Michigan’s Governor Rick Snyder is expected to sign off on a bill that will change the teacher’s pension plan for the state later this week, when he returns from a trade mission in Europe.
The bill, Senate Bill 401 looks to increase contributions from employees to provide for a more cost-effective defined benefit plan for the state. If passed, the new plan will eliminate the current hybrid pension system (a combination of a 401 (k) and pension), replacing it with a new hybrid system that provides for a more attractive 401(k) option for school employees. Should employees elect the defined contribution plan, the school district will pay 4% of an employee’s salary into the 401 (k). The employee can also choose to contribute to the plan and the state will match up to 3% of their contribution.
According to the Detroit Free Press, 20% of new school employees enroll in the current 401 (k) plan, where they pay 6% and have a 3% employer match. New school hires from February 1, 2018 on will automatically be enrolled in the plan. Those currently enrolled will obtain the new benefits on October 1, boosting the employer match. Currently enrolled employees will also have a 75-day window to opt out of the new plan.
It should be noted that if the pension portion of the new hybrid system isn’t at least 85% funded for two years in a row, the state will close the plan. If the plan falls below the 85% mark, the Legislature would decide between boosting the funding or closing it. In regards to the worst-case scenario, Kurt Weiss of the Michigan state budget office told CIO “future Legislatures will have options to consider if it dips below 85%, which would include closure or paying down the debt. If they did decide to close it, that would leave a 401 (k) option for the teachers.”
Weiss assured that in this particular situation, employees would keep what they had accrued up until the point of closure, but the Legislature’s reasoning behind this option is their “intent or desire to control any future debt that would be built. Their goal is to avoid an unfunded system that grows liabilities for the state. This new hybrid provides an enhanced 401(k) option for teachers while reducing the risk on the pension side.”
The bill passed last week on a narrow vote of 55-52, after identical House and Senate bills were pushed through the Legislature.