A Wake-up Call?

Jacksonville (Fla.) Police and Fire Pension Fund might close to new hires later this year following approval from the city’s police and fire unions of a proposal from Mayor Lenny Curry’s office.

This development should be a wake-up call to all the public DB pension systems that think that their plans are perpetual. Poor funded status and escalating contribution expense will get the attention of the taxpayer.  DB plans must be preserved, but they need a new focus and direction (see the KCS website and blog for our many thoughts on this subject). Clearly, the all-out pursuit of the return on asset assumption (ROA) has failed, as many pension plans continue to struggle despite 8+ years of a bull market in equities and nearly 35 years in bonds!

The move by Jacksonville to push new employees into a defined contribution plan might ultimately reduce the City’s liability, but it isn’t in the best interest of their future hires.  Although the proposed employer contribution of 25% is quite generous, DC plans still must be managed by the individual employee, who in most cases doesn’t have the financial literacy to execute a successful program.

Furthermore, with a vesting schedule that allows full vesting after just 3 years, Jacksonville should expect far greater turnover in its ranks.  We appreciate that there is a financial burden to fund these systems, but closing them isn’t the answer.  We believe that there are strategies that can be deployed that will help stabilize both the funded status and the contribution expense while beginning to de-risk the plan so that it remains a viable option.

A retirement system solely dependent on a defined contribution plan is no retirement system!  DC plans are glorified savings accounts.

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