Describe the types of pension plans most often found in governmental entities and the differences between them. Do you expect that most governmental employers sponsor a “single-employer plan” or participate in a public employee retirement system (PERS)
question 9
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Governmental entities commonly offer two types of pension plans: single-employer plans and participation in a public employee retirement system (PERS).
1. Single-Employer Plan: In a single-employer plan, the governmental entity establishes and manages an independent pension plan solely for its employees. This plan is specific to that employer, providing retirement benefits exclusively for their employees. The employer directly bears the responsibility for funding and managing this plan.
2. Public Employee Retirement System (PERS): A PERS is a multi-employer pension plan that pools the resources of various governmental employers within a specific jurisdiction, such as a state or municipality. Multiple employers, like local government agencies, school districts, or state government departments, participate in a central retirement system. The pooled resources are invested jointly, and retirement benefits are paid out to the employees based on a collective funding pool.
Differences between both types of plans:
1. Administration: In a single-employer plan, the governmental entity has full control over the plan's administration and management. They make decisions regarding funding, investment strategies, and benefit structures. In contrast, a PERS is typically administered by an independent board of trustees responsible for making decisions on behalf of all participating employers.
2. Risk Sharing: In a single-employer plan, the employer bears the full responsibility for funding the plan and ensuring there are sufficient funds to pay out future retirement benefits. The employer assumes the investment risk and must make additional contributions if the plan becomes underfunded. In a PERS, the risk is spread among all participating employers. They collectively contribute to the funding pool, mitigating the individual employer's risk.
3. Portability: Single-employer plans are specific to one employer, making them less portable. If an employee leaves the employer before retirement, they may not be able to transfer their pension benefits to a new employer's plan. On the other hand, PERS often allows employees to maintain their pension benefits if they move to another job within the participating employers' network.
Regarding which type of plan is more common among governmental employers, it can vary based on the jurisdiction. Some governmental entities prefer to establish their own single-employer plan, while others choose to participate in a PERS to take advantage of the pooled resources and shared risk. The decision depends on factors such as the size of the entity, financial resources, administrative capabilities, and legal requirements.