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Study says 401(k)-style public pensions cost more than traditional plans

LOS ANGELES (Reuters) - Public worker unions and others who back traditional pensions over 401(k)-style plans got ammunition on Tuesday from a new study that shows U.S. state governments that made the switch did not achieve the predicted savings but rather lost money.

The National Institute on Retirement Security (NERS), a non-profit group that has defended traditional public pensions, issued case studies on three states that switched to 401(k)-style defined contribution retirement plans.

In all three states, Alaska, West Virginia and Michigan, problematic funding gaps widened, the report said. When the changes were made, backers of the switch predicted it would solve funding problems.

Critics of the report said it used faulty methodology and was politically motivated. They said NERS has an agenda to keep traditional public pensions in place.

In 2006, Alaska switched newly hired state workers from its two biggest traditional defined benefit plans to a defined contribution plan. Yet the funding gap doubled, from about $6 billion in 2006 to $12 billion last year, according to the state. In 2014, Alaska made a $3 billion cash infusion into the defined benefit plans to shore them up.

One problem in Alaska, critics of the switch said, was that the old pension plans still had to pay out pension benefits to workers hired before 2006, but lacked contributions from new workers.

“I voted against the change, and now the state has had to come in with a bailout. It’s exactly what I said would happen,” said Mike Hawker, an Alaska Republican assembleyman.

Union-backed defenders of public pensions have been battling reformers looking to curb rising costs. Reformers say state contributions are lower and more predictable for defined contribution plans, and that once the contributions are made the long-term financial risk falls on the employee.

Pension costs were significant factors in bankruptcies of Detroit, Michigan, and California’s Stockton and San Bernardino. Recent ballot initiatives in various states aimed at switching traditional pensions systems to 401(k)-style plans have sparked bitter debate and campaigns have attracted tens of millions of dollars in funding from both sides.

Illinois Republican governor Bruce Rauner, in his first state of the state address on Feb. 4, called for a switch to a less generous 401k-type plan for future state workers.

New Jersey Governor, Chris Christie, a Republican mulling a 2016 White House run, said last year his state must “stop the insanity of a defined-benefit pension system that we cannot afford.”

NERS Executive Director Diane Oakley called the case studies a “cautionary tale” for states thinking of making the switch.

Among critics of the NERS report were the Laura and John Arnold Foundation, which has assets of $1.3 billion according to its latest tax filings.

Hedge fund billionaire John Arnold, who runs the foundation with his wife Laura, has donated millions of dollars toward efforts in U.S. states to switch to defined contribution plans.

Josh McGee, vice president of accountability at the foundation, said NERS has a history of “placing a heavy thumb” in favor of traditional plans. He said the report was flawed because it assumed that underfunding problems occurred in Alaska, West Virginia and Michigan because of the switch to defined contribution plans.

McGee argued that “the states would have been in an even worse fiscal position today had they stuck with their legacy plan for all employees.” He said there were already excellent defined contribution plans in existence in the public sector in states including Oregon, Colorado and Indiana.

“The defined benefit plan versus defined contribution plan debate is beside the point,” McGee said. “It is well designed plans that matter.”

(This version of the story corrects name of Laura and John Arnold Foundation in 13th paragraph)

Reporting by Tim Reid; Editing by David Gregorio