The bear market in stocks has a lot of people with 401(k) plans worried about their retirement and looking longingly at those stodgy defined-benefit government pensions. Consider a few of the many wrinkles in the pension plans of the City of Memphis, Shelby County, Memphis Light, Gas and Water, and the public school systems.
- A city division director or high-level appointee can leave voluntarily after 12 years, start drawing immediate retirement benefits of around $32,000 a year, and go off to another job in the public or private sector and work 25 more years and get a second pension.
- A public school teacher or principal can work 30 years, begin taking pension benefits at age 55, go work in DeSoto County for another 10 years, and get a second pension plus Social Security. Total value of the deal: over $80,000 a year.
- MLGW employees enjoy an 8-percent company contribution annually and can take up to 25 percent of their benefits in a lump sum at retirement after 25 years.
- City of Memphis employees can retire with a full pension after 25 years, no matter what their age.
And in what may be the most attractive feature of all, at least in hard times anyway, government pension plans save employees from themselves. Unlike employee-directed 401(k) plans, government plans are run by experienced pros, and everyone gets the same mix of stocks, bonds, and money-market investments. Bottom line: no years with 30 percent gains, but very few losing years either.
Pension documents are full of pages of details hammered out by unions, politicians, and pension boards, and an overview can't do justice to all of them. It's the unusual case that's likely to make news, as former City Finance Director Roland McElrath did earlier this year when he "retired" from that job to take a similar one with the school board. Suddenly McElrath was a pensioner at the tender age of 40, with a nice raise to $116,000 to boot. City and school system officials say he is worth it, and they note (correctly, based on Memphis magazine's last two surveys of local corporate compensation) that financial officers at corporations with smaller budgets and fewer employees command much higher salaries and benefits.
Pension administrators say competitiveness with the private sector is the underlying assumption in public pension plans.
"The mentality is, 'I work for the government and make less salary but I get security in return,'" says Danny Kail, human resources administrator for Shelby County.
Key questions for any pension plan include:
- When are you vested? That is, how many years do you have to work before you qualify for pension benefits?
- Does the employee, the employer, or both contribute regularly to the pension plan, and how much?
- At what age, and with how many years service, can you retire with full pension benefits?
- How are age, years of service, and salary weighted to reach the final benefit calculation?
- What are the special perks and pitfalls?
To see how public and 401(k) plans compare, play a little game we'll call "$25,000." The objective is to reach an annual pension of $25,000 - a modest level but probably adequate if paired with Social Security and other savings and assets.
Typical 401(k) plan
In this defined-contribution plan, the employee invests 6 percent (or some other percentage) of salary each month and the employer matches it with a 3-percent contribution. (Some plans match dollar for dollar up to a certain point, while some don't have an employer match at all.)
The employee works 25 years, earning an average salary of $50,000. Contributions of $4,500 a year total $112,500 at the end of 25 years. If investment returns build the account up to $420,000, the employee can earn $25,000 a year in interest at 6 percent without touching the principal. Less than that and the principal will have to be reduced each year to get $25,000.
Can the employee invest wisely enough to earn $307,500 over 25 years? It's certainly possible, but probably a lot harder than some 401(k) salesmen made it sound when the market was returning 20 percent a year. Plug in a year or two where you lose 30 percent, as some plans did last year, and you could actually have less than the total of your contributions.
If all goes well, you have $25,000 a year and a $420,000 savings account to draw down. If the stock market does exceptionally well, a 401(k) could outperform a conservative public pension plan.
Shelby County Government
Shelby County has a defined-benefit plan. The employer makes all contributions, and the employee can calculate his or her exact benefits at retirement.
County employees hired after 1986 pay only the Medicare portion of Social Security taxes, which is 1.45 percent, and they get only that benefit.
Employees are vested after 7.5 years and can begin drawing reduced benefits at age 55. Public safety employees, however, can get a pension without age penalty after 25 years. The idea is that the county doesn't want 65-year-olds climbing ladders and chasing bad guys. It wants them to retire.
For all others, age is as much of a factor as years of service, on the assumption that younger people can get another job and change careers easier, says Kail.
A county employee with 25 years of service and a $50,000 average final salary gets a $20,625 pension at age 55. To reach the $25,000 threshhold, the employee has to be 62 years old with the same salary and service.
There are about 6,500 current full-time county employees.
City of Memphis
In the City of Memphis plan, the employee and employer both contribute 5 percent. The employee contribution increases to 8 percent in July. Employees are vested after five years and can retire with full benefits after 25 years of service, regardless of age.
That means city employees reach that $25,000 threshhold earlier. An employee with 25 years of service and $50,000 final average compensation gets $29,531. The city contributes to either the pension plan or Social Security for every employee, but not both.
A unique aspect of the city plan is the "DROP" feature adopted three years ago.
"We had a significant amount of employees with 20 to 30 years experience," says Sara Hall, administrator of benefits and employee services. "The DROP plan, it was felt, would help retain experienced employees but also let them and the city plan for transition."
Employees with 25 years service can set a retirement date up to three years in advance. All contributions cease on the effective date, and no additional years of service are credited. At the end of the period, the employee must retire.
During the DROP period, a special account is credited with an amount equal to the employee's monthly retirement benefit. At the end of the period, he gets a lump-sum payment. For example, someone whose DROP period is three years and whose benefit was $2,000 a month would get $72,000, plus interest.
"It's a significant boost to a person's retirement dollars," says Hall.
Another unique feature of the city plan is the treatment of high-level appointed employees like McElrath who take "involuntary" retirement. If they have 12 years service, they can get immediate retirement benefits even if they resign. And the benefit is based on their highest one-year salary instead of their highest three-year average.
There are approximately 8,500 current employees and retirees in the city pension plan.
Memphis and Shelby County Schools
Both school systems are part of the Tennessee Consolidated Retirement System (TCRS). Employees are vested after five years, and they contribute 5 percent of salary. Employers contribute 3.7 percent to 5.2 percent depending on the employee classification.
School system employees can retire with reduced benefits at age 55, but they probably won't make that $25,000 threshhold. A teacher with 25 years experience and a $50,000 salary will get $15,816 a year. To get full benefits you must be either 60 years old or have 30 years of service. That gets the benefit to $24,960, assuming a $50,000 salary.
The TCRS has 185,000 active members.
Memphis Light, Gas and Water
At MLGW, employees are vested after 10 years. Employee and employer each contribute 8 percent, the highest employer contribution in the public pension plans. But the retirement benefit is the only source of income for most retired MLGW employees, who are not eligible for Social Security.
They can retire with a full pension after 25 years. An employee with 25 years service and a $50,000 salary gets $28,125 a year.
MLGW has an option that allows retirees to take up to 25 percent of their benefits in a lump sum.
"Most employees take from 5 to 25 percent in a lump sum," says Brenda Greene, manager of risk management.
There are 4,600 current employees, retirees, and survivors covered under the plan.
[This story originally appeared in the May issue of Memphis magazine..]