Explainer: Christie Pushes Pension Alternative, But Option Already Exists

Taking a look at New Jersey’s 401(k)-type public-employee deferred compensation plan

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Gov. Chris Christie earlier this year proposed a series of sweeping public-employee benefit reforms that, among other changes, called for moving state workers from the grossly underfunded traditional pension plan into a hybrid retirement system with some features of a 401(k). Though the change would be radical for employees, New Jersey already offers a way for state workers to put aside money for their retirements outside of the pension plan.

Similar to 401 (k) plans: Known as the 457 plan after the IRS code that allows such tax-deferred savings accounts, the New Jersey State Employees Deferred Compensation Plan allows state workers to make contributions into individual accounts similar to the way a private-sector 401(k) works.

New Jersey’s 457 plan – which employees can contribute into while also building up a pension — was established in 1982. It had about 50,000 members when the last state fiscal year ended on June 30, according to state Department of Treasury officials.

What’s the difference between the plans? The key difference between the state’s existing pension plan and the 457 plan is that the pension system is a defined-benefit retirement plan, meaning it provides retired workers with a defined monthly payment based on how long the worker was employed by the state and how much they earned, among other considerations.

New Jersey’s 457 plan, meanwhile, is a defined-contribution plan, meaning it relies on regular, tax-deferred contributions that are typically invested, but do not automatically yield a guaranteed monthly payment upon a worker’s retirement. Also, unlike the pension system, county and municipal employees are not permitted to enroll in the state’s 457 plan.

No employer match: While the 457 plan is similar to many private-sector 401(k) plans in featuring individual accounts for employees, a key difference is that the state does not match employee contributions.

Maximum contributions: Under federal rules, state employees during the 2015 calendar year can contribute up to $18,000 into the 457 plan with taxes deferred on those contributions. And enrollees age 50 or older can put in even more, up to $24,000.

Who oversees the plan? Right now, the 457 plan is managed for the state through a six-year contract with Prudential that began in 2006. The contract also has two one-year extension options, Treasury officials said.

Array of investment options: Under Prudential’s administration, employees have more than 20 investment products to choose from using an “open-architecture” format, and they receive quarterly reports detailing the performance of their investments.

How has it performed? Compared against benchmarks and similar investment plans, the 457 investment options have generally performed well for enrollees, Treasury officials said.

Take it, don’t leave it: The 457 plan offers a degree of portability, meaning that if state workers leave their government jobs, they retain full access to their account balances. They can decide to leave the funds in the account, or they can take some or all of it out, or they can roll it over into another savings instrument.

Christie’s pension-reform plan: Treasury officials also stress that there’s a big difference between the hybrid, cash-balance plan that Christie proposed back in February when he rolled out a sweeping public-employee benefits reform package that also called for offering employees less generous health plans and pushing the cost of teacher-retirement benefits onto school districts.

Under Christie’s proposal, a new cash-balance plan to replace the current pension system would be funded with contributions from both the state and the worker as a percentage of salary. Those contributions would be managed by state-investment professionals or investment managers hired by the state. His proposal is based directly on recommendations that were put forward, also in February, by a commission of benefits experts asked by Christie to study the affordability issue.

Good for workers, local governments? The goal, Christie said, would be to make it easier for governments in New Jersey to fund their workers’ retirements – state government, for example, has not made the full pension contribution required by actuaries for roughly two decades — while also giving employees more certainty that a more stable and predictable benefit will be there when they decide to retire.

That’s because the overall state pension system right now is carrying about $40 billion in debt, and under current conditions experts predict some funds within the broader system could run dry within a decade.

More risky for workers: But with the current 457 plan, like a lot of private-sector 401(k) plans, the employee takes on the risk by making investment decisions.

What does the future hold? Christie’s broader benefit-reform proposal, including the shift from a defined-benefit pension plan to a defined-contribution cash-balance plan, has not been embraced by the Democrats who control the Legislature. And Christie has largely shifted his attention away from state issues since he announced in late June that he is seeking the GOP’s 2016 presidential nomination, leaving the benefits issue largely unresolved heading into the fall.