State workers weigh pension plan windfall

November 26, 1993|By David Conn | David Conn,Source: Maryland State Retirement and Pension SystemsStaff Writer

In yesterday's editions, a graphic accompanying an article about state pensions gave the wrong percent for the formula used to compute the annual basic retirement allowance under the old retirement system. The correct number is 1.8 percent.

The Sun regrets the error.

Thousands of state employees and teachers are being exhorted by investment advisers and salesmen to switch retirement plans in order to collect lump-sum incentive payments that in many cases total hundreds of thousands of dollars.

The 39,000 people eligible face a Dec. 7 deadline to decide whether to remain in the "old" more generous state retirement plan or to switch to a newer plan set up in 1980 and collect the lump sum. Although the incentive is offered every year, an extraordinary set of circumstances has converged to make this year's offer more enticing than any in the past or any likely to come for some time.

FOR THE RECORD - CORRECTION

The main attraction: Employees get back all the money they've paid in compounded at a hefty 14.4 percent annual rate -- and the chance to roll it over into another qualified retirement plan tax-free.

As a result, pension officials have been besieged by inquiries and are working overtime to calculate the size of workers' potential windfalls. But officials are concerned that some of the salesmen are unscrupulously advising prospective clients to make a choice against their best interest.

"We have been swamped with thousands of requests to get this information because there's been a lot 7p,12l of pressure being put on these people by financial planners to get the money," said J. Howard Pleines, legislation director for the Maryland State Retirement and Pension Systems (MSRPS).

Some salesmen's pitches are anything but subtle.

"I know of one company whose standard answer is, 'Give us your money, give us your money,' " said Rod Obaker, the principal of Kingsville Elementary School near Perry Hall.

Through September this year, the state paid $154 million to 924 employees who decided to switch to the new system. State officials haven't yet tallied payouts during October, but with two weeks to go before the deadline they're keeping a close tab on November: About 560 people so far have asked for payments that exceed $100 million, or an average of more than $180,000 apiece.

For some people, the choice was easy. Mr. Obaker found out his lump-sum payment will be about $125,000. So even though his monthly retirement benefits will drop by at least one-third under the new pension plan -- and that doesn't take into account the less generous cost-of-living adjustments -- he's taking the cash.

"That one-third [reduction in benefits] is going to be more than recouped if you put the $125,000 aside and work off the interest," said Mr. Obaker, who is 49 and has 25 1/2 years in the system. "Nobody takes care of your money like you."

But a Baltimore City school administrator, who asked not to be named, said he's decided to pass up the roughly $100,000 payment he would receive. "The state plan is a very good plan," he said. "You pay royally for it, but you'll never see anything like it again."

Luck and mathematics

Employees in line for a huge payout -- and those wringing their hands over what to do -- can thank a series of events, some planned and some coincidental, and the mathematics of compound interest.

It began with the double-digit inflation that in 1980 prompted the General Assembly, over the fierce opposition of state teachers and workers, to create a new retirement plan that both reduced the benefits and limited the rate of cost-of-living increases for retirees. Those already in the old plan, which dates back to 1927, were allowed to remain in it, but were encouraged to switch. Predictably, few did, even though the new plan requires no annual contributions from most employees, as the old one did.

Thus, in 1984 the state sweetened the pot by offering to refund an employee's past contributions to the plan, plus interest. The interest rate -- called the transfer investment rate -- would depend on the average return on investment generated by the MSRPS during the previous five years, and applied retroactively, as if the employee's money had been growing at that rate every year since he entered the retirement system.

And the employee would still be eligible for the newer pension plan's reduced benefits.

Despite the enhanced incentive, most eligible employees declined to switch, even though the transfer investment rate was running at a respectable 8 percent to 10 percent.

But in late 1987 something happened that made the deal far more attractive. In a remarkable act of prescience, the state comptroller's office sold off practically its entire portfolio of stocks, including about $2.5 billion held by the retirement plans, one week before the stock market crash on Oct. 19. The proceeds were invested in safer fixed-income investments.

Unheard of return

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