Let’s look at retirement
ND Insurance Commissioner
Over the past few years, we’ve witnessed a dramatic workforce shift. Baby boomers are retiring, while millennials and Gen Z are taking over workplaces across the country. Data shows that these generations of workers are changing jobs every three to four years, on average. The reality is that employers, including the State of North Dakota, will need to adjust for this reality to be competitive. The legislature is currently discussing the state employee’s retirement system, debating whether to implement a 401k-style retirement plan for all new hires or maintain the default pension plan. The primary issue is the ongoing cost of maintaining a pension plan with a current $1.9 billion unfunded liability versus implementing a more portable, market-adjustable plan. While this decision remains firmly with the legislature, as a state employee and someone elected to regulate risk, solvency, and consumer protections, I want to offer some thoughts on this debate.
Today’s workforce requires flexibility – precisely what a 401k, or defined contribution plan, offers. It’s customizable to an individual’s goals and portable when moving jobs. The state’s pension plan is fixed. It promises you a certain amount of money in retirement, but only after you have worked for the state for a long time. Some people like the security of a pension, but it doesn’t work well for those who want to change jobs. While both have merits and drawbacks, a flexible, personal pension style defined contribution plan provides both solid retirement income and the flexibility required for the next generation workforce.
To be completely transparent, when I was elected Insurance Commissioner in 2016, I chose the 401k, defined contribution plan. I was 34 years old and knew I was only guaranteed employment until December 2021. The pension plan requires an extended tenure with the state to attain its full potential. That didn’t make sense to me. And even though most state employees are hired, not elected, I’m far from the only person for whom the extended pension timeline isn’t a fit. According to the North Dakota Office of Management and Budget, 55% of new hires leave before they have worked even three years, and 80% leave before reaching ten years. Those 55% never vest under the current pension plan. When they leave, they receive only their contributions plus interest.
Thus, the 401k plan is a better choice for the overwhelming majority of new employees who are becoming more mobile and interested in opportunities through different jobs and sectors.
401k plans are portable and belong to the employees, allowing them to manage their retirement savings and choose how much to save and invest. This flexibility empowers employees to take control of their financial futures and facilitates freedom of employment. It is also predictable and reduces the long-term financial liability of the state and, therefore, taxpayers.
Moving away from pension plans will not only provide consistency and predictability to state finances but also attract employees who are seeking flexibility. Enhancing the 401k program will be an excellent way to attract employees who are realistic about their career mobility. This topic affects every North Dakota because having a state government that attracts and retains high-quality talent benefits us all.
Today’s pension plans and employee career paths are not what they used to be. And while this doesn’t take away from the good that pensions have provided in the past, 401k contribution plans make more financial sense now. 401k plans offer more flexibility and control, allowing individuals to manage their retirement savings and take their saving gs wherever their next career opportunity might take them. Whatever the choice, it needs to be informed. Asking a new employee to lock in today what they want to do 30 years from now is a tall order (even for a Guinness record holder in height).