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VRS chief renews call for 401(k) plan
Thursday, June 18, 1998
BY JEFF E. SCHAPIRO
Times-Dispatch Staff Writer
CHANTILLY -- The head of the $31-billion state retirement fund yesterday renewed his pitch for self-managed pensions for public employees, and the Gilmore administration signaled that it was willing to look at the idea.
Only minutes after opening the Virginia Retirement System's annual conference at a hotel near Washington-Dulles International Airport, chairman Edwin T. Burton III of Earlysville again urged the legislature to endorse an optional 401(k)-type pension for new workers.
Though Burton's continuing advocacy of a so-called defined-contribution plan puts him at odds with other VRS trustees and government employee groups, Gov. Jim Gilmore's top fiscal adviser said the state should examine the proposal.
"We're clearly intrigued with the concept," said Secretary of Finance Ronald L. Tillett.
But it frightens the Virginia Education Association and the Virginia Governmental Employees Association, organizations whose members rely on VRS -- the nation's 30th-largest pension program -- to manage money for their retirement.
VRS is a defined-benefit system under which 365,000 active and retired members qualify for a pension that is set, and guaranteed, by law. Pensions are derived from investments made by the retirement fund alone.
Under a defined-contribution plan, employees would make their own investment decisions. Further, the state, which spends about $500 million annually bankrolling VRS, would be virtually free of responsibility for paying for retirement -- except matching contributions.
That may be appealing to Gilmore, who could be foraging for cash to finance his no-car-tax plan. By the end of his term, in 2002, the state will need more than $1 billion annually to reimburse localities for revenues once generated through their tax on personal motor vehicles.
Burton, in part, considers self-directed pensions an empowerment issue -- that public workers, like many of their counterparts in the private sector, should have a free hand in planning their retirement. He also complains that the current program denies employees portability, or the option of taking their money to other plans when they move to non-government jobs.
"Those people get hurt," said Burton, an investor and economics professor at the University of Virginia. "They're not getting a good deal now unless they stay to retirement."
Burton, who first floated the idea of a do-it-yourself pension option in 1995, emphasized that it should not be compulsory and only available to new state employees. He presumes they would be younger, more inclined to take an active role in overseeing their retirement kitties and likely to switch jobs during their careers.
Trustee Clifford A. Cutchins III of Virginia Beach, a retired bank chairman, acknowledged the generational component of the defined-contribution debate.
"As these dynamics change, it changes the way you think," he said.
But trustee Elise L. Emanuel of Williamsburg, a teacher, likes things the way the are, largely because a defined-benefits system frees beneficiaries of having to make decisions on matters about which they may be ignorant, unsophisticated or uninterested.
"Teachers are too busy teaching school to make investment decisions," she said.
W. Gordon Binns Jr. of Richmond, a member of the VRS investment advisory committee and its former chairman, also is cool on a defined-benefits program, though he participated in one as president of the giant General Motors Pension Corp.
"To produce a given level of retirement income, a properly designed system of defined-benefit plans will cost less than a system of defined-contribution plans," he said.
"The reason for that is that employees -- even if they had perfect investment knowledge -- can't take as much investment risk as a pool of funds. Therefore, the return is not as high."
Legislative developments and the historic run-up on Wall Street are fueling Burton's new push for a defined-contribution alternative.
The 1998 General Assembly approved, and Gilmore signed, bills requiring VRS to provide 401(k)-type pensions for about 80 high-ranking state political appointees, including Cabinet secretaries, as well as a dozen big-city school superintendents.
About five states, among them, West Virginia, offer public workers some form of defined contribution.
"It's probably something that ought to be offered to everyone in our system," said Burton.
Tillett, who, with nearly 20 years state service, is sticking with VRS' traditional defined-benefit program, cautioned that a defined-contribution option would require bipartisan support to become a reality.
"There has to be comfort," he said. "People have to understand the risk, and that's part of the issue."
Del. A. Victor Thomas, D-Roanoke, a member of the House Appropriations Committee, welcomed the study of defined contributions, saying, "It's a damn good idea."