Swampscott officials begin debate between 401K, pensions

SWAMPSCOTT – Selectmen have begun discussions about whether to replace the municipal pension system with 401Ks for new employees, expressing concern at an estimated $30 million that the town potentially owes in retirement benefits.”The reason why every state has gone (the) route of defined benefit plans is because actuaries will tell (you) it’s the cheaper plan – but that’s if it works,” said Selectman Barry Greenfield, who proposed the idea. “But all the risk is on the taxpayer. Whereas with a 401K, you know exactly how much you have to contribute.”Swampscott employees – like many government employees – participate in a defined-benefit plan, or a pension plan, according to Joseph Connarton, Executive Director of the Public Employee Retirement Administration Commission, which oversees retirement systems in the state.In such a plan, employees contribute a certain amount of their salary to a retirement fund – approximately 11 percent since 1990 for Massachusetts employees, Connarton said – and that money is pooled and invested. Swampscott’s investment goal is an 8 percent return, Greenfield told selectmen at their Dec. 7 meeting.These earnings plus the town’s pension appropriation and members’ contributions enable the fund to pay its pensioners a set percentage of their salary – dependent on numerous factors including salary and years of service – for the remainder of the employee’s life after retirement.But Greenfield said that two problems have arisen with pensions in recent years.Life expectancy has increased, meaning that the town has to pay a set of benefits for more years than it would have expected.In addition, the fund has not only missed its anticipated 8 percent return, but has lost significant value in the recession, Greenfield told selectmen at a recent meeting.Greenfield said municipalities have routinely deferred paying this difference. That leaves Swampscott with an unfunded liability of $36.5 million as of a 2010 audit, according to data provided by Connarton.In order to make up this deficit by the state-mandated 2040 deadline, Town Accountant Dave Castellarin said the town will have to dedicate approximately $2.4 million this year – in addition to the $1.034 million it will pay for current employees’ retirement costs.Additional post-employment benefits are near $50 million, according to the 2011 Annual Town Warrant report.But Greenfield argued that while offering a 401K or some type of similar contributory retirement plan would not eliminate the existing liability, it would keep it from growing in the future. It would also mitigate uncertainty about the town’s future obligations.In contributory retirement plans, employees also set aside a portion of their earnings – a percentage of which employers usually match – to be put into an investment account for retirement. But once the employee retires, the town has no more obligation to contribute to the fund. There is also no guaranteed set amount that a retired employee receives each year.But town officials debated if instituting a 401K plan would hurt the town’s ability to recruit employees.”Defined benefit plans are why many employees work in municipal government,” Town Administrator Andrew Maylor said.But Selectman Jill Sullivan said she was not convinced that there was such disparity among private and public salaries. She said that municipal benefits were one of several appealing conditions for municipal employees.”We have to make sure the mix is appropriate to hire the right people,” Sullivan said.Cyrus Moulton may be reached at [email protected]