Illinois state Sen. Bill Brady (R-Bloomington), who served on the Governor’s Pension Commission in 2004, has introduced legislation to create a voluntary 401(k) retirement fund, known as a defined contribution plan, for state employees.
Brady’s proposal would extend to participants in all state retirement systems the option to participate in a voluntary, self-managed plan like the one already offered to state university employees. No pension benefits would be changed for those choosing to remain in the current defined benefit system, which pays retirement benefits based on years worked and salary and is outside the control of individual employees.
A defined contribution plan is a retirement savings system in which employers and employees make tax-deferred contributions to accounts owned by employees themselves. The contributions are invested, and employees receive the amount their investments earned, when they retire or leave the system.
State Would Cut Checks
Brady said his bill would allow an employee in the defined benefit pension system who wants to move into the 401(k) program to receive a check from the state for past employee contributions, past state contributions, and the investment return on that money. The employee could then put that money into the 401(k).
“Actuarially, the benefits work out the same to a large extent,” Brady said. “The benefit to employees is they know their retirement is funded. The state’s matching contribution comes from a dedicated fund. They also control their investments. There’s none of this deferring of payments and the potential for scandal that we’re seeing now.”
Workers Get More Freedom
Brady also pointed out that a 401(k) gives workers total freedom to move from one job to another or change careers without losing any of their retirement money.
“Because defined pensions are so back-end loaded, people are trapped financially,” Brady said. “With a 401(k), the money is theirs. They can take it wherever they go. There’s also greater inheritability with a 401(k). If a person dies prematurely, there’s more ability to leave money to their heirs.
“For the public, they’ll know we’re not digging a deeper hole, creating financial problems years from now,” Brady said.
— Steve Stanek