Unsuccessful Shift to Costly 401(k) Accounts Led to Unprecedented Public Employee Turnover

A new case study released by the National Institute on Retirement Security (NIRS), Retirement Reform Lessons: The Experience of Palm Beach Public Safety Pensions, looks at a decision by the Palm Beach Town Council to close its defined benefit (DB) pension retirement plan in 2012 and move its police officers and firefighters to a “combined” plan that offered a dramatically lower pension benefit along with individual 401(k)-style accounts.

As the case study shows, public safety workers quickly fled Palm Beach, retiring or finding employment in other cities that continued to offer DB retirement plans. Only four years after the sharp cuts to the traditional pension, the town found that about a third of its police department had three years of experience or less. Along with a retirement rate of 20 percent after the 2012 change, 53 mid-career safety officers left Palm Beach from 2012 to 2015. By comparison, only two mid-career employees departed from 2008 to 2011.

Palm Beach faced significant financial challenges as a result of the high attrition. The town had to cover high levels of overtime to fill staffing gaps and soaring training costs as it brought in rookie police officers and firefighters. And as the case study notes, “the move to (defined-contribution) accounts does nothing to reduce plan liabilities on its own.”

After the costs of employee turnover and recruitment skyrocketed, Palm Beach reversed course and, in 2016, abandoned the defined-contribution aspects of new retirement plans and strengthened the defined benefit provisions. As a result of the exodus of workers, the town council strengthened the pension elements of the plan with the aim of improving recruitment and retention.

The high rate of retirements and departures from the town might not be that surprising, given the value that public sector employees place on retirement benefits. A 2015 NIRS study found that 88 percent of public-sector employees rate retirement benefits as extremely or very important, compared to 57 percent who said the same the about salary.

The experience in Palm Beach mirrors similar experiences of statewide plans in Alaska, Michigan, and West Virginia, where shifts from DB pensions to 401(k)-style accounts caused pension plan costs to skyrocket.

For more on defined benefit and defined contribution research, see these PERA on the Issues posts:

Cautionary Tales: Case Studies Show How States Face Funding, Debt Challenges After Switching to Defined Contribution Retirement Plans

Report: Defined Benefit Plans Increase Retention and Reduce Turnover Costs

Importance of Public Sector Defined Benefit Plans