Estimating the Financial Impact of Adopting the MSERS Defined-Contribution Plan

In the MSERS defined-contribution plan, the state employer contributes an amount equal to 4 percent of each employee’s pay to the employee’s retirement account. The employee also receives an additional 100 percent employer match on the next 3 percent of pay that he or she voluntarily contributes.[*]

To address the question of whether this plan has saved taxpayers money, the brief analysis below falls into three categories:

  1. Measuring the annual employer contributions to the MSERS defined-contribution plan vs. the defined-benefit “normal cost”
  2. The potential impact on state government’s unfunded liability
  3. Potentially counterproductive political incentives in pension plans.

Each of these categories is examined in turn below. The analyses are based upon certain simplifying assumptions. Different assumptions could yield materially different results.

[*] “State of Michigan 401(K) & 457 Plans Key Features” (Michigan Office of Retirement Services), michigan/640002/key_features.pdf (accessed September 23, 2009). An employee’s maximum annual contribution is “[t]he lesser of $16,500 or 100% of compensation.” Ibid.