State workers would potentially have to contribute more of their income under private retirement plans, lawmakers heard Wednesday as they mulled changes to the state’s pension system.
Still, a top Senate Republican ruled out changes this year.
Michael Lane, with Dimensional Fund Advisors, spoke to a mass meeting of three legislative committees convened to consider, in general terms, privatizing KPERS. Workers need to invest between 12 and 15 percent of their income under a private retirement plan to be able to retire comfortably, he said.
The meeting marked another chance for the company, headed by University of Kansas mega-donor David Booth, to speak to lawmakers. In 2013, the company unsuccessfully tried to sell the Legislature on a 401k style investment plan for state workers after meeting with Gov. Sam Brownback and other members of the administration.
Currently, workers in KPERS contribute between 4 and 6 percent of their income, with employers contributing about 10 percent. Lane said the aggregate amount, including employer and employee contributions, needs to be about 15 percent, but he also said that in other countries where Dimensional does business, employees are often required to contribute in excess of 10 percent themselves.
“A defined contribution (retirement system), just like a defined benefit, only works if there’s an appropriate level of contribution. And that contribution percentage is more than 10 percent. It’s not two percent, it’s not three percent. If you’re only putting in that amount I can virtually guarantee there’s no way to invest your way to a comfortable retirement,” Lane said.
In a private retirement plan, such as a 401k, employees often get to determine the amount they wish to contribute. Lane indicated workers typically contribute far less – 3 percent for example — than what is necessary to yield the returns needed to live on in retirement.
Sen. Ty Masterson, R-Andover, and the Senate Appropriations Committee chairman, said the possibility such a high employee contribution rate would be needed under a private system shocked him.
“It was interesting to me because the public narrative has been that the state has underfunded, the employer has underfunded the plan. (Lane) would contend that it has also been underfunded by the employee – not that it’s the employee’s fault – but that’s the number the state had put out,” Masterson said.
Rep. Kathy Wolfe Moore, D-Kansas City, indicated she would not be able to support a system where employees had to kick in so much of their income.
“I don’t think our state employees can afford that,” Wolfe Moore said.
KPERS reached 60 percent funded at the end of 2013, considered a benchmark. The system remains billions short of what it needs to pay all promised benefits to current state and K-12 employees as well as retirees.
Lawmakers earlier this year approved $1 billion in bonds to help pump funds into KPERS. The aim is to generate an annual return of about 8 percent with an interest rate of 5 percent or less.
Wednesday’s meeting comes months after the administration suggested in lawmakers should examine privatizing KPERS. In December, state budget director Shawn Sullivan suggested the state look at annuitization.
Under annuitization, an outside company would assume liability for doling out KPERS benefit payments. The state would no longer be directly responsible for meeting the payment obligations to its retirees.
Masterson said the objective of the meeting was to look at if the state’s retirement system can operate more efficiently. He said no legislation would come this session.
“For the conspiracy theorists that think this is some subversive way and they’ll be some new legislation to privatize KPERS, that is not even in the discussion,” Masterson said.
At most, Masterson said, lawmakers may form an interim committee to study the issue after the end of session.