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Nest egg options

Across Florida, state and local employees face a decision about their retirement funds: stay in a pension plan or tend their own investments? Most are playing it safe.

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published October 13, 2002

From the corridors of the Capitol in Tallahassee to the hallways of the state's elementary schools, 600,000 state and local government workers are making a decision that will shape their retirement fortunes. At the invitation of lawmakers, they have the chance to trade in their traditional pension plans for a nest egg they tend themselves.

Their overwhelming response to date: no thanks.

State workers had the first shot. When 164,506 of them made their decision this summer, 94.5 percent opted to stick with the pension plan, two-thirds of them by default when they failed to specify a choice. Teachers and other school employees are in the second group, which must decide by the end of next month, while local government employees have until the end of February to make up their minds.

In the current market environment, risk-taking is not attracting many fans.

"I've been giving a lot of thought to the investment plan, but I think about how the stock market's been doing these days," said Charles Girard, 54, a Pinellas County park maintenance worker. "What I don't want to do is end up shortchanging myself down the road."

The market's dismal performance for three years running has undercut workers' confidence in their ability to meet their retirement needs by investing. The result is that even workers who likely would be better off with the investment plan often are afraid to choose it.

"It's not what anybody would have guessed a few years ago," said Donald Nast, an associate professor of finance at Florida State University. Nast serves on the investment advisory committee to the Florida State Board of Administration, which manages the investments in the traditional pension plan. Before stocks tanked, board consultants were estimating that as many as half the pension plan participants might switch to the investment plan, which was created under state legislation enacted two years ago.

Nast says wholesale switching would have been a big mistake.

"One of the benefits of the down market is that it made people make more rational choices," he said.

Nast said the reaction of Florida workers in the face of the market downturn also shows how difficult it will be to win public favor for proposals to privatize the Social Security system.

"It definitely would be a hard sell today," he said. "There are people who still believe that it's the right way to go, but they're not going to get a lot of support right now. But that doesn't mean it won't resurface once the market gets going again."

Choosing between the state system's two plans is easy for only two groups of employees: short-term workers who are certain they will not keep their jobs long enough to qualify for a pension and long-term workers making government a career. The first group belongs in the investment plan, the second in the traditional pension plan.

Most workers fall somewhere in between those two extremes. For them, making the right choice requires a series of guesstimates about the future.

"The decision is not nearly as simple as most people think," said Mitchell Helton, a financial planner and certified public accountant. The state hired his employer, Ernst & Young, to help retirement plan participants make good choices. Last month he walked a small group of county and city workers through the details at a seminar in Dunedin.

He told them it matters a lot how long you've been employed, how long you will be employed in the future, how much your average raise will be for the rest of your career and what kind of investment return you will earn if you choose the investment plan.

And then there is that really tough question: how long you think you will live. A long life expectancy weighs in favor of the pension plan, a short one for the investment plan.

"The hardest part is deciding what assumptions to use," Helton said. "We want you to go into this with your eyes open."

All plan participants received a computer-generated report showing the current value of their retirement benefits and projecting future benefits under both plans and various assumptions.

Mitchell said workers really need to run the numbers again, substituting their own assumptions about the future. They can do that themselves on a Web site ( featuring software that can show how receiving smaller pay raises, earning a lower return or working a few years longer changes the future payout. Personalized information also is available through a toll-free telephone line.

In the first group of workers to go through the choice process, 13 percent attended a workshop, 20 percent called the toll-free line and 25 percent logged on the Web site.

The computer reports sent to workers show that the investment plan starts out as a big winner, but if you stay on the job long enough, the pension plan shoots to the top. The "crossover point" varies widely with the assumptions used.

And, of course, if any of the assumptions are incorrect, the report will be wrong. Most notably, the calculation assumes an investment return of 8 percent a year, a reasonable average historically but hard to reconcile with the stock market losses of recent years.

One result of all the workshops, printouts and publicity is that some workers have discovered for the first time how good they have it.

"A lot didn't even realize they had a benefit," said Kevin SigRist, a senior investment officer with the State Board of Administration. "Many younger people had not even thought much about it."

The reality is that government workers in Florida have the sort of retirement benefits that most private-sector workers can only dream about. A typical worker can retire at 48 percent of pay after 30 years' service regardless of age, while a law enforcement worker can get 75 percent of pay after 25 years' service. Those who work an extra five years get an even sweeter deal. And once they start collecting, benefits increase 3 percent every year under an automatic cost-of-living adjustment.

"If you're here 35 years, this is probably the best pension plan I've ever seen," Helton said.

The problem is that most workers don't stick around for the time it takes to earn full benefits. Many leave before they have earned any benefits.

"If you are here five years, the plan is virtually worthless," Helton said. It takes six years of employment to be eligible for any benefit at all.

The investment plan offers an alternative, giving workers a benefit if they stay at least a year. Those who switch to the new plan will get an opening account balance based on the current value of the future pension benefits they already have earned. After that, their employers will contribute to their accounts each year -- 9 percent of pay for most employees, 20 percent for law enforcement workers.

Workers who join the investment plan can choose from 40 investment options, including both name-brand and lower cost private-label funds designed specifically for the state. The fund choices include U.S. and foreign stocks, bonds and money-market funds.

Under its contract with the state, Ernst & Young is teaching classes on investing and helping employees make their choices.

"We can weed out the dogs for you," Helton promised.

Becky Reed, 28, who went to work for Pinellas County straight out of Largo High School, listened intently to Helton's presentation. She is training to become a computer programmer and expects to work for the county for at least 25 years, if not longer. Her husband, Mitch, 39, is a sheriff's deputy who already has 17 years in the state retirement system.

"His was an easy choice; he didn't even have to go online," Reed said. But she said her own decision was more difficult.

"There's pros and cons," she said. "You just have to weigh out the differences. Twenty years is a long time, and a lot could happen in 20 years."

She played with the software on the retirement plan Web site but ultimately decided not to trust her fate to the stock market.

"I've got a lot of money in the market already, and I'm losing big just like everybody else," she said.

Workers who find it too difficult to choose between the two plans can hedge their bets and pick both, freezing their pension benefit at its current level and directing all new contributions into the investment plan. However, that has not been a popular choice.

The choice workers make now can be reversed later. They can switch plans one time at any point in their careers. But if they want back in the pension plan, they have to buy their way back in. If there is not enough money in their investment plan accounts, they will have to kick in the difference.

"If you mistime the jump, you'll have to pay in to get something you could have gotten for free," Helton said.

In spite of the risk, the investment plan has attractions for some.

A followup survey of state employees found those who chose the investment plan were typically younger employees who wanted a benefit they could take with them if they moved on to another job. Some workers said they liked the idea of controlling their own investments.

Stan Baldwin, 57, an equipment operator for the City of Dunedin, said he is thinking seriously of switching to the investment plan, either now or at retirement. He already has a pension from serving in the military, and the investment plan would give him a lump sum at retirement.

"If I took the money out, I'd like to pay off my home with it," he said.

-- Helen Huntley can be reached at or (727) 893-8230.

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