benefit guarantee Employees bear all investment risk Benefit based on contribution + investment return - administrative costs Typically DC plans do not include survivor benefits or disability benefits No cost of living adjustments after retirement are typically granted

What is a Defined Benefit (DB) Plan? PERS' current program in which your benefit is based upon a statutory formula is a defined benefit plan (years of service X 2.5 X average compensation) Individuals do not bear the investment risk regardless of return, your benefit is guaranteed DB plans include survivor and disability benefits Cost of living adjustments after retirement are part of the benefit

In the 1999 legislative session the Retirement Act was amended to include language allowing members to roll money into the Retirement System on a tax deferred basis for the purchase of service credit, provided that the money met the qualifications under the Internal Revenue Code. The statute provides that any member may use: