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Council to Vote on Joining MD State Retirement Pension Plan

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MD State Retirement – Is this good for City employees?

At tomorrow’s Council meeting, the City Council will vote on whether the City should join the Maryland State retirement plan.

Currently, the City employees contribute to a plan called 401A plan, which is  a defined contribution plan. In this plan, the City makes a 6.5% contribution to all employees towards their retirement. The contribution is invested in mutual funds with a  vesting period of 5 years. The current 401A plan does cost the employee nothing.

In the Maryland State Retirement Plan, the City will be contributing 6.47%. On top of that, the employee would have to contribute 7.0% pre-tax, effectively about 5.25%. In this proposed plan, the vesting period is 10 years but the employees are guaranteed to get the benefit once they retire, for the rest of their life.

That said, if the City were to buy into the plan and purchase 50% of employees’ past employment credits for 2013, it would cost 6.47% of payroll plus approximately $1.5 million as a one-time expense. This money will come from City’s reserve fund.

There have been considerable concerns about joining this proposed State plan because of the cost the City will have to buy the employment credits. Furthermore, many think the defined benefit plan may not be sustainable in long run given the State’s declining economic health. Many municipalities having a State run plan had to raise taxes and some have even gone bankrupt. One can hardly find defined benefit plans in private sectors now a days.

Please let me know what you think about joining the plan.

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2 Comments to “Council to Vote on Joining MD State Retirement Pension Plan”

  1. By Pat, July 15, 2013 @ 10:51 am

    Even the existing City 401A plan is very generous compared to the private sector. I have only had one employer (a University) that contributed anything without an employee match. I would recommend eliminating the automatic contribution, and instead match employee contributions at 100% up to 6.5%. Employees should be motivated to set aside some of their earnings for retirement, and I suspect many do not when there is an automatic contribution from the employer.

  2. By Bill Smith, July 16, 2013 @ 3:20 pm

    I’m in the finance business and the expected return on the state plan is unrealistic. The city should assume that number will be lowered and check to see what the effect of that will be on their payment.