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LANSING, Mich.-Michigan is launching a new defined contribution pension plan for newly hired state employees and will offer existing employees the option to remain in the state's current defined benefit pension plan or participate in the new plan.
Michigan Gov. John Engler in December signed into law a package of bills creating the new defined contribution retirement program and an early-retirement program for state employees, among other provisions.
Under the new defined contribution program, all state employees, judges and legislators hired on or after March 31, 1997, will be eligible to participate in a new employer-match 401(k) plan.
Although government employers have been prohibited since May 1986 from adopting 401(k) plans, states like Michigan that had 401(k) plans in existence before that date are granted an exemption.
Currently, Michigan provides a defined benefit pension plan in which employees vest after 10 years of service. The state also has long used a 401(k) plan for a deferred compensation program, though it lacked an employer match. That plan will be merged into the new 401(k).
Under the new 401(k) plan, the state will contribute 4% of each employee's annual compensation to his or her personal account. Employees can continue to contribute to their accounts to the extent the Internal Revenue Code permits and the state will match employee contributions up to 3% of salary.
Employees will fully vest in the state's 401(k) contributions after four years of service. The vesting schedule is 50% vesting after two years of service and 75% after three years of service.
A spokeswoman from the state Department of Treasury said the state is reviewing bids from outside administrators to manage the new retirement savings program.
The state will continue to offer its defined benefit pension plan to existing employees who opt to stay in the defined benefit program. Those employees wanting to switch, particularly workers not yet vested in the defined benefit plan, will be eligible to join the new plan in spring 1998.
"The whole reason behind the new program is portability," said a spokeswoman for the state's Department of Management and Budget. Many people refused to take state jobs after they found out they had to make a 10-year commitment before being eligible for a defined benefit pension, she said.
In addition, "we found 45% of the state employees did not vest" in the program before leaving, she said.
"In absolutely every study this is the way of the world nowadays," she said, referring to defined contribution plans.
State employees were first made aware of the new 401(k) plan through e-mail.
"We received a lot of questions back from people interested" in the new plan, the spokeswoman said. The state is planning a "massive information campaign" to further educate employees about the 401(k) plan.
Retiree health insurance benefits for employees hired on or after March 31 also will change.
Current state employees become eligible for retiree health care coverage after 10 years of service, after which the state covers at least 90% of premiums.
Now, employees will earn a 3% state contribution toward premiums for each year of service, fully "vesting" after 10 years.
Michigan also is launching an early-retirement program expected to save the state $25 million annually.
Currently, only state employees age 60 or older with at least 10 years of service, or age 55 to 59 with at least 30 years of service, are eligible to retire with full pension and health care benefits. Under the new program, employees age 55 or older with at least 15 years of service and those age 50 or older with at least 25 years of service are eligible to retire with full benefits.
In addition, a factor used to calculate retirement benefits for early retirees will be increased to 1.75% from 1.5%. That factor is multiplied by years of service and final average compensation. About 7,000 of the state's approximately 60,000 current employees are eligible under the program to retire as early as April 1 and no later than June 1.
The state estimates 3,000 to 4,000 employees will opt for early retirement. If that occurs, the state will see an average annual savings of $25 million, the Management and Budget spokeswoman said.