the word pension on a blue, black dial (Photo: Shutterstock)

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South Carolina has become the latest state looking to close itsdefined benefit pension plan and move all newstate workers into a defined contribution plan.

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According to a report in Chief Investment Officer, in aneffort to control the state's unfunded liabilities, Henry McMaster,the governor, sees a DC plan as a means of shutting off the flow ofstate funds to what he describes as an "open system"—as he termedit in this comment in his state of the state address: "Puttingmoney into an open system like that is like trying to fill abathtub with the drain open. We must close enrollment first."

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A look at the governor's budget reveals his aim of closingenrollment in the South Carolina Retirement System to new employeesafter December 31, 2020, the report says. Newhires would instead join the State Optional RetirementProgram. Participants in the defined benefit ORP, itpoints out, "are solely responsible for their retirement accountand they choose how to invest and manage their money."

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As of July 1, 2019, the South Carolina Retirement System hadunfunded liabilities of just under $23 billion. At the same time in2018, the total stood at $22.1 billion. McMaster sees the switch asa way of protecting taxpayers. But based on the experiences ofother states and municipalities who went that route orproposed to, it doesn't always save money.

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Kentucky proposed going that route in 2017, with a proposal toshut its DB plan to new participants and instead putting them intoa DC plan. But, the report says, "An analysis of that proposal released in late2019 said … that the move would have saved the state money in theshort term, but would have been more expensive over the longerterm."

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Kentucky, which has the worst-funded pension plan in thecountry, has fallen prey to high fees and risky hedge fundinvestments. According to a report in The Intercept, despite the fact that thosealternative investments failed to provide the returns state pensionofficials were promised, Kentucky Retirement Systems continued toinvest in alternatives that not only did not reward the effort butimposed "fees roughly 10 times what a pension fund would pay toinvest in a plain vanilla stock fund."

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Kentucky plan participants saw their plan fork over "$13.6million in annual management fees. Five years later, that figurehad ballooned to $126 million" but still did not account for "allthe millions of dollars in those 20 percent 'performance fees' thathedge funds and private equity collect." Switching to a DC planwouldn't solve the problem of trustees who perhaps could have donemore due diligence on the plan's investments.

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And a report from the Teachers Retirement System ofthe State of Illinois reviewed the pros and cons of switching froma DB plan to a DC plan, and found that not only are DC plans notpopular among employees, they provide smaller benefits, cost morethan DB plans, and provide weaker investment results than DB plans.They also raise government contributions.

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In fact, it points out, West Virginia actually switched from aDB plan to a DC plan and then went back again, and Nebraskaswitched from a DB plan to a DC plan which it subsequently closed,switching all members to a cash balance plan that, like a DB plan,provides a guaranteed annuity in retirement.

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The city of Palm Beach, Florida, likewise ended up reinstating aDB plan after the switch resulted not just in lower benefits butalso a "mass exodus of public safety officers" in neighboring townswho departed after DB benefits were reduced. It too saw a 20percent resignation of the town's workforce, as well as losing 100first responders—and the resignations resulted in higher costs inother areas, such as overtime to fill the gaps caused by theresignations and millions in expenses for training courses for newreplacement personnel.

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