TOPEKA, Kan. (AP) – Republican legislators and GOP Gov. Sam Brownback's administration on Monday launched a campaign to create a 401(k)-style pension plan for new Kansas teachers and government workers with a pitch from former presidential candidate Bill Bradley and a Nobel laureate. Bradley, a retired U.S. senator from New Jersey and former New York Knicks standout, and Robert Merton, a professor of finance at the Massachusetts Institute of Technology, were star witnesses for a Kansas House Pensions and Benefits Committee hearing.
Both advise a Texas company that manages 401(k)-style plans in the private sector, where such plans are the norm, and they said innovations in managing such plans can reduce uncertainty for employees about their retirement benefits. If legislators opt for a 401(k)-style plan, that firm and others could seek a contract to manage it for the Kansas Public Employees Retirement System.
The committee has been working quietly for weeks on legislation aimed at improving the long-term financial health of KPERS, which has a projected $9.3 billion gap between its anticipated revenues and the benefits promised to public employees through 2033. Legislators enacted a major overhaul of the pension system last year, but it did not include a new 401(k)-style plan, favored by Brownback and other GOP conservatives.
The House committee's proposals would start a 401(k)-style plan for teachers and government workers hired after 2014 and authorize the state to issue $1.5 billion in bonds to bolster the pension system, an idea the panel planned to review later Monday. KPERS now operates traditional plans that guarantee retirement benefits up front, based on an employee's years of service and career-end salary.
Bradley and Merton said such traditional plans are no longer sustainable, but they acknowledged that 401(k)-style plans have defects as well. Merton said such plans tend to focus on building up an overall nest egg and investment returns, rather than on the amount of income a worker wants in retirement. He said it's possible to design a 401(k)-style plan that gives workers simple-to-use guidance on how much to save to have an adequate income in retirement.
“This is an innovation that is desperately needed in the pension area,” Bradley told the committee. “Your choice is: Do we really try to innovate here and in this case make Kansas really the cutting edge?”
The committee's proposals still face strong skepticism from retiree and public employee groups and their Democratic allies.
Like private-sector counterparts, a 401(k)-style plan would base retirement benefits on the amount of money workers and their employers contributed to the plan and the earnings from stocks, bonds and other investments over time. Public employee groups worry that volatility in financial markets – or a crash – could slash benefits for employees as they near retirement age.
They've also noted that starting a new plan doesn't address how the state will close the long-term funding gap in its existing pension system. Supporters of such plans say creating one will at least keep the gap from growing.
Ernie Claudel, vice chairman of the Kansas Coalition of Public Retirees, said he also has numerous questions about the purported innovations for 401(k)-style plans that Bradley and Merton were pitching.
“All they're doing is showing you the radio and the dials and expecting you to buy it,” Claudel said. “They aren't showing you the inner workings.”
The visit by Bradley and Merton created a buzz at the Statehouse because of Bradley's past as a professional basketball player and his run for the Democratic presidential nomination in 2000. Also, Merton won the Nobel Prize for economics in 1997.
Both are associated with Dimensional Fund Advisors, of Austin, Texas, which says it was managing $262 billion in assets at the end of last year. The company was co-founded by Rex Sinquefield, a St. Louis businessman known for pushing to end state income taxes, and David Booth, a Lawrence, Kan., native who made headlines in 2010 by paying $4.3 million for the original, typewritten rules for basketball from James Naismith, the sport's founder.
Lt. Gov. Jeff Colyer, who accompanied Bradley and Merton to meetings Monday, said KPERS itself would as for multiple proposals from private firms in designing a new 401(k)-style plan, and the services offered by Dimensional Fund Advisers would be only one option. He said the administration is inviting other companies to make similar presentations to lawmakers.
“What that looks like is up to KPERS and the legislative process, to set the guidelines,” Colyer said after the hearing.