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Pension Shift Proposed in Old Saybrook

Published Jun 13, 2017 • Last Updated 12:17 pm, June 13, 2017

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The Board of Selectmen has adopted a 401a defined contribution plan for the town, marking a shift away from the traditional defined benefit pension model for employee retirements, a shift that likely will affect negotiating positions with employees going forward.

As the names suggest, a defined benefit plan promises a set payout upon retirement, while a defined contribution plan requires employees to put aside a certain amount of money which is, in this case, matched by the employer. While defined benefit plans are sometimes considered a better deal for employees, many employers are moving towards defined contribution plans because they can be less expensive for the employer.

In this case, the town has effectively adopted a plan that could be used for non-union employees. Through negotiations with town unions, it also could be used going forward for new employees who are members of a town union.

The new 401a plan the selectmen adopted is similar to 401k programs common in the private sector. In a 401a plan, as in a 401k plan, a town employee contributes to a retirement savings 401a account with pre-tax funds; the government as employer then has the option to match the employee’s contribution to this retirement account.

Earnings that accrue over time in this type of retirement account are tax-deferred. Employees do not owe any federal or state income tax on the 401a funds that are deposited into or that accumulate as earnings in the account until withdrawals begin upon retirement.

Retirement savings programs like the 401a program are specifically available for governments, and their employees. Participants are mandated to contribute five percent of their salary each year, in an effort to ensure they save enough for retirement. Under the Town of Old Saybrook’s plan design, that contribution is matched with an equal contribution by the town. Should an employee participating in a 401a choose, he or she can contribute up to eight percent of salary: the extra three percent is voluntary, and the town agreed to match the extra contribution, should the employee choose to make it.

The town’s Pension and Benefits Board on April 27 adopted the new 401a retirement pension plan as a road map for the town to follow on pension planning and employee contract negotiations going forward. The Board of Selectmen in turn acted to adopt the new plan on June 5.

“This is a long-term strategy for the town—it still has to be negotiated with unions,” said First Selectman Carl Fortuna, Jr. “The important thing for me was to get away from defined [retirement] benefits for new town employees.”

The town also has—and would continue to have, even if 401a becomes the norm—a voluntary retirement savings plan designated as a 457b plan after the section of the law that describes such plans’ rules.

In other action, the town recently divided the current town defined benefit pension plan into two plans. One of the plans is for funds set aside to pay a defined benefit to the town’s volunteer firefighters consistent with the plan’s rules. The other plan is for all of the other town employees eligible for a pension. The separation of the two retirement plans was approved by the Pension and Benefits Board on April 27.

As described by Finance Director Lee Ann Palladino, the split makes it easier for the town for financial reporting purposes.

The Fire Department, which is not part of the town’s 401a defined contribution plan proposal, has 22 retirees and 90 active participants.

At the April 27 Pension and Benefits Board meeting, Chairman Suzanne Taylor summarized the current participants in the town’s legacy defined benefit pension plan. She explained the town has 63 active and 34 retired participants from the town; 32 active and 19 retirees from the Police Department; and 28 active and retirees from the Board of Education.

Those employees or retirees from the Board of Education who participate in the town pension plan do not include certified teachers or administrators. Instead, this other group of Board of Education employees participate in the Teachers Retirement System administered by the state’s Teachers Retirement Board (TRB). All certified staff members are required to contribute 7.25 percent of their salaries annually to the TRB to participate in the pension plan.

Fortuna noted at the June 5 Board of Selectmen meeting that the town’s pension plans are currently 85 percent funded, per actuarial calculations.

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