Pension Plan Choice

PENSION PLAN CHOICE IN THE PUBLIC SECTOR

THE CASE OF MICHIGAN STATE EMPLOYEES

Wages & Salary, BADM 4430, Prof. Noel R. Rivera Reymundi, Sept. 8,2005

1. Author - The Author of this article I have reviewed labeled Pension Plan Choice in the Public Sector was created by Leslie E. Papke who is a Professor at Michigan State University currently working within the Department of Economics. This Professor has written many articles relating to Economics and specifically within pension plans. She has published a total of ten working papers and a total of six journal articles ranging from the year 1989 to her most recent article in 2004 labeled Choice And Other Determinants Of Employee Contributions To Defined Contribution Plans.

2. Title - Pension Plan Choice in the Public Sector: The Case of Michigan State Employees

3. Journal - Based on the Title what type of Journal is it? This journal was published within the National Tax Journal as stated on all pages of the Statistical Report.

4. Year - Vol. LVII, No2, Part 1, June 2004

5. Topic Area - The main topic area of this study is to identify pros and con's of certain benefits within pension plans both Private sector as well as the Government sector. The study concludes that different benefits based on several factors including Rate of Pay and Time and Grade all play major roles within the statistical analysis.

6. Primary Issue - What is at the core of the article? The core of the article discusses the advantages and disadvantages of two different pension plans with different interests for both the employer and employee. In traditional Pension Plans called D.B. or Defined Benefit the employee expected a certain percentage rate of pay at the age of 60 based on certain criteria like years worked at company and age requirements. The latest in Pension funding options is called D.C. or Defined Contribution. This plan also known as the 401- K Plan offers employees flexibility. Many advantages such as tax breaks or "Bene's" for both employer and employee make this pension fund more attractive. Options to pick where to contribute pension funding within a government matched and private matched shareholder program also give employees more money at retirement and at an earlier age of fifty five. The difference between these two pension plan options is the core of this report.

7. Major Focal Points/Perspectives of Paper - A case study was done with Michigan State Employees in June of 2004. The study's object was to define and develop patterns with factual reasoning why certain people choose certain pension plans. Some people have no choice if they want to work for a certain company that does not offer a certain pension plan they are looking for. Others have the option as is the case with Michigan state employees. In 1997 Michigan stopped offering D.B. pension plan to new state hired employees. D.C. accounts were established and put in place of the defined benefit (D.B.) plan. This change changed long term obligation facing Michigan taxpayers. This also put a burden on the pension promise for state workers. In general people usually pick the employer and the primary pension plan offered by that employer. The D.C. account piers into the idea of privatized social security. The D.B. plan is calculated by years of service and final average salary. This is paid in the form of an annuity as opposed to a whole one lump sum. Both private sector and public sector is funded through employer contributions. These contributions are backed by sponsors either State in public plans or employer in case of private plan. The sponsor takes the investment risk of meeting the pension obligation. Unexpectedly high return on assets reduces the employers' future contribution while low returns may also make it necessary for increased future contribution. In a D.C. account the sponsor establishes an individual account for each employee. The employer makes a contribution either monthly or yearly, or they may match a pre-tax contribution by the participant. Key words pre-tax. One of the catches is you can not touch it before a certain time like a Bond. If you do you will be taxed heavily on your withdrawal and the fund does not look so appealing any more because you the employee take a huge tax hit as is the case with me. I opted to let it mature to get the maximum allowed to withdrawal when the time is right. I choose the option with the highest percentage rate of matched return. This is one of the perks. By doing this the employee has the advantage to have some limited control over his or her assets. Some people would rather play it safe and stick to the original pension plan where they do not have to worry about more of as risk in choosing the right asset to invest your and the employers money into. The risk is that there is no guaranteed pension benefit with D.C. plans unlike D.B. plans unless you were Enron. I'm not sure what plans Enron had but you get the picture. Either way the employees lost everything. Distribution options are more flexible than the D.B. plan. They include monthly payments for a specific period not to exceed 20 years and the option to roll it over into an IRA.

In 1996