Michigan to steer school workers into 401(k) plan
LANSING (AP) — Gov. Rick Snyder on Thursday signed a law that will steer more newly hired school employees into a 401(k)-only retirement plan, which critics say could eventually lead to new hires being barred from a traditional fixed pension.
Republicans who control the Legislature said the law is long overdue and hailed it as a “historic” attempt to address debt that accounts for a third of payroll costs for K-12 districts. Michigan’s major teachers union said there are too many unknowns, including what sort of risk may face new hires who choose a hybrid plan that includes a pension and 401(k) instead of just a more generous 401(k).
The bill’s enactment caps a contentious process that began with GOP legislators pushing to prevent all new teachers and other school workers from qualifying for a pension and ended with that option staying intact, but only if they agree to contribute an estimated 12.4 percent of their salary instead of the 8 percent that newer employees pay, according to the state budget office.
Starting Feb. 1, all new school hires will be automatically enrolled in a 401(k)-only plan like those that new state employees have received since 1997. They will have 75 days to opt out. It is unclear how many will. Currently, about 20 percent voluntarily decline the pension.
“Modernizing the school employee retirement system means these benefits will be there for retired school employees in the long term, while at the same time protecting taxpayers from escalating liabilities,” Snyder said in a written statement after signing the legislation in private with Republican lawmakers in attendance.
Michigan Education Association President Steven Cook criticized the law, which Democrats opposed, saying it was rushed through without proper analysis.
“Although it retains choice in retirement plans for school employees and improves the defined contribution option available to them, there are still too many unknowns,” he said, citing concerns about uncapped costs increases in the event of a shortfall in what will be a new pension-401(k) system.
New hires who want a pension will be forced to assume more of the risk of poor investment returns. They will be blocked from a pension if the system is funded below 85 percent for two straight years. A more conservative investment return assumption of 6 percent will be adopted. The retirement age to start receiving a pension could rise for new workers.
Michigan’s overall unfunded pension liability totals $35.2 billion, including $29.1 billion for a system that covers employees of K-12 schools, libraries, community colleges and some universities. This is the third significant change to the teacher retirement system in seven years.
While critics say the law will do little to nothing to lower existing debt, backers say that at the very least, it will keep Michigan taxpayers from accumulating more.
The nonpartisan Senate Fiscal Agency projects additional ongoing state and local costs for two reasons — offering a more generous 401(k) and assuming more conservative investment returns. It estimates $23.1 million more in spending next fiscal year, increasing to $81 million in year five, $168 million in year 10 and $811 million 30 years from now.